Ladies and gentlemen, good day and welcome to Sterling and Wilson Solar Limited Q4 FY 2022 earnings conference call. This conference call may contain forward-looking statements about the company which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Vishal Jain. Thank you and over to you, Mr. Jain.
Good afternoon, everyone. I welcome you all to Q4 and FY 2022 earnings call. Along with me, I have Mr. Amit Jain, Global CEO, Mr. Bahadur Dastoor, CFO, and Strategic Growth Advisors, our investor relations advisors. We will start the call with an update on the acquisition of 40% stake by Reliance Group, along with the solar power industry update and the operational highlights for the year by Mr. Amit. This will be followed by financial highlights by Mr. Bahadur. Post which we'll open the floor for Q&A. Thank you and over to you, Amit.
Thanks, Vishal, and a warm welcome to all the participants on this call. I would like to give a quick update on the stake acquisition by Reliance Industries, solar power industries and other allied renewable businesses, and status on our business operation. The acquisition of 40% stake by Reliance Group has been completed. During Q4 FY 2022, Reliance New Energy Limited, a wholly owned subsidiary of Reliance Industries Limited, completed acquisition of 40% stake in Sterling and Wilson Renewable Energy Limited via combination of primary investment, secondary purchase and open offer. Reliance Group has also been classified as a promoter of Sterling and Wilson Renewable Energy Limited, along with the existing promoter and promoter group.
Reliance Group now holds 40% of the total paid-up equity share capital of SWREL, while SP Group and KYD Group holding 25.71% and 12.85% respectively. Reliance is committed to making India a global leader in green energy based on latest and most cost competitive technologies and development capabilities. SWREL, with its engineering talent, deep domain knowledge, global presence and experience of executing some of the most complex projects globally, will become an important part of solar value chain of Reliance Group. With the primary infusion done by Reliance Group, the company balance sheet has been strengthened. Being a part of Reliance Group has given a lot of confidence to our customers, suppliers, bankers and other stakeholders, giving us an opportunity to grab a larger share of the global solar market in the coming years.
Now coming to solar EPC industry opportunities. The unprecedented commodity super cycle over two years, coupled with COVID, has led to entire solar industry suffering huge losses and IPPs choosing to buffer their projects by a year wherever possible. The shift in demand can be seen as an aberration, and solar industry is well poised for robust growth in the long term due to strong levers and the fact that LCOE for the solar plant is still cheaper than traditional sources of energy, as well as the renewable sources of energy. The stronger policy support from government in terms of tax incentives, favorable policies for renewable sector coupled with ambitious climate targets announced for COP26 are going to drive demand for solar energy to new records worldwide.
With the Indian government accelerating its plans for clean energy transition, with Prime Minister Narendra Modi pledging to build 500 GW of renewable energy and ensure that half of our energy requirements will come from renewable resources by 2030, we expect outstanding growth in Indian solar power industry in the years ahead. In the recent months, global tariffs have also started correcting upwards with the revision in prices and a lot of projects are going to be finalized in FY 2023, including in H1. It is estimated that solar PV utility scale market is expected to grow at the rate of 15% over the next few years, with growth led by developed markets like U.S., Europe, Australia as well as Indian market. Now I will give you updates on our O&M business.
Our solar O&M portfolio as of date is 7.42 GW, with 1/3 is coming out of third-party customers. O&M constitute 4.3% of revenue in FY 2022 and stood at INR 222 crores. Reduction in O&M portfolio during FY 2022 is primarily on account of sale of plants by clients to customers having their own O&M team. We are focusing on increasing international O&M portfolio through both organic and inorganic routes. Our enhanced value to customer through O&M differentiators like drone thermography, strong analytics and predictions, IV curve tracer, underground cable fault finders, etc., will help us to expand our O&M portfolio.
There has been an increased focus of countries globally towards green hydrogen mission. The government of India has launched National Hydrogen Mission and announced its decision to transform India into a global hub for green hydrogen production. Additionally, the clients are focusing on round the clock renewable energy projects with battery storage, which is going to drive the demand for renewable plants, especially solar plants. U.S., Europe, and Australia are the large market for focusing on large solar PV plus battery energy storage projects. We'll leverage our client relationship to gain meaningful market share in these new businesses. Now coming back to our order book and operations, as mentioned in our earlier investor calls, there have been significant delays in finalization of orders in FY 2022 due to unprecedented increase in module, commodities, and freight costs, resulting in order finalization getting pushed to FY 2023.
The entire order book of INR 719 crore in FY 2022 is from the domestic market due to the sharp reduction in finalizations of orders globally. Due to unprecedented increase in input prices, the company has been cautious in picking orders in the international market. Our unexecuted order book as on March 31st, 2022 stands at INR 3,253 crore, which is mostly executable over the next 12 months. This UOB excludes solar EPC orders amounting to INR 2,030 crore, which will now be unviable for developers considering increased module and commodity costs, and INR 1,500 crore orders relating to waste-to-energy projects in U.K. Post the primary infusion in the company, our focus has shifted to scaling up the solar businesses to meet the huge demand which will be generated due to this strategic investment.
The board of directors have taken a decision not to pursue this contract at this point of time and focus our energies on our core business. The module prices, commodities prices, and logistic costs, which had started to soften slightly from January 2022, have again started hardening due to Russia-Ukraine war, and we anticipate them to remain elevated. However, the developers are geared up to award projects in FY 2023 after factoring the price increase. The opportunity pipeline for finalization during FY 2023 looks robust in the domestic and international market. We expect our order booking to return to pre-COVID levels in FY 2023. I would like to state that with our global reach, strong relationship with customers and lenders, as well as induction of Reliance Group as an additional promoter of the company, we are well-positioned to capitalize on these growth opportunities. With this, I will ask Mr. Bahadur, our CFO, to take you through the consolidated financial highlights.
Thank you very much.
Thank you, Amit, and good afternoon, friends. I will take you through the consolidated financials for the year ended March 31st, 2022. Revenue for FY 2022 increased by 2.3% to INR 5,199 crores. O&M constituted 4.3% of the total revenue in FY 2022. The region-wise revenue breakup is as follows. Australia 56%, U.S. 21%, India 11%, Latin America 9%, and balance 3% by the MENA and Africa region. Gross margins for FY 2022 continue to remain impacted significantly, primarily on account of increase in module prices, liquidated damages, and increase in overhead and subcontracting costs due to extension in project timelines because of COVID and module delivery delays. Gross margins on unexecuted UOB as of 31st March 2022 is likely to be between 4%-6%.
Recurring overheads increased by 6% in FY 2022, majorly due to office set up in Spain and its associated costs to cater to the European market. The company has decided to invest in its manpower to take advantage of the tremendous growth opportunities in the domestic and international market. As part of the transaction with Reliance Group, the company has signed an indemnity agreement with SP Group, KYD Group, and Reliance Group on December 29th, 2021. According to the agreement, the SP and KYD Group would indemnify and reimburse the company and its subsidiaries for a net amount if it exceeds INR 300 crore on settlement of liquidated damages pertaining to past and existing projects, old receivables, direct and indirect tax litigations, as well as certain legal and regulatory matters.
These amounts would be settled on 30th September of each succeeding year on the basis of the final settlement amounts with customers, suppliers, and other authorities. SP Group and KYD Group are consequently entitled to net off the amounts payable with specific counterclaims levied and recovered by the company and its subsidiaries on its customers and vendors relating to these matters. The company and its subsidiaries have already made provisions equivalent to INR 300 crore. Thus, there will be no further impact on the results of the company in future in these matters. Now, coming to the balance sheet. As on March 31st, 2022, net worth stood at INR 905 crore, and cash and cash equivalents stood at approximately INR 508 crore.
The borrowings from banks stood at INR 435 crore, and thus the company is net debt-free as of 31st March 2022. Advance and performance bank guarantees and cash by four customers amounted to INR 588 crore. With one customer, we have signed the final settlement agreement, and the encashed amount of INR 176 crore has been refunded by the customer in January 2022. An additional INR 144 crore towards another project is expected by end of April 2022. With respect to the balance two customers whose projects are virtually completed, the company is confident of a mutually acceptable settlement in the coming quarters. As on March 31st, 2022, we had a negative working capital of INR 302 crore as compared to negative working capital of INR 530 crore as on March 2021.
Receivables due for more than one year as at March 31, 2022 stood at INR 251 crore. They comprise related party receivables of INR 19 crore, which is net of INR 196 crore that the company needs to pay back to the related party against advance received for the waste-to-energy project. With this, we can now open the floor to questions and answers.
Thank you very much. We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. Anyone who wishes to ask a question may press star and one. The first question is from the line of Abhineet Anand from Emkay Global Financial Services. Please go ahead.
Yeah, thanks for the opportunity. My first question is to Mr. Jain. When you mentioned in your opening remark that, you know, you see your order book going back to pre-COVID times. If you can elaborate on the same with, and also add upon some of the regional, you know, what do you expect in, say, Australia, U.S., et cetera, in terms of, you know, prospects and, your hit rate in those regions.
Okay. As we have reiterated in our previous calls that the project pipeline continues to be robust in itself that due to the uncertainties in the market, the orders closer by the clients have been shifted. In international markets, we have a pipeline of close to 12 GW, which we are pursuing right now, which remains open in various geographies USA, Australia, Middle East, LATAM, and Southeast Asia, as far as international geographies are concerned. We are targeting to close this year close to 1.5 GW of orders valued between $700 million-$1 billion. That's our international targets. The U.S. pipeline continues to be around 3 GW. The U.S. and Europe are going to be around 3 GW.
Our target pipeline is there, and we expect to close from these markets somewhere between 400-600 MW from both the markets. It can be there, and we get to know as we approach close to the deal closing. That's what we can expect. We are fairly sure that we'll be having reasonably good success in all the markets, and we see the growth coming from all the markets. That was our projections from the international markets this year.
In terms of the domestic market, there looks to be, you know, some uptick that can be seen for the next few years. I mean, from the domestic side, what's your strategy to maybe gain market share or how do you know, given the increase in the size of the market itself, how do you plan to, you know, take more orders?
Yeah. The factors which are like both of those, we all know that Indian market is poised for a great growth and the numbers are going to go big way. The factors which are impacting international markets are impacting Indian markets as well, the commodity super cycle and modules. This year we are sure of closing between INR 1,000 crore-INR 1,200 crore for the Indian market. Both the numbers which I have given you for international as well as the domestic market don't include the projects to be done by numbers for third party.
Okay.
Sorry. Amit was not very clear towards the end. What he meant was that both these numbers do not include any captive work which we may get for the Reliance Group.
Okay. This domestic INR 1,000-1,200 crore you are saying as an inflow or the revenue is more from the current order book, right?
I will take that question.
Yeah, revenue will be from it. Yeah.
Amit is talking about order inflow and not revenue. Generally it depends on which quarter the order comes in. Obviously, right now we are projecting the order book for what is given for the full year. Over the succeeding quarters we'll be able to give a better revenue guidance.
Okay. Basically, as I understand, you're talking about $750 million-$1 billion of which is outside India and around INR 1,000-INR 1,200 crore inflow in India. Is it right?
These are order booking numbers.
Yeah, yeah. I'm talking about order booking only, sir. For 2023. Okay. Second thing is to Bahadur in terms of gross margin. I think you did mention in terms of unexecuted order book to have a margin of 4%-6%, right? Given our fixed cost below the gross margin, is it fair to say that we will be a bit positive on these projects as of now?
You can't take the entire gross margin and attribute it to a 4%-6% gross margin on INR 3,000 crore because then you would not be EBITDA positive. Obviously, after factoring in the revenue inflows from the orders which Mr. Amit did mention, we would definitely be EBITDA positive.
Any ballpark revenue guidance you would like to throw?
No, not at this stage, Abhineet. Maybe by the time we come to the next quarter, we'll be able to give a revenue guidance where we'll actually work out when the order inflows will come in and how much of that will be revenue for the year. Basically what we are trying to say is we are targeting numbers which were close to what we were doing before. Revenue part we'll just update in the next quarterly call.
Okay. Last thing from my side is what I understand from the indemnity agreement and what you did mention is that the company has taken all the provision. Anything to do with ups and downs will be between RIL, SP and KYD Group and not to the company. There is no hit on the company, right?
There will be no hit on the company, but if the company's cash flows have been blocked by virtue of this, so any cash flows which come in would come in into the company. There would be no profitability angle in this at all.
Okay. Thanks. Those were my questions.
Thank you. Operator, please press star one to ask a question. The next question is from the line of Ankit Gupta from Alchemy Capital Management. Please go ahead.
Hi, sir. Sir, I missed the O&M portfolio size. Can you repeat it again? Hello?
Sir, can he hear us?
Yeah. You want to know the O&M portfolio?
Yeah.
As on 31st March, it is about 7.4 GW.
7.4 GW. Second, sir, the profits in the O&M side has been reducing in Q3 as well as Q2 in Q4 drastically. Can we expect the margins to again go up in FY 2023 to earlier levels of 30%-35%?
See, the gross margins on an average on running projects are 35%. As I had explained in Q3, in Q4 there have been certain costs where the revenue could not be recognized because the O&M will start from the first quarter of FY 2023. Once that comes in on running jobs, the gross margin on a blended basis does continue to be 35%.
Okay. That's good to know. Sir, just to understand-
Am I audible or am I not audible?
Yes, sir, you're audible.
Yes, sir, you are audible.
Okay.
Last thing on my end, sir. How are the polysilicon prices now? In Q3 you told us that the prices have started to come down and they were down around 10% in January. What are the prices now after Q4?
Prices of solar polysilicon are highly volatile so that they are continuously fluctuating in the market. As we had told during our speech, they started stabilizing, but the volatility has started again and we'll get to know the trends when going next one quarter how in which direction they are moving.
Because of this volatility, can we expect that the finalization of-
Sorry to interrupt you. Your voice-
Yeah.
Your voice is not coming very clear. May I request you to speak through the
Just a minute. Yeah, yeah. Just. Yeah. Is it okay now?
Yes, sir. Thank you.
Yeah. Sir, just last question, sir. Because this increase in prices, should we expect the finalization of projects to even get delayed to second half of FY 2023?
We are tracking the situation. For some of the places, even the tariffs are going up. We expect we have to watch the situation very closely, and some of the orders closing may shift to H2.
Okay. Sir, you talked about this captive projects from Reliance. Any idea what would be the scale of these projects? They will be given entirely to SP Group only or they will also be like we have to bid for them?
Both the companies are still working on the strategy and we are still under discussion. We'll come up with more clarity and guidance on that during our next quarter call. We are discussing and still that is work in progress and we are still finalizing what could be the volume.
Okay. Thank you, sir. Thank you so much.
Thank you. The next question is from the line of Puneet from HSBC. Please go ahead.
Thank you so much. My question again is on your, you know, captive orders. Have you been asked to keep some, you know, spare capacity, you know, separate for Reliance orders or are you free to use whatever capabilities that you have for all your global orders?
No, that's what I said. That's something which we are discussing and strategizing how to address that. In any case, considering the you know strong growth in Indian markets, we are always in a position of capacity building, and we can address the significant markets. We'll come out with more details during our next quarter call.
Okay. In terms of order margins, is there an agreement as to what margins you will get? Or is that also based on each project?
I will request Mr. Bahadur to take that question.
Yeah.
This will be discussed on a case to case basis. There is nothing we can add at the moment right now. We have sufficient teams to cater to both the present order capacity as well as what we may need to do for Reliance in future. We have been asked to gear up for large volumes.
Understood. From the margin perspective, there is no, what you call, transfer pricing formula, which has already been defined as yet?
Obviously, there would have to be some kind of formula, but it is at early stages of discussion. I would say rather it is at a good stage of discussion.
Okay. Understood. Theoretically, if I were to say, what would be your capabilities in terms of executing orders in a single year in terms of gigawatts?
Let's just go back a few years, and you will see that the same company had got turnovers of INR 6,500 crores, INR 8,300 crores. Turnover is not the issue. Gigawatt is not the issue. There is sufficient capacity within the organization, and wherever we would need to augment, we would be able to do so, and ramp up capacities.
Understood. That's all from my side. Thank you so much, and all the best.
Thank you. The next question is from the line of Keval Ashar from DSP Investment Managers. Please go ahead.
Hello, am I audible?
Yes, sir.
Yeah. Just wanted to understand with BCD on imports of solar module and solar cells in India, do you see project prices to increase significantly? As well as how do you foresee the demand scenario for utility scale projects in India, post implementation of basic customs duty?
Could you please repeat the last line of the question, or you can speak.
Yeah. How do you foresee the demand scenario for utility scale projects in India, post the implementation of BCD, that is, on modules and cells?
I would like to say that the current projections we have and the plans the Government of India has announced, there is no-
Mm-hmm.
No doubt the demand for utility scale projects, irrespective of any duty regime, is bound to go up significantly. This question of BCD, there are various discussions going on, but
Yeah.
I don't see that there will be any significant impact, but the volumes will keep being significantly higher. All the domestic corporates are working through the addition of significant in-house manufacturing capacities. The various DLI schemes have been announced by Government of India. I think going forward, that will take care of all the duty issues, and we will see that the demand for utility scale projects will continue to be on an upward trend only.
Okay. Sure. Thank you so much, and all the best for the coming years.
Thank you. Participants, you may press star and one to ask a question. The next question is from the line of Pritesh Vora from Mission Holdings Private Limited. Please go ahead.
Hello, sir. Can you hear me?
Yes, we can hear you.
Yes, you are audible.
Yes. I just want to understand how is the structure of contract worked out in this industry? Like, when you take a EPC contract, would not be the material cost, which you do not make PV modules and other things, is back-to-back passed on to the customer? I do not understand why there is a gross margin negative in this industry. Generally, EPC industry, when material is back-to-back billed to the client, what had happened in the past where you have a gross margin negative? Can we understand that this is past now and now all the contract which you will execute will have a back-to-back arrangement of material cost transfer to the client?
I will answer your question. Basically, it all depends upon what kind of marketing and what type of client you are closing the contract, and contract format can be very different depending upon the market requirement. So far, what we have seen, like I was excluding the periods of this super commodity cycle, we have seen that the module prices and the material prices were pretty constant, and we could predict what the volatility is going to be in the market, and it is the same as pricing in our contracts. During the last two years were like of extreme volatility and no EPC company could have predicted that. That's the reason the kind of the contract structure which we are signing.
It's not that in all the contracts we were taking on the risk. Those contracts were mixed, where we were passing on the risk, but the module prices were passed through. Some of the contracts we had taken the risk. That was a mixed model. Going forward, we'll be open to both the structure in which we'll be signing the passing on the risk back-to-back to our clients, and somewhere we will be accepting the risk with the proper mitigation strategy and risk sharing with the client as well as with our supplier. We have to address the contract structure going forward based on what the market conditions are. How the commodity market prices are moving. We have to address based on that.
In the markets where the non-recourse funded projects are there, and that's in most of the Western and Middle East markets. There is no option, but we have to go for complete EPC projects, and there is no mechanism for pass-through model. In all those kind of contracts, we are working out strategies with our clients and vendors to mitigate those risks going forward.
How does the industry function in this? Suppose you get a D-date, a zero date, you get an order from the client. Would you not place the order back-to-back to the vendor at the same price? How does the time lag happen? Why there is erosion in terms of, I mean, why there is a negative gross margin? I mean, how does it happen?
No, actually you are right. We have the strategy for placing the orders on back-to-back prices for most of the materials, and that's the basis we have worked on. In the recent years, most of the Chinese suppliers have reneged on the signed contracts, and they have not respected or honored the contracts which we have signed. That's the major reason we have taken the hit on our margins. Not only that, they've also delayed the supplies, which has led to the erosion of the margins in our prices. All that you are saying has already been like part of our strategy. The orders are placed back-to-back. We take care of the pricing.
It is due to the reneging of contracts by Chinese suppliers which has created this situation, which has led to increase in prices and our overhead costs. With other suppliers like cables, inverters, et cetera, and other miscellaneous suppliers, they honor their contracts, and there we have been able to withstand any kind of price variations.
Okay. How we are sure, sir, that going forward, this will not get repeated? Like, how we are sure that Chinese supplier now onwards will able to honor the contract and we will not have a problem in fulfilling the EPC order?
In that case, if we take those risks, they will be then that's with the Chinese suppliers. The contracts will be backed by much higher amounts of the performance guarantees. They will be far more bankable, and we'll be signing far more stringent contracts. If that strategy is there, and we'll try to involve our clients in finalizing the orders so that they are under pressure both from the developer as well as the EPC, and they are backing up their contracts with much higher amounts of the bonds.
Okay. My last question is, sir, what can we consider the EBITDA margin, steady-state EBITDA margin in this business? What is the current, I mean, if you consider that everything is back to normal, what can we consider steady-state EBITDA margin in this business?
Yeah.
I will take
Bahadur will take it.
If you look at our gross margins in the past, they were between 10%-11%. If we are looking at overheads to be between 5%-6% or even lesser than that, your steady-state EBITDA margin could be anywhere between 5%-7%, more likely a 5%-6% EBITDA margin is what we are looking. They may slightly go up also, but I'm just being a little conservative when I say a number like this.
All right, sir. Wish you all the best. Thank you very much.
Thank you very much.
Thank you. Participants, you may press star and one to ask a question. The next question is from the line of Faisal Hawa from H. G. Hawa and Company. Please go ahead.
Hello? Hello?
Sir, sorry, we are unable to hear you.
Yeah. Can you hear me now? Can you hear me now?
Yes, sir.
Sir, we are starting out with a very small order book this year. Will we not find it very difficult to recover ground from here on?
You are not very clear.
Mr. Hawa, we lost your audio in the end of the.
We are starting out with a very small order book at the beginning of the year. Will it not be very difficult to, you know, really, have any kind of a traction in this year for revenue growth? That is one. Secondly, will we ever get into kind of any area of manufacturing processes for, say, green hydrogen or, you know, even solar panels for that matter?
Yeah. Mr. Hawa, that's it. That, I would say you are correct. This year, we'll not be able to match the revenues of FY 2022, so there will be reduction in revenues for the year FY 2023. Could you repeat your last part of your question again?
Will we ever be getting into any kind of manufacturing for, say, green hydrogen or say even for solar panels to cut out the risk of, you know, suppliers not
No. Not at this point of time, we'll not be entering into any kind of manufacturing, but we'll be supported on our project going forward. Because as you must have heard, Reliance will be at, has planned for gigafactories for panels, batteries and electrolyzers as well. In future, if we go into the projects, we'll be supported by the products of Reliance, and there'll be no dependency on China for our projects.
Just to add to what Bahadur said.
Sir, any progress on batteries? Yeah, sorry.
This is more like the year of consolidation. It is actually FY 2024 which will be good with the order inflow of 23 + the captive business that we've been talking about.
23 + what, sir?
It'll be FY 2024.
Got it.
Which will be the real year of growth.
Okay.
With the order inflow carry forward of FY 2023 that we have targeted.
Okay.
Plus captive business, which is what we are talking about.
Sir, any progress on the battery front? Are you developing any kind of proprietary technology with batteries or...
Sir, your voice is not clear. Can you repeat your question again?
Any progress from the battery front, you know, where we get any kind of proprietary technology on the battery front from Reliance and, you know, we-
Uh.
Implement an end-to-end?
No, actually, as we have said, because we're still discussing with Reliance and we are not clearly up to speed on what kind of work which Reliance is doing on battery technology. To give an update on our battery energy storage business, we are technology agnostic, and we are bidding for EPC projects in all our international geographies of Australia, U.K., Latin America, USA and Australia. We are there. Currently we have a big pipeline of 500 MWh, which is valued at $125 million. We see a pretty robust growth in this market, and we are addressing internationally this market. With the RTC tenders seen from Government of India, in coming years, we see a robust growth in Indian market with respect to battery energy storage space.
As far as the manufacturing is concerned, we are not going to get into any manufacturing on our own.
Now that we are broadly debt free, are we changing banks and are we getting some more bank guarantee limits also from our bank?
That is a work in progress. We are working towards ensuring that we have all the limits that we need for the business that we are looking at for FY 2023 as well as FY 2024. We are in the process of talking to newer bankers to increase our consortium size, both within and outside India.
Okay. Thank you. Thank you a lot for answering all my questions.
Thank you. Participants, you may press star and one to ask the question. The next question is from the line of Akshay Kothari from Envision Capital Services. Please go ahead.
Good afternoon, sir. Which are the geographies where we are facing aggressive bidding, if you may, put some light on that?
I would say a lot of geographies are competitive, but with the Chinese coming in, the Middle East and Africa are the markets where we see the most fierce and aggressive bidding. Middle East and Africa are still continuously dominated by Chinese with the kind of very, very low prices. We see that in coming quarters or coming years, we may see the course correction and even in these markets, because the players which have bagged the orders at very low prices are not able to deliver, are not able to perform. As of now, the Middle East and Africa, they are the most price aggressive markets.
Okay. On the second front, like where the Chinese suppliers have not honored their contracts. Are we taking some damages from them or, what are we doing regarding that?
We are working on that. Wherever they have not honored the contract, we are working on recovering damages or renegotiation or how we can be compensated against the impact wherever they have reneged the contract.
Okay. Thanks a lot. All the best.
Thank you. Participants, you may press star and one to ask the question. The next question is from the line of Alok Ranjan from IIFL Asset Management. Please go ahead.
Hi. Good afternoon, sir. Just couple of clarifications. In terms of unexecuted order value movement, you have mentioned that INR 2,030 crore of contract is now unviable. Whether there is any, you know, claims which will be made by us to developers, or is it the developer only who canceled the INR 2,030 crore of, you know, orders?
It is broken up into two parts. In the case of part of it, the developer himself has said that the order is unviable and has canceled it. In another part, we are also in discussions with the developer to say that it is unviable for you and unviable for us. Discussions are presently ongoing on that front, but we have excluded it out of being conservative to say that we believe that it is at the present not going to be executable.
Sir, if we have to execute that portion then that will be executed at the losses, in terms of, you know, if the developer goes ahead with the project, right?
No, the developer will not be going ahead with the project. That's why we said we are under discussions with him. At the present even he is suffering on various other grounds, not just the EPC part.
Got it, sir. In terms of cost, you know, in the normal scenario, you mentioned that 35% is the gross margin. Then in that case,
O&M even.
O&M. Okay. 15% for this project, sir, right?
No, no, I never said 15%. I said it is between 10%-11% was what it was, which included the O&M. If you were to just look at EPC, it could range, depending on which geography you are, somewhere between 8%-10% would be our EPC margin.
Got it. I just wanted to understand this 90% which we procure from outside, what is the cost inflation that we have seen over the last, let's say 18 months?
Sorry, could you repeat that? 90% of what we get from outside?
The COGS part, which is, let's say 90%, what is the inflation that we have seen the overall basket that we procure?
It is not really a COGS because we do not supply goods here. We are into project manufacturing. If you see our investor presentation in slide number nine, we have given the inflationary trends for steel, for logistics, as well as for module prices over there.
Can we say that the inflation have been close to 50%-60% around that, in that overall basket blended?
No, no. It is different. Your module prices, which were $0.17-$0.18, have gone up all the way up to $0.27-$0.28, cooled down, and now gone up again. Logistics pricing, which has freight, which has been somewhere around $2,500 per 40-ft container, have gone up all the way up to $17,000 + per container before cooling down. Same is the case with LME as well as with steel and other commodities. There is no one ratio that will fit all. There are different increases happening for different items of cost.
Got it. I was just trying to understand the price variations, INR 325 crore approval that you have got. Will it be catering to the unexecuted order value at the end of 31st March which you have? At least it will be catering to what inflation that we have seen or there will be impact which will be continuing, like the way you are mentioning 2023, a consolidated year or something.
The price variations, which have been considered, are those which have already been approved. They were part of the order book, some of which has seen revenue in the year FY 2022 and some of which will remain in the UOB. The balance portion will remain in the UOB for FY 2023.
Got it. Sir, in terms of receivables, the way you have mentioned for more than one year, INR 251 crore is there. Can you help me understand, this 49% Argentina, INR 123 crore which is there? You have mentioned that this is covered under promoter indem-
Your voice has once again cracked. I missed you after Argentina.
To understand this INR 123 crore portion out of INR 251 crore, whether there is any impact on the company that can happen if this INR 123 crore cannot be recovered in that sense.
There will be no impact on the company. As we have mentioned before, this is covered under the indemnity agreement. And therefore, anything beyond INR 300 crores, the impact doesn't fall on the company. All provisions up for INR 300 crores have already been made. Therefore, anything happening on this Argentina front or even the matter under NCLAT front will not affect the profit and loss account of the company.
Got it. Perfect, sir. Just last question from my side. In case of China, the kind of the contract dishonoring that we have seen, is it like it happened, across the Chinese solar companies or it was with few weaker companies in the China which we might be dealing with, in the last year?
I will just start off and then Mr. Amit will add. First of all, we do not deal with any weak module manufacturers. The ones we deal with are all the top tier one module manufacturers only. Because that is the kind of module manufacturers that even our global clientele look for. The reneging has happened across the board with a number of EPC contractors and developers. Mr. Amit can add further if I have missed anything.
No, no, Bahadur, you have perfectly stated the right position that we use only tier one contractors. The reneging was across the board, and we are not the only one who suffered. We have seen that phenomenon globally across other EPCs as well as our clients in multiple geographies which they have suffered by reneging of contracts by tier one Chinese module manufacturers.
Sir, just a follow-up to that. In such kind of scenario where the contracts are not getting honored by Chinese company, how global counterparts for you, like developers, are imposing any condition that you have to procure from, a part of that from ex-China or something in the new contracts?
No, that's what we told, that both developers as well as EPCs are working together. We are working together with our clients to develop any strategy where the modules have to be procured by us. The various new mechanisms are being included in the contracts, where our EPCs have to buy these modules directly from Chinese suppliers.
Got it, sir. That's all from myself. Thanks.
Thank you.
Thank you. The next question is from the line of Abhinav Bhandari from Nippon Life India Asset Management. Please go ahead.
Yeah, thanks for the opportunity. A couple of questions. One is while one understands that you're not giving a revenue guidance for FY 2023 because of things getting decided. Just to understand on the overhead side, where we had you know exceptional items the entire last year. Obviously, there was that extra expense because of Spain office set up as well. How should one look at overheads for FY 2023?
Overhead should be slightly higher, maybe 10%-15% higher. That is what we presently envisage, as compared to FY 2022.
Sure. Any, you know, specific areas where we are investing more because FY 2022 base itself was quite high. Just understanding that. Most of the provisions you have already taken, which are in that base, actually.
Correct, Abhinav. What is happening is the company is not going to invest too much in the development cycle that we are looking at in certain markets like U.S. and Spain. Those expenses are not expected to be high. However, at the same time, you will understand that there is always inflation, increase in remuneration, et cetera, which happens from time to time. There is also the captive business of Reliance, which we have to gear up for. Keeping all this in mind, we believe that we will have to build up overheads, especially keeping FY 2024 in mind.
Got that. The other-
Will gradually fall as the revenue goes up. Right now it is 6% on a INR 5,000 crore. Obviously, in FY 2024, when things are much, much better as we believe they would be, your revenue to, overhead to revenue percentage would be much lower.
Sure. Just on the working capital cycle as well, since there are a lot of stuck items in the working capital cycle sitting in both the receivables as well as other assets, other current assets, would this release be sufficient to take care of our requirements for FY 2023, given that we are any which way not looking for a bigger growth year in FY 2023?
Release of, you mean all of these items which are stuck? It will take some amount of time because.
Itself, I think.
Sorry. Say that again, please, Abhinav.
I was saying part release itself should be good enough for us to understand.
It may not be. The company would need to borrow in the near term just to ensure that, you know, it takes care of its cash requirements for ongoing projects as well as overheads. If all of it were to be released, obviously it is far more than enough than the company requires.
Yeah. Sure. Got that, sir. Thank you so much.
Thank you. The next question is from the line of Mohit from DAM Capital Advisors. Please go ahead.
Good morning, sir. Sir, two questions. The first is any color of when to expect the captive module capacity available for us to meet the domestic and global demand?
I would say that, like, that is still under discussion and Reliance is working on the plan. We'll update you on this particular aspect in coming quarters.
Understood, sir. My second question is, sir, given that let's say your captive module capacity is functioning for FY 2023, will you be able to supply that module for your global demand? Do you think there is some gestation period before you demonstrate the new product, so that the product will have a greater acceptability with the clients?
Actually that part is being handled by Reliance. As I already said, that we'll be able to share more details on this particular aspect in next few quarters. At this point of time, all the discussions are happening, but we are not in a position to share more details at this point of time.
Can I expect by the next quarter results, or do you think it will take two, three quarters?
No, I'm not sure by the next quarter because that's a process which is like the plants are being set up, so we're not sure about the details. As and when the discussions with Reliance conclude on that front, we'll come back to you. Maybe next or maybe Q1 or Q2 call that we are not sure of. As and when we have updates, we'll definitely come back to you.
Understood, sir. Thank you, and sir, best of luck. Thank you.
Thank you.
Thank you. The next question is from the line of Abhineet Anand from Emkay Global Financial Services. Please go ahead.
Yeah, thanks for the opportunity again. As I understand, the domestic EPC strategy that we had, we never bid for projects where, you know, land et cetera was involved. Correct me if I'm wrong. With Reliance as, you know, one of the promoters, is there a shift in our domestic EPC strategy?
As of now, our strategy with respect to land risk continues to be the same. If there is any development after discussion or change in strategy, we'll reconfigure our strategy. As of now, we'll continue without the land risk on our domestic EPC market.
Okay. Secondly, you know, you did mention that Middle East and Africa market has become very competitive, you know, right, largely from the Chinese side. I mean, what this competition, I'm just trying to, you know, maybe you know, dissect in terms of are these because the module price, module guys itself are competing or basically that the EPC guy is making a 0% or 1% margin and, you know, being very competitive. Which end of that competition, is it the EPC guy or the module guy who is basically, you know, sacrificing the margin for that?
I would say that the EPC guy is highly subsidizing the numbers which they are quoting to various developers. What we would have seen in the market trends in last two years is that Chinese EPC players taking huge hits in this market. That is very significant that they have taken very aggressive calls, bidding without margins or sometimes at negative margins. Now we see that even on those numbers, there is a huge, huge hit they are taking and a lot of projects are underperforming. That's very clear from that, where it is coming from.
It's fair to understand that policy of theirs will not survive for medium-term, right? It might be a near-term strategy because of whatever reasons, but it's fair to understand when this market stabilizes, because we have done good work in this region earlier. I was just trying to understand whether this in the medium term remains as an opportunity size for, you know, Sterling.
Absolutely, we are hoping for that. Because most of the major players are not able to deliver in this market on the scale of projects which we have delivered in the past. We remain very hopeful and optimistic that this market will come back to us. We have to just wait and watch maybe next week, quarter or next year. That's difficult to comment on. Definitely we remain a strong contender for this market, and it is definitely going to come back to us. What we see that even the market size would grow significantly in the Middle East because of the green hydrogen. Chinese will not be able to address everything in any scenario. We'll see.
Let's see how the things unfold, and we remain, like, very bullish for future quarters or years for this market.
Lastly from me, you know, you did mention the, you know, captive from RIL. Is the green hydrogen part also going to be built with the EPC arm for that, or it is too early to state?
As you have said yourself, it is too early to comment on green hydrogen part.
Okay. Thanks a lot. Thanks a lot.
Thank you very much. I now hand the conference over to Mr. Amit Jain for closing comments.
Yeah. Thank you. With the robust backing of Reliance Group and Shapoorji Pallonji Group, we endeavor to accelerate our growth trajectory by aggressively pursuing large international markets, that is U.S. and Europe, where we foresee a huge potential of growth. India too has reached an inflection point from where we anticipate the growth of solar power industry to garner further pace and momentum. We would like to reiterate that the opportunity pipeline for finalization during FY 2023 looks robust in the domestic and international market, and we expect our order booking to return to pre-COVID levels in FY 2023. With our deep-rooted client relationships, global presence, ability to provide customized solution, strong track record of executing complex and large scale projects supported by a robust balance sheet and strong parentage of Reliance Group and Shapoorji Pallonji Group, we are confident of regaining our leadership position.
I would like to thank everybody for joining the call. I hope we have been able to address all your queries. For any further information, kindly get in touch with Mr. Vishal Jain, our Strategic Growth Advisors, our investor relations advisors. Thank you once again and have a great day. Thank you.
Thank you very much. On behalf of Sterling and Wilson Renewable Energy Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.