Ladies and gentlemen, good day, and welcome to the Sterling and Wilson Solar Limited Q2 and H1 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 guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in 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, Head, Investor Relations. Thank you, and over to you, sir.
Good morning, everyone. I welcome you all to Q2 FY 2022 and H1 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 solar power industry and operational highlights for the quarter and half year by Amit, followed by financial highlights by Bahadur. Post which, we will 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 industry and other allied renewable businesses, and status on our business operation. In October 2021, Reliance New Energy Solar Limited, a wholly owned subsidiary of Reliance Industries Limited, executed definitive agreements with promoters of the company to acquire 40% stake in Sterling and Wilson Solar Limited via a combination of primary investments, secondary purchase and open offer. This deal would entail a cash inflow of INR 1,100 crore into Sterling and Wilson Solar Limited from preferential issue to Reliance New Energy Solar Limited, thereby strengthening the balance sheet and further improving our financial profile. Reliance is committed to making India a global leader in green energy based on latest and most cost-competitive technologies and development capabilities.
Sterling and Wilson Solar Limited, 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. Sterling and Wilson Solar will immensely benefit from Reliance Group integrated new energy vision, which will further strengthen our position as a leading EPC and O&M player globally. This will provide us with great opportunity to further accelerate our revenue growth. Now I'll give you an update on our waste to energy business. We signed our first waste to energy order in United Kingdom for approximately INR 1,500 crores from a leading developer of energy assets in U.K. and Europe. The project is in collaboration with an associate company, and the project will be executed over a period of three years, which will provide consistent revenue stream year- on- year.
The facility will process 23.2 tonnes of non-recyclable solid municipal waste per hour, diverting over 185,600 metric tons of waste each year and generate around 19.6 MW of energy. As per the contract, the company would receive 15% of the contract value as advance. From our waste-to-energy business, we largely plan to focus on Europe and U.K., which constitute 40% of the global waste-to-energy market. We have recently opened a branch office in U.K. The waste-to-energy market in Europe and U.K. is expected to grow by $5.25 billion annually for coming 5-7 years. About 70 new plants are anticipated to come up every year until 2027.
There is a robust bid pipeline for waste-to-energy business worth $685 million in the U.K. market. We expect gross margin for waste-to-energy business upward of 10% with negative working capital cycle. Now, as we informed during our last call, we have entered into battery energy storage system. Battery energy storage system is expected to grow in next four years to $12 billion annually. U.K. and Europe will be the next big consolidated market with U.K., Germany, France, Italy and Spain being top five countries. We have added team of battery experts, sales and execution team to capture this market opportunity and have bid orders pipeline of 1.4 gigawatt hours across U.S., Australia, Europe and Latin America.
Now, the solar industry continue to face headwinds due to unprecedented increase in cost of modules, commodities and freight costs over the last one year. It was earlier anticipated that situation would ease out and order finalization would pick up in H2 FY 2022. However, the prices continue to rise, making the projects for IPPs unviable and hence we anticipate that majority of order finalization will shift from current year to FY 2023. As a result, the short-term outlook continues to be challenging. The long-term outlook continues to remain robust due to global thrust on clean energy and significant solar capacity additions planned by IPPs globally. Our overall addressable market across the globe for solar EPC projects is expected to grow at 14%-15% per annum.
We have increased our focus on two large significant green energy markets, U.S. and Europe. The U.S. market is expected to add at the rate of 25 GW in 2022 with 75% of the projects in utility scale. The recent U.S. government policies have given a significant impetus to the growth of solar and energy storage, which gives us an exciting growth opportunity in one of the largest global market. We have already completed 7 projects aggregating 38 MW in U.S. Currently, 2 large projects in U.S. aggregating 400 MW are in progress and expected to be completed by Q1 FY 2023. This has resulted in Sterling Wilson being recognized as a strong EPC player in U.S. market. In Europe, we have already opened our office in Spain last year, which will be our headquarters in Europe for European operations.
200 GW of solar PV installation is expected by 2030 owing to shutdown of coal, gas and nuclear plants. We'll be pursuing development activities in both U.S. and Europe to secure more EPC business and increase market coverage in these markets. Further, the Indian market will continue to remain our focus. At recently held COP26 summit, Prime Minister Narendra Modi enhanced India's target for installed renewable energy capacity by 2030 to 500 GW, and also pledged to make renewable energy 50% of the country's energy mix by the end of the decade. The Indian solar power market is primed for enormous growth over the next decade. Our unexecuted order book as of November 13, 2021, stands at INR 6,730 crore, which is executable over the next 12 months.
It is important to note that the module price risk is limited only to the pending partial supply for the two projects aggregating 422 MW amounting to INR 765 crores. Now coming to our solar O&M business, our portfolio as of date is 8.4 GW as of 30th September 2021, with third-party O&M constituting 44% of the portfolio. We are focusing on increasing international O&M portfolio through organic and inorganic route. Our enhanced value to customer through O&M differentiations like drone thermography, strong analytics and predictions, I-V curve tracers, underground cable fault finder, et cetera, will help us to expand our O&M portfolio. With this, I will ask Mr. Bahadur Dastoor, our CFO, to take you through the consolidated financial highlights. Thank you very much. Over to you, Bahadur Dastoor.
Thank you, Amit, and good morning, friends. I will take you through the consolidated financials for the half year ended September 30, 2021. Revenue for H1 FY 2022 has been INR 2,633 crores as compared to INR 2,405 crores in H1 FY 2021. O&M constituted 4.3% of total revenue in H1 FY 2022. The region-wise revenue breakup is as follows. Australia contributed 57%, Americas contributed 27%, followed by India, which contributed 13%, and balanced 3% by MENA and Africa region. At a company level, the gross margin were impacted significantly in H1 FY 2022 on account of unprecedented increase in prices of modules, commodities and freight, and higher execution costs due to COVID.
If we were to eliminate these unprecedented price increases, then the normalized gross margin for H1 would have been 3.5%. Further, the normalized margins for H1 continue to remain lower on account of carry forward impacts of items which had affected FY 2021. Recurring overheads for H1 FY 2022 increased by INR 8 crore to INR 171 crore. In H1, we have also accounted for accelerated mark-to-market loss of INR 58 crore on account of cancellation and rebooking of forward contracts on expiry relating to ongoing projects. This resulted in accelerated accounting of losses. The same has been flushed out from effective portion of cash flow hedge of the other comprehensive income, resulting in negligible impact on shareholder funds. The same would be reversed in the coming quarters and would be recorded as a gain. Now coming to the balance sheet.
ICDs outstanding as at 14 August 2021 stood at INR 741 crore. I am happy to state that these ICDs have been fully repaid by Sterling and Wilson Private Limited and Sterling and Wilson International FZE, along with interest thereon during Q2 FY 2022. With this, the entire outstanding loans of INR 2,563 crore as on the date of listing of the company's equity shares on the stock exchanges, along with all further interest accrued till date, stands repaid in full. However, gross debt have increased from INR 468 crore as at March 2021 to INR 674 crores as at September 2021 due to advances and performance bank guarantees encashed by three customers.
We have cash and cash equivalent of approximately INR 432 crore and a net worth of INR 438 crore as on September 30, 2021. We also had a negative working capital of INR 297 crore as compared to negative working capital of INR 531 crore as on March 2021. Receivables due for more than one year as at September 30, 2021 stood at INR 412 crores compared to INR 445 crores due for more than one year as at June 30, 2021. They comprise of related party receivable of INR 166 crore, which includes receivable of INR 113 crores against which the company has received unconditional assurance of proceeds from sale of plant. Cash flow.
On the cash flow front, during H1 FY 2022, we had a negative operating cash flow from operations due to increase in working capital on account of BG encashment of INR 404 crore and payment to overdue vendors. Amount received from ICDs and additional borrowing from banks have been used to meet the requirements of cash flow from operations. Upgrade in credit ratings. In October 2021, India Ratings and Research have upgraded Sterling and Wilson Solar Limited's long-term issuer rating to IND AAA- from IND BBB+ while revising the rating watch to rating watch positive from rating watch developing. According to the credit rating agency, the upgrade reflects an improvement in SWSL's financial and liquidity profile at the standalone level, majority on account of an inflow of INR 741 crore of ICDs from the promoters, which have been used to repay the entire outstanding term debt.
The upgrade in rating also reflects an expected improvement in the business and financial profile and a further improvement in the liquidity profile of the company, as there would be a further cash inflow of INR 1,100 crore subsequent to the acquisition of a 40% stake by Reliance New Energy Solar Limited in SWSL. Additionally, Acuité Ratings & Research have also upgraded the rating for commercial papers of INR 200 crore to Acuité A2+. With this, we can now open the floor to questions and answers.
Thank you very much. We will 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. The first question is from the line of Akash Mehta from CapEx Investment. Please go ahead.
Hello. Good morning, sir. Thank you for taking my question and the detailed update on this operations. First question I had was that we had accounted for one-offs in our previous quarter results. Just want to know, you know, why is there a spillover for the same in this quarter result? Will it continue in the second half of FY 2022 as well?
I will take this question. If you see, we have explained in our investor presentation that module prices have continued to increase. Module suppliers have continued to increase their prices. We have faced effects of that. Also, freight costs earlier at between $7,500-$13,500 per forty-foot container still continue to pop to $11,500-$18,400 per forty-foot container. All of these prices, price increases have led to the effect. While we believe there were one-offs which impacted us in March 2021, the increase continues even now, affecting our performance for this six months.
Okay. When can we expect a complete turnaround in terms of our operational metrics?
See, the prices which are going right now are too volatile for someone to take a complete view on when this turnaround is expected. We will have to wait for this super cycle to come before we are in a position to give a prediction on how things will turn around.
Okay. Makes sense. Just a last question will be, how does the company plan to really hedge itself against any future volatility in module commodities and logistics prices? Any, color on that?
The company right now is in various stages of discussions with module suppliers as well as customers to try and reduce the dependencies on various costs. While for modules, we definitely have a kind of strategy in place, one has to keep in mind that as far as logistics costs or other costs are concerned, it is a part of business risk which has to be adequately costed, which we have been doing from a number of years, except for the commodity super cycle, which has existed over the last 9-12 months.
Okay. I think that's it from my side. Thanks. Thanks a lot.
Thank you. The next question is from the line of Mohit from DAM Capital. Please go ahead.
Yes. Good morning, sir, and congratulations on getting a marquee investors on your board or as a shareholder or strategic investor. My first question is, how does this new investor coming in changes our opportunity basket, and does it change anything in terms of strategy for us for the next couple of years?
Yeah. As you know, with the new investor coming in, as you must have known, Reliance is committed to making India a global leader in green energy, based on the latest and most competitive technologies, and they are capturing the entire value chain of the solar, starting from silicon to modules and storage. About a couple of years down the line, we'll be able to source all the products from India, and that will reduce our dependency on the global markets. That will give and enhance our portfolio as well as reduce our risk significantly. There, this partnership will add a lot of value to our portfolio, our top- and- bottom lines. On the other hand, Reliance is also committed to make India as a green energy hub.
They will be adding significant capacities, which will also add to our business top- and- bottom lines. We see that and our balance sheet will grow stronger year- by- year. We see that all the three synergy adding the financial strength, capturing the entire value chain and their captive projects which will be coming in India will provide a lot of business to us. All the three areas put together will give a lot of impetus to the business, and we don't see any change in our strategy going forward. We'll continue to maintain our global leadership in EPC space going forward as well.
I understand that the H2 is going to be challenging for us. How do you see FY 2023 in terms of order opportunity from international and domestic market? Have you seen the clients, you know, floating tenders at least so that we can close it somewhere in FY 2023, especially in the solar space? If you can comment something on the waste-to-energy market, the tendering which you believe is likely to close in FY 2023.
As we have explained our investor presentation and opening speech, that though the bids were there this year as well, the decision making has moved to FY 2023 due to volatility in the global markets, so projects are not viable. We see the markets also stabilizing and all the pent-up demand in the. We see the market growing at the rate of 10% to 15%-20% every year. Plus the decision making, which is not happening this year. All the projects getting moved to FY 2023. We see a big movement and enhancement in order booking in FY 2023. We see a very foreseeable at this point of time, if market stabilizes a great good growth in our order booking in FY 2023.
How does the Middle East in the H2 or FY 2023 is it going to be a key market for us?
Middle East, we are taking a cautious approach as we have explained in like various investor calls, that because of the Chinese competition in the Middle East market, we are very, very cautious, but we are taking wait and watch approach in Middle East market. U.S., Europe, Latin America, they are going to be very, very strong markets and we see lot of robust growth in those three markets, and they are our target markets.
How is Australia's space right now?
Yeah. Same applies to Australia for FY 2023 because a lot of the projects getting decided this year. We see, like, regular growth plus a pent-up demand in Australian markets as well.
Understood, sir. Thank you. All the best, sir. Thank you.
Thank you. The next question is from the line of Avneesh Anand from NK Global. Please go ahead.
Yeah, thanks for the opportunity. First, I wanted to know which Reliance association, obviously great news, but you know, how does an investor in Sterling take this from the point of view that its modules are being sourced from some of the entities in Reliance? How does this profitability in the two entities get adjusted?
This is a little presumptuous at the moment. Obviously, all related party transactions are by law at arm's length. We will be able to take this appropriately once Reliance's module capacities are in place. As of right now, I would not say dependencies, because modules are available till such time as Reliance comes up with its factories. We'll answer that question appropriately at the right time.
Yeah. Secondly, I think, Bahadur sir did mention that, you know, even if you adjust for the one-off that we have had, the gross margin in 1H would have been somewhere around 3%-4%, right? If I'm not wrong, that was the number. So we used to do somewhere around a double-digits number in the last two, three years. What is needed from the company and external environment point of view that we will go back to our double-digits gross margin numbers? Say in 2023, 2024, whatever timeline you think is suitable.
Okay. First of all, the 3% is also because of the carryover effects of the one-offs which we faced in Q4 of FY 2021. Otherwise, we would have been close to what we normally do. At the same time, what we are seeing is bids right now. The global bids have again gone up by almost 20%-30% due to increase in prices. These projects will come up for bidding next year. If all of this stabilizes, if the external environment stabilizes, I see no reason why we cannot go back to what our normal margins were in the earlier years. As of right now, these have been affected, as we have repeatedly said, due to the ongoing external issues, not entirely within the control of the company.
This is something that has affected various industries and most notably the solar industry and not just Sterling and Wilson Solar.
I appreciate that. Thirdly, this is the last question. See, domestically, if you go 1-2 years back domestically, probably we were 20% odd ±5% in terms of our order book. We used to be around INR 2,000 crore. If you see in the last 2-3 years, I see, I mean, I don't want to mention names, but Tata Power, for example, does EPC solely in India, has an order book almost of INR 8,000-9,000 crore. What exactly have we missed in the domestic market, which itself is a decent market as of today, where we were almost number one and, you know, now probably we have slipped a lot. Thanks.
No, we have not slipped a lot. We are still in the top two as far as the domestic market is concerned. Of course with Reliance coming in, that will certainly help us drastically in the domestic business for sure. We continue to remain in a leading position in the domestic market. Even right now, we have won orders in this year in the domestic market from two premium customers. We do not believe that we have slipped so much right now, and we will continue to maintain one of our leading positions in the market. Of course, let's keep one thing in mind that when we are talking of our turnover, we do not have modules in domestic business. It is always ex-modules, while Tata Power includes modules in its overall scheme of things.
That also brings into account almost a 40% differentiator in terms of turnover.
Selective in choosing.
We are also very highly selective in choosing of our customers. Not to say they must not be, but we prefer to be cautious.
Do we do public sector orders? Because I don't see we have a lot of public sector orders in India from the likes of, let's say, NTPC and from SJVN and others. Do we participate in tenders for them as well, EPC?
Yes, we do. Unless the tender includes sourcing of land, because there is too much of risk if land sourcing is also involved, especially in India. We do not do any orders with land.
With 10 GW of outstanding orders in India, how much of that would include, you know, orders with sourcing and orders without sourcing of land? A ballpark number will suffice.
We do not do any orders with land. None.
Sir, is that if India is a 10-15 GW market now and it will grow, what percentage of that would be with sourcing of land and what percentage without sourcing of land?
We'll have to check and come back to you on this, Avneesh.
Sure. No issues, sir. Thanks a lot. Thanks. Those were my questions.
Yeah.
Thank you. The next question is from the line of Samir Palod from AUM Fund Advisors. Please go ahead.
Yes, hi. Thank you for the opportunity. Sir, just if you can walk us through when on your order book solar module prices started going up and the logistics costs going up, what would be the behavior of your customers or IPP? What sort of discussions have you had with them for letting some pass-throughs, et cetera? Just want to understand the structure of the industry when this unprecedented volatility comes into being in your business.
When this unprecedented volatility in module and polysilicon started coming in, we have initiated discussions with most of our customers where we are getting impacted. Discussions are in advanced stage and some of our customers have given some compensation to us also. The discussions are in advanced stage with other customers. As part, the module and the commodity risk is on us. Going forward, we are building some strategies to pass on the risk to customers and protect from the increase with our module suppliers as well. That is an ongoing process and that is in place.
Look, sir, the module from China obviously have not agreed to stick to their commitments. How are you going to enforce anything against Chinese module suppliers? Is it gonna via bank guarantees or?
Yes. That's one of the strategies, to have the higher amount of bank guarantees from the module suppliers in China. As well as we are taking a part of our bidding strategies, so how to protect the maximum risk at the bidding stage, and so that the risk can be passed on to the customers going forward.
Isn't the customer an IPP who's bid a particular power price, and hence is very sensitive to any increases in the cost of the project?
Yes. That's why this year all the projects are getting pushed out to next year. They are sensitive. They are also working on strategies and building in tariffs. As you would see that this year tariffs, most of the tariffs with the biddings are happening. The tariffs have gone up by 10%-20%. Everybody is taking those factors into account and building suitable strategies to handle this price increase and to protect against the volatility in the market.
Okay. My second question is for your unexecuted order value, how much more gross margin damage are you gonna see? Or is that whatever the current prices are already being baked into the provisions you've taken?
Yes.
Are we gonna see extended gross margin level losses for the next two quarters as this order book gets, executed?
I'll break up this into two parts. First of all, what is the module exposure that we have in the unexecuted order value? As of right now, the pending partial supply of modules are only for two projects, which is 420-odd MW aggregating to about INR 750 crores. For this, the orders are finalized. The LCs have already been opened on the vendor. Now, if there is no further reneging, this is the kind of quantum that we have already factored in as part of our costs. As of right now, we have taken all costs which we believe are required for completion of the project. But we are in circumstances where prices are not fully within our control. Things are fluctuating. We expect that gross margins of H2 will also remain suppressed.
As I have mentioned, we have taken all the costs already in place unless there are further increases which come in, which are beyond calculation at the moment.
Sir, if everything's already been taken at current prices, then why will gross margin not trend in the next two quarters itself back to high single- digit or even your earlier 10% odd levels? I mean, I understand if prices remain further volatile or go up further, but if those prices remain constant, why should you not be able to maintain gross margins over the next two quarters? Is there anything that I'm missing?
No, you're not. We will have the gross margin, but if you're looking at it from an annual basis, it will be a suppressed overall picture. As of right now, we are definitely seeing gross margin being higher in H2 as compared to H1, unless there is a module, logistics or commodity impact which comes and hits us. All things remaining constant, your understanding is absolutely right.
Would it be fair to say that this, whatever this unprecedented volatility in logistics and module prices have sort of overall changed the way the whole solar EPC contracting business is going to renegotiate its contracts, both at the IPP end and at the vendor end?
As I mentioned a little while ago, while we do have strategies which we are implementing for modules, one has to keep in mind that things like commodity, freight, et cetera, are part and parcel of business risk. Therefore, that is not something that can be completely passed on. Of course, buffers can be built into cost, which we do even now, but those buffers have been breached. If you see our investor presentation on slide 7, it clearly shows how last year the freight costs were about INR 1,800-2,000 crores per 40-foot container. They are at $11,000-$18,000 per 40-foot container now. These are phenomenal price hikes which no one can take.
Again, answering your question, in the next quarter, in the next two quarters rather, if everything remains constant for that quarter, the gross margin would be up. On an overall year basis, it would definitely be suppressed.
Okay, thank you for that. All the best.
Thank you. The next question is from the line of Vipul Lamba from Lamba Investments. Please go ahead.
Hi. Thanks for taking my question. What is the base commodity for module prices? Because the price increase which has happened is significant. What else, which is other than the base commodity, is there anything else in power, you know, demands like gap or anything else which is leading to such kind of increase? What do you see as a future trend coming up?
The base commodity for modules is the polysilicon, the price of which has shot more than four times over last one quarter. As you know, the major production of polysilicon is happening in China, and prices have got significantly impacted. Some of the facilities in China has come under scrutiny from various countries because of the social issues, and that has also impacted the polysilicon prices. As far as the module production and polysilicon, what was the factor which has severely impacted over last one month is the power rationing and rationalization in China. Most of the manufacturing, not only polysilicon and module manufacturing facilities, the other facilities are operating almost half their capacity.
Which has created a supply demand gap, as well as the price increase due to increased overheads and production costs by the manufacturers in China. This has led to a sharp jump over last 4 weeks itself. We have seen significant increase there. That is the immediate reason for the increase in module prices.
In terms of future trend, as the solar industry is dependent on this, what do you see? Because these kind of challenges you're talking about considering the Chinese economy, they may go on for some time. You know, the unrest which is there or the slowdown which is there in China right now, this may continue. How do you see it as the impact on the overall industry, including your business, even if you start passing on the cost of that increase or the risk yourself from the module price risk, but how do you see the overall industry moving?
Overall, the industry, I think, has realized that we have to have all the countries and globally there is a movement that they are delinking from China and local capacities are coming up. As we have said, in India also, the huge capacities will come up in next 18-24 months. As we see this, the short- term it will continue to be challenging, but in the long run, we'll be delinking ourselves from the global dependencies will reduce and we're able to source products from Indian market and that will provide a significant risk reduction in our operations.
Okay. When do you see this Reliance deal getting completed? Is there a possibility because they are buying 40%, how would the promoter share look like after that, the shareholding?
I'll take that. It is broken up into three tranches. The first tranche is where there will be an infusion of about INR 1,100 crore into the company. That would give them close to 15% of the enhanced share capital base. Post that, there will be a first tranche of about 10% of the enhanced base, which they would buy from the promoters, taking them to 25%, triggering an open offer. In the open offer, they would want to come to about 15% more, thereby taking it at 40%. If the open offer, if they receive more, they would sell down.
They and the promoters would sell down such that on an overall basis, finally, Reliance would be at 40%, the existing promoters would be around 35%, and the public shareholding will be about 25-26%. This is the overall understanding that is there on how the deal will transpose.
Okay. From a future strategy perspective, in terms of the business, it is that we are trying the best possible to de-risk from the commodity price and be more of a service player rather than the product play business, and that's right?
No, no. We will always be supplying products as part of our overall offering, except in markets where modules are not part of our scope for the moment, example India. Everywhere else, we give balance of system, or BOS as we call it, for the entire EPC offering.
Okay. Sir, just last question. Maybe I've missed it. How much is the backlog left where we have the old pricing and the cost implication is that we have to keep booking considering the change in the market prices?
No, all our orders, as Mr. Amit has explained, are lump sum orders with a fixed price. We are in discussion with customers for asking for enhancement of costs. That's an ongoing discussion that happens. All of our customer contracts are lump sum fixed price.
No, how much is the order book such left which has this kind of risk of commodity pricing impacting our business? How much is the value of the order book which is still to be booked in?
In terms of modules, as I explained, it is about INR 100 million in this entire INR 6,730 crores. Roughly about INR 4,000-odd crores is the solar orders order value where the risk is there. We have factored in all the pricing, but these are the final lump sum prices which are there.
Okay, sir. Thank you. Thanks for taking my question.
Thank you. The next question is from the line of Anuj Jain from Globe Capital. Please go ahead.
Yeah, good morning, everyone. Thanks for taking my question. Sir, I mean, I'm just having one basic question. Like, the orders which, on which we are taking the hit, right, our cycle is generally of 12-15 months. I am assuming those projects which are there in the month of September, probably they might have initiated in the month of September 2020. As per our cost escalation in terms of module prices and logistics, we have seen the, you know, cost overrun in the last one year.
Just want to understand why initiating contracts in the last, you know, after June 2020. I mean, why, when we take that thing into account with the customer that costs are going, you know, haywire, why didn't we take that kind of floating kind of thing into our contract? Otherwise it is a big problem. As per our last phone call after March quarter as well as after the June quarter, as per your commentary, you said that you are almost, I don't exactly remember what is the bifurcation of the short-term contracts and the long-term contracts, and you were saying, yes, there is a possibility of cost overruns in the short-term contracts, which are not of much magnitude vis-à-vis the long-term contracts.
I'm not able to understand the kind of cost overrun which we are currently going on. I mean, without passing on to any of the customers, I mean, it's little surprising. Can you please elaborate on those points, sir?
Okay, Anuj. I will draw your attention to slide number 8 of our investor presentation, which I will just speak about. You will see that we have booked orders of about INR 2,000 crore, out of which 1,500 is the waste-to-energy. The orders pertaining to solar, which is there in this entire UOV, which is booked in the current financial year, is just about INR 500 crore. At the same time, you will also see that price variations of almost INR 200 crore, 183 to be precise, have been approved by various customers. While we have mentioned that they, we do not take risk of modules in long-term projects, but there are other prices also which have gone up, not just relating only to modules.
Commodities have gone up, freight have gone up, and all of this continues to impact the entire UOV. It has nothing to do with short- term or long- term except for the fact about module risk. Module risk we already explained today. The balance modules which have to be shipped are just about $100 million or INR 750-760 crores in the entire UOV that we have as of now. Have I addressed your question, Anuj?
Yes, sir. Thank you, sir. That's it from myself.
Thank you.
Thank you. The next question is from the line of Vetri Raju from Equity Analyst. Please go ahead. Mr. Raju, your line is in talk mode. Kindly go ahead with your question, please. As there is no response from the current participant, we move to the next question from the line of Manoj Dua from Geometric. Please go ahead.
Sir, congratulations, sir, with your joining with Reliance. I understand this commodity super cycle has been a once in a lifetime thing which we have seen, and I appreciate that management has to work so hard to counter all these things. My question is, when you suffer that kind of loss or kind of headwind we faced, which may not repeat and we may try to create lot of hedges to protect that in future, which may be too much providing for risk. I mean, being our low margin business, do you think it's right to think too much for the risk in the future in terms of this super commodity cycle? Thank you.
See, all business is fraught with risk. There is no risk, there is no reward. So one has to take in a balanced view of how much of risk one needs to factor in. Obviously, there are some items like modules which we cannot live with because those would impact the business significantly. But a lot of the other line items of risks, we are internally also evaluating to see how much of these we can live with because at the end of the day, business has to continue. You have to also keep in mind that in spite of all of this, players with strong balance sheet and track record like ourselves have managed to hold our fort and will continue to, you know, go forward and reap the benefits.
Yeah, really appreciate that. This is what I was trying to think, that we may not necessarily create too many hedges and reduce our margins. My second question is, can you explain me how this second tranche of shifting of shares to Reliance will happen? Will it be off market or on market? Can you provide some details to it? If the Reliance doesn't get the shares and the open offer, then again, you have to shift it through off market or on market. Thank you. It's my last question.
No, no problem. The off market/on market will depend on the price which is prevailing on that day. I cannot right now offer a comment on, you know, whether it would be off or on market. As I have already explained, after Reliance reaches 25% and does the open offer, depends on the success or not of the open offer. Reliance wants to achieve about 40%, and it will then take them either from the existing promoters, if there is a shortfall in the open offer, or entirely from the existing promoters if there is no success in the open offer.
Can I ask one more question?
Please go ahead.
Okay. I'm not worried about the related party transaction which may happen in future because that is by law, there are provisions for that. As a shareholder, old shareholder of Sterling, I'm little bit worried about that if any case the merger would happen with Reliance because we invested for something with ESG for a longer term, and that would fail our purpose to being invested in a Reliance Industries as a collective group. Is there any provision made that any merger won't happen?
There is nothing that has been discussed on this front at the moment. Reliance itself, in its open offer and public disclosure, has said that it only wants to have 40% in the company.
Reliance Industries
It is also held through Reliance New Energy Solar and not through Reliance Industries.
Okay. Thank you. Sunita, best of luck.
Thank you so much.
Thank you. The next question is from the line of Mohit from DAM Capital. Please go ahead.
Yes, sir. Thanks for the opportunity once again, sir. My first question is on the use of proceeds from the Reliance money?
It will be utilized for working capital requirements of the company. The rest, if, as whatever surplus may be there, would be parked for future utilizations, expansions or strengthening of the balance sheet to bid for bigger projects.
When is this money expected to come?
There are certain approvals that are required for these transactions. Some of them have already come in, some of them are expected shortly. If you see in the presentation, we have mentioned which approvals are pending. Right now, what is pending is the CCI approval, which is one of the primary requirements for the first tranche or the primary issue. Once that comes in, we would be able to fructify the first transaction.
Okay. Sir, as bank guarantee encashment is concerned, do you think in your mind, in your opinion, what is the chances of reversal of this, you know, a bank guarantee?
See, first of all, we have quite clearly mentioned it in our note as well as explained it to our auditors, that we believe that we should be able to get our money back from the bank guarantee very shortly. In this quarter, and we would be in a position to give you a complete answer by the time we come about giving the investor call for Q3. This is on account of certain misunderstandings between two customers. There were operational disputes. There were claims and counterclaims. So the customers have encashed the bank guarantees. We are in advanced talks with the senior-most management, and we believe that this thing will reverse very shortly.
Understood, sir. Thank you and all the best. Thank you.
Thank you.
Thank you. Thank you. The next question is from the line of Danesh Mistry from Investor First Advisors. Please go ahead.
Hello. Good morning, and thank you for taking the time out, and congratulations on bringing on a marquee investor. You mentioned basically that the solar modules are roughly about $100 million in your PPE that is left. Is this at current market prices, or is this at the book value at which the order was booked? Thank you.
No, no. They are at current market prices on the basis of the latest contract amendments that have been signed with the module suppliers.
Mm-hmm.
All the latest prices that we are aware of and signed off.
Mm-hmm
They have been considered.
Of course.
If something goes off there and then there is a further increase, then that is a completely different ballgame. As of right now, that the latest amendment is what we have signed. If you see the amendments right now between $0.23-$0.235.
Mm-hmm.
Present market trends are $0.27-$0.28.
Got it. Just one more thing. When we start supplying these modules, like if, for example, the Chinese don't renege on us, and if we start supplying, then are these—you know, is the increase already booked in our PNL? As and when we supply, the increase would get booked and accordingly margins get impacted?
No, the gross margin which is shown today is after considering the increased costs of modules which have been signed.
Mm-hmm.
Just because you supply it doesn't mean that the loss comes in then. That's already factored in. As long as it is at the present signed contracted price.
Got it. Just last question from my end. This INR 1,100 crores that will come in from RIL whenever it does, and even the ICD that came in actually.
New energy, solar and not RIL, huh?
Let's say for example, the funds that we got from the ICD, you know, forget the fresh infusion. Would that make us net debt free once we recover the bank guarantees from the customers?
Well, if the bank guarantee were not there, we would be, you can very clearly see that we would be net debt neutral.
Got it.
Of course, with the Reliance money coming in, subject to whatever is required for working capital, the banks will all go towards making the company as net debt free as possible.
Understood. Great. Thank you so much, and wish you the very best of luck. Thanks.
Thank you.
Thank you. The next question is from the line of Faisal Hawa from H.G. Hawa and Co. Please go ahead.
Yeah. Am I audible, sir?
Very much.
Uh.
Mr. Hawawala, sorry to interrupt. Your voice is breaking up.
Sir, can you hear me now?
Yes. Please go ahead.
If the entire pie of solar EPC is to be taken in the developed countries at least, what part of the solar conversion from thermal energy has happened, you know, I mean, and how much remains, you know? I just want to know what is the kind of work which can be had for the next 20- years or so. Secondly, sir, this waste-to-energy project which you got, which is worth around INR 15 billion. Now, these are very big area, and most of it is being catered by, you know, Japanese majors who are having the technology and the repertoire to execute these kind of projects.
where do we see ourselves in this space, and you know, can we get some more orders on that and how profitable it is? Is it more or less commoditized than our solar modules EPC business?
First, taking on your waste-to-energy part, as you rightly said, it's a huge market, and we are targeting U.K. and Europe for this business. Every year, we expected this market to grow in that market by $5.25 billion annually. We have a good pipeline there. The space we are operating in, you are absolutely right that this is a niche market, and we expect that business to grow significantly. The margin in that particular segment, 10%-15%. That's where waste-to-energy market is, and there is literally huge potential in that market. Thermal to solar is, as you know, the financing is becoming a constraint for thermal plants going forward.
Year- on- year, that they are adding significant portion to the solar pie, and I see like roughly 15%-20% of the market is getting added to solar by closure and non-capacity addition of thermal plants.
There would be only four players in waste-to-energy at this point of time?
It's difficult to say, but it is definitely a niche market. There are some players. We also have the technical expertise within the group.
which enables us to go ahead and become one of the leading players in the Waste-to-Energy market. Right now, as Mr. Amit Jain has explained, our focus is majorly U.K. and Europe.
The solar EPC itself would be definitely, you know, a good 20- years business to be had.
Even I would say, yeah, that definitely it's a business going forward because new technologies will keep coming in, and our other portfolio of battery energy storage and green hydrogen will be another area which will further lead to the further increase in our business portfolio for solar energy. Definitely we saw this business going strongly for next more than the next decade and even up to 20- years.
Thank you so much, sir, and I really hope that even future Reliance is able to really have a lot of synergies with you, with our top management, and we continue to have these Conference Calls. Thank you, sir.
Thank you. Thank you.
Thank you. The next question is from the line of Vetri Raju from Equity Analyst. Please go ahead.
Hello, can you hear me?
Yes.
Okay. Thanks. I know whatever I wanted to ask has been answered. I just have one question. With the, you know, customers getting very cautious and trying to delay the projects and maybe we as a company also very cautious, you know, in terms of not losing money, is it fair to assume that FY 2022 revenues will be potentially lower than FY 2021 revenues?
No, not really. Considering the order book that we already have in hand and the execution that we are planning for that, we believe that FY 2022 revenues will be at least 10%-15% higher than what we had for FY 2021.
Oh, thank you very much. Just for the previous question I got the answer that Green Hydrogen is also a potential, you know, diversification of the company because largely the source of electricity is from solar or wind or something. Is there any concrete plans to get the engineering talent in that area, or it's a few years away?
No, we are right now focusing on the renewable energy, which is associated with Green Hydrogen. We are focusing on that part right now. The plans will evolve in future, but as of now, that's it. Like, I think strategy making is in progress, so we can't comment anything concrete on that part as of now.
Okay, fine. Thank you.
Thank you. As there are no further questions, I now hand the conference over to Mr. Amit Jain for closing comments. Over to you, sir.
Yeah. Thank you. With the robust backing of Reliance Group and Shapoorji Pallonji Group, we endeavor to accelerate our growth trajectory by blending our robust project execution capabilities with the manufacturing size and scale of Reliance Group. We plan to grow significantly in the large markets in the 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. With our deep-rooted client relationship, 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 navigating current tough times and emerge much stronger. 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 Vishal Jain, our Strategic Growth Advisors, our investor relationship advisors. Thank you once again and have a great day.
Thank you. Ladies and gentlemen, on behalf of Sterling and Wilson Solar Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.