Shares of Sterling and Wilson Renewable Energy (SWREL) have surged almost 27 percent just in July so far after the company's gross profit in the June quarter (Q1FY24) turned around after nine quarters, beating Street expectations on the back of execution of new profitable orders.
Post the Q1 results, domestic brokerage house Nuvama retained its buy call on the stock with a target price of ₹454, indicating an upside potential of 24 percent from its current market price of ₹367, as on July 21.
The company narrowed its losses to ₹95.32 crore in the June 2023 quarter compared to a loss of ₹355.99 crore in the year-ago period. Revenue from operations, however, fell to ₹514.96 crore, from ₹1,206.93 crore a year ago. The gross margin for the Shapoorji Pallonji Group company stood at 11.3 percent during the June quarter. It also managed to achieve its standalone operational EBITDA breakeven in Q1, while its net debt stood at ₹2,100 crore as of June 30, 2023.
The brokerage noted that the PAT loss of ₹95.3 crore was 4 percent better than its estimates. It forecasts an accelerating v-shaped recovery.
Nuvama also informed that the company bagged two domestic orders worth ₹500 crore (400MW) and its order book stands at ₹4900 crore (94 percent high margin domestic). Further, the firm targets ₹5000 crore domestic order inflow and Nigeria by end-Q2FY24, it added.
Nuvama further predicted that high operational leverage/falling fixed cost will drive the company's EBITDA turnaround by Q3FY24. However, it cut FY24E EBITDA by 43 percent but hiked FY25E EBITDA by 13 percent.
Investment Rationale
Sharp turnaround of gross profits: As per the brokerage, SWREL reported gross profits of ₹60 lakh in Q1 (- ₹300 crore/- ₹200 crore QoQ/YoY), largely led by the execution of new profitable domestic EPC orders. Meanwhile, its domestic Engineering, Procurement, and Construction (EPC) margins rose 180 bps YoY to 13 percent in Q1. Also, the Operation and Maintenance (O&M) margin trajectory has also begun to improve. O&M gross margins stood at 14 percent in Q1FY24 (7 percent YoY, 13 percent QoQ).
The brokerage said that O&M profits shall rise disproportionately on revenue recognition of projects where cost is already incurred. The company has guided for 10–11 percent gross margins going ahead. This is very much achievable on large profitable domestic orders. Besides, higher operational leverage shall also enable EBITDA turnaround Q3FY24E, it noted.
Rising order inflow trajectory: SWREL won two domestic (BOS) orders worth INR5bn (400MW) in Q1. Orderbook stands at ₹4900 crore – majorly high margin domestic projects (11–13 percent gross margins).
The current bid pipeline is 22GW ( ₹50000–60000 cr) with a domestic project mix of 58 percent. The company is targeting 4–5GW domestic projects in FY24E. It also targets $10bn longer-term prospects in Nigeria (Mega Nigerian project). A two-pronged strategy has been devised to reduce module price risk: i) 15 percent surety bonds from suppliers versus 5 percent earlier. ii) Cost pass-through, it stated.
Outlook and valuation
The brokerage forecasts a v-shaped earnings recovery from FY24 onwards, accelerating to a hockey stick curve on a strong global outlook (Hockey stick curve). Q1 net debt stands at ₹2,100 crore and will likely reduce substantially by Q4FY24.
Stock Price Trend
The stock has jumped 25 percent in the last 1 year and over 27 percent in 2023 YTD, giving positive returns in 5 of the 7 months in the current calendar year.
It surged almost 27 percent in July so far on the back of strong June quarter earnings. A day after the company posted its earnings, its stock price surged over 15 percent (July 17).
The company has shed over 51 percent from its all-time high of ₹756, hit in August 2019. Meanwhile, it has surged over 426 percent from its all-time low of ₹69.75, hit in March 2020.
