India Ratings Downgrades Sterling and Wilson Solar to ‘IND AA-’/Stable; Off RWE

India Ratings and Research (Ind-Ra) has downgraded Sterling and Wilson Solar Limited’s (SWSL) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND AA’, while resolving the rating watch evolving (RWE). The Outlook is Stable. The instrument-wise rating actions are as follows:

India Ratings and Research (Ind-Ra) has downgraded Sterling and Wilson Solar Limited’s (SWSL) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND AA’, while resolving the rating watch evolving (RWE). The Outlook is Stable. The instrument-wise rating actions are as follows:

*The assignment of the final ratings follows the receipt of the final documents conforming to the information already received by Ind-Ra.

** The ratings are provisional and shall be confirmed upon the sanction and execution of the loan documents for the above facilities by SWSL to the satisfaction of Ind-Ra.
#The CP will be carved out of the existing working capital limits.

Analytical Approach: The rating action reflects a change in Ind-Ra’s approach for rating SWSL. The agency had earlier factored in SWSL’s strong operating and strategic linkages with its parent Shapoorji Pallonji & Company Private Limited (SPCPL) to arrive at SWSL’s ratings. The agency believes that post the successful completion of SWSL’s INR28,500 million initial public offering (IPO) in August 2019 (wherein promoters diluted their stake in SWSL) and its increased global footprints, SWSL is no longer dependent on SPCPL.

As per the terms of the Red Herring Prospectus, the promoter selling shareholders shall utilise a portion of the net IPO proceeds towards full repayment of the loans due to SWSL and Sterling and Wilson International Solar FZCO from Sterling & Wilson Private Limited (SWPL; ‘IND A+’/Negative) and Sterling and Wilson International FZE (a subsidiary of SWPL), respectively, within 90 days from the date of listing of the equity shares. Further, SWSL shall not be allowed to provide any inter-company loans as per its revised Articles of Association and Ind-Ra’s understanding is that the dividend distribution policy of SWSL would remain consistent with the need to grow the business and maintain a low leverage position.

Hence, Ind-Ra would analyse SWSL on a standalone basis without a support construct. SWSL’s standalone credit profile has improved since the last rating review, as reflected in its improved business profile and likely improvement in its financial profile in FY20, post the collection of inter-corporate loans from the group entities. However, given that SPCPL continues to be the majority shareholder of SWSL, the rating of SWSL would remain linked to the credit profile of SPCPL and any further material deterioration in the credit profile of SPCPL would be negative for SWSL’s ratings.

SPCPL, in addition to utilising these funds towards payment of receivables of SWSL, has been undertaking various initiatives for deleveraging itself and raising funds from various sources for investment into several infrastructure projects being undertaken by the company/group. SPCPL is among the largest construction companies in India and a well-known brand in the engineering, procurement and construction (EPC) space.

KEY RATING DRIVERS

Improvement in Business Profile: The ratings reflect an improvement in the business profile of SWSL in FY19 as compared to FY18, as demonstrated by its strong and diversified presence in the global solar EPC space. The company is executing multiple solar projects across geographies such as Africa, the Middle East, Asia, Latin America, the US and Europe that helps it to mitigate risks related to market concentration or economy-specific risks. As on 31 March 2019, SWSL had 205 commissioned and contracted solar power projects with an aggregate capacity of 5.3GW. The company installed 4.6% of all utility-scale photovoltaic (PV) systems greater than 5MW globally (including China) and 8.6% market share of global PV installations outside China in 2018. SWSL’s business profile is supported by strong cash flow generation, given the short execution period for solar EPC projects. The company also had a high return on capital employed of around 76% in FY19, mainly on account of quick working capital turnaround.

Blip in Credit Profile Expected to be Corrected in FY20: SWSL’s revenue increased to INR82,404 million in FY19 (FY18: INR68,717 million) on account of higher number of orders executed, while its EBITDA margin remained stable at 8.0% (7.9%), driven by its strong execution capabilities. The company’s net leverage (total debt less unrestricted cash/EBITDA), however, increased to INR2.7x in FY19 (FY18: 0.2x), on the back of debt availed by the company to support SWPL and other group companies. However, as mentioned above, the funds from the IPO would be ultimately utilised partially to repay these intercompany loans, thereby resulting in a significant reduction of debt by SWSL. The agency expects the company to have a net cash position from end-FY20. As a result of higher debt, SWSL’s interest cover (EBITDA/gross interest expenses) declined to 6.5x in FY19 (FY18: 23.7x). The agency expects the interest cover to improve in conjunction with lower interest expenses and a higher profit base in FY20.

Prudent Risk Management: SWSL prudently manages off-balance sheet risks such as module warranties or defect liability claims. Module/equipment warranties are backed by similar warranties from original equipment manufacturers. Typically, equipment cost would be 65%-70% of the total solar power plant cost and, thus, effectively, as per the management, SWSL’s defect liability and liabilities towards liquidated damages would not be more than 5%-10% of the total project cost.

Liquidity Indicator – Adequate: SWSL had cash and cash equivalents of INR4,208 million at FYE19 (FYE18: INR955 million). However, its cash flow from operations turned negative to INR7,946 million in FY19 from INR2,430 million in FY18, largely on account of accelerated payment to its creditors in FY19 since the company could not issue letters of credit in their favour because of a delay in splitting SWSL’s banking limits from SWPL, subsequent to their demerger.

Ind-Ra expects SWSL to report positive cash flow from operations in the future, driven by the company’s low working capital intensity, higher profitability and the likely reduction in interest expenses. The company utilised 44% of its fund-based limits and 72% of its non-fund based limits for the 12 months ended August 2019. SWSL also benefits from its well-established relationships with banks and access to capital markets as demonstrated by the successful placement of its IPO.

Limited Revenue Visibility: The ratings are constrained by lack of revenue visibility (order book/revenue) for SWSL beyond one year, as project life cycle is typically 12-15 months. As of March 2019, SWSL had an order book of INR38,316 million (0.5x of FY19 revenue). Further, the company received letters of intent (LoIs) for additional INR39,082 million orders. As per the management, the rate of conversion of these LoIs into confirmed orders is almost 100%, which provides further revenue visibility. SWSL plans to bid for projects of over 20GW globally in FY20. This, combined with a high strike rate is likely to result in SWSL maintaining strong revenue traction over the next 12-18 months. Solar installations have increased to 103GW in 2018 from 31.6GW in 2012. The agency expects these capacity additions to continue over the medium term, which provides further revenue visibility.

Stretched Credit Metrics of Parent: In FY18, SPCPL’s revenue was INR387,347 million (FY17: INR295,995 million), its EBITDA margin was 6.7 (6.3%), while its interest cover was 1.3x (1.1x). The company’s net leverage was 7.6x in FY18 (FY17: 9.6x). However, the management expects the company’s leverage to improve to around 3.0x by end-FY20 driven by the various deleveraging initiatives being undertaken by SPCPL.

RATING SENSITIVITIES

Positive: An improvement in the business profile as a result of additional long-term contracts and/or a longer track record of SWSL, along with a material improvement in the credit profile of SPCPL and timely flow of adequate information required for periodic monitoring of the credit ratings would lead to a positive rating action.

Negative: Any reduction in the revenue visibility, increase in the working capital cycle and invocation of bank guarantees, leading to the net leverage exceeding 0.5x could result in a rating downgrade. Also, any material weakening of SPCPL’s credit profile or lack of timely flow of adequate information required for periodic monitoring could be negative for the ratings.

COMPANY PROFILE

SWSL was demerged from SWPL in March 2018. It is one of the largest non-original equipment manufacturers. The company is a leading global solar EPC contractor with diversified presence across geographies.  SWSL got listed on the BSE Ltd and National Stock Exchange Limited in August 2019. SPCPL owns 50.6% stake in the company, Mr. Khurshed Daruvala holds 25.7% stake, while the balance is held by public.

FINANCIAL SUMMARY

RATING HISTORY

COMPLEXITY LEVEL OF INSTRUMENTS

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Source : indiaratings