Anand Rathi Share and Stock Brokers has reiterated its “Buy” rating for Sterling and Wilson Renewable Energy Ltd (SWSOLAR) with a 12-month target price of Rs 870, implying an upside potential of 49% from its current market price of Rs 583. The company’s improving credit ratings and a robust order book signal a promising recovery after a challenging period. With the company’s FY25 revenue expected to hit Rs 80 billion, Sterling and Wilson is positioned as a leader in the solar EPC market, benefiting from strong sector tailwinds and government support for renewable energy.

Record Order Book to Drive Growth

Sterling and Wilson ended the second quarter of FY25 with a record order book of Rs 105 billion, a clear indication of strong demand for its EPC (Engineering, Procurement, and Construction) and O&M (Operations and Maintenance) services. The domestic market, in particular, contributed significantly, with the EPC segment growing by 37% year-over-year to Rs 9.7 billion, driven primarily by domestic projects worth Rs 9.3 billion. This robust pipeline is expected to fuel the company's revenue growth, helping it achieve its FY25 revenue target of Rs 80 billion.

The company is also well-positioned to benefit from Reliance Industries Limited’s (RIL) ambitious plans to set up 100GW of renewable energy capacity by 2030, which presents a substantial EPC opportunity worth Rs 300 billion for Sterling and Wilson over FY26-31.

Improved Credit Ratings to Accelerate Execution

Sterling and Wilson’s recent credit ratings upgrade to investment grade, with a long-term rating of ACUITE BBB and a short-term rating of ACUITE A3, marks a significant milestone for the company. This upgrade enhances the company's ability to access bank credit more efficiently, which is crucial for accelerating project execution and expanding operations. Furthermore, the company has secured a Rs 5 billion loan from the Indian Renewable Energy Development Agency (IREDA), further bolstering its financial capacity to execute its growing order book.

Q2 FY25 Financial Performance: Steady Progress Despite Challenges

Sterling and Wilson’s Q2 FY25 results demonstrated steady progress, albeit below market expectations. The company reported:

Revenue of Rs 10.3 billion, up 35.7% year-over-year.
EBITDA of Rs 182 million, a significant improvement from Rs 15 million in Q2 FY24, reflecting a 12x increase year-over-year.
PAT of Rs 86 million, compared to a loss of Rs 545 million in the same quarter last year.
However, lower revenue recognition due to monsoon-related delays and deferred project approvals led to underperformance relative to analyst expectations. The EBITDA margin stood at 1.8%, up from 0.2% in the year-ago quarter, signaling gradual margin improvement.

Strong EPC and O&M Business Performance

Sterling and Wilson’s EPC revenue grew by 37% YoY, reaching Rs 9.7 billion in Q2 FY25, driven by strong domestic demand. The company’s EPC EBIT saw an even more impressive growth, rising by 62% YoY to Rs 868 million.

The O&M services segment, though smaller in size, also showed promising growth, with revenue increasing by 16% YoY to Rs 597 million. This segment remains crucial as it generates consistent, recurring income, and O&M EBIT grew by 37% YoY to Rs 162 million, further improving the company's overall profitability.

Balance Sheet Strength and Debt Reduction

One of the highlights of Sterling and Wilson’s recent performance is the significant reduction in its net debt. As of H1 FY25, the company’s net debt stood at Rs 3.1 billion, down from Rs 19.2 billion in FY23, thanks to improved business revenue, better cash flow management, and timely fundraising initiatives. The company has also secured financing to support ongoing projects, reducing its reliance on short-term borrowings and improving its overall liquidity position.

Outlook and Revenue Projections

Sterling and Wilson is on track to meet its FY25 revenue target of Rs 80 billion, supported by its strong order book and improving execution capabilities. The company’s management has also expressed confidence in the timely completion of key projects, including the 4GW Khawda project, which is expected to be completed by FY25.

Looking ahead, the company anticipates strong revenue growth from both domestic and international markets, particularly in EPC services. Excluding orders from Reliance Industries and Nigeria, the company is targeting a 15-20% revenue CAGR in the medium term, driven by the ongoing expansion of renewable energy capacities by public sector undertakings (PSUs) and private players.

Valuation and Investment Case

Anand Rathi values Sterling and Wilson based on a DCF (Discounted Cash Flow) model, with a 12-month target price of Rs 870, implying a P/E ratio of 24.8x for FY26e. At the current price of Rs 583, this represents a 49% upside potential for investors.

The stock is currently trading at a 34.2x FY25e P/E, and its EV/EBITDA ratio stands at 35x, reflecting market confidence in the company's ability to deliver on its growth promises. With EBITDA margins expected to improve to 6.5% by FY26, and net profit projected to reach Rs 5.5 billion, Sterling and Wilson offers a compelling growth story in the renewable energy space.

Risks and Challenges

Despite the strong growth outlook, Sterling and Wilson faces several potential risks:

Government Policy Changes: Ad-hoc changes in renewable energy policies or incentives could impact the company’s long-term growth trajectory.
Execution Delays: While the order book is strong, any delays in project approvals or execution could affect the company’s revenue recognition and profitability.
Competition: The renewable energy EPC space is becoming increasingly competitive, with both domestic and international players vying for market share.

Conclusion: Poised for Growth with Strong Tailwinds

Sterling and Wilson is in the midst of a robust turnaround, driven by a strong order book, improving financial health, and a favorable credit rating. With significant growth opportunities in India’s renewable energy sector and a clear path to profitability, Anand Rathi’s “Buy” recommendation with a target price of Rs 870 reflects the company's potential to deliver strong returns for investors. However, as with any investment, potential risks related to execution and policy changes should be carefully considered.

Disclaimer: This report is for informational purposes only. Investors should conduct thorough due diligence and consult financial advisors before making any investment decisions.