ProfitNama

ProfitNama

Sterling & Wilson Promoters Infuse Funds to Pay Debt and Avoid Default

Sterling and Wilson promoters to sell upto 5.27% stake in company via OFS

Introduction:

The article reports that Sterling and Wilson Renewable Energy (SWREL) promoters recently infused 418 crore rupees to help the company avoid defaulting on loans. SWREL had missed certain loan payments which could have resulted in lenders tagging the company as a non-performing asset (NPA). The infusion helps SWREL pay the missed payments and avoid default.

Analysis of this news for a layman (explain all of the abbreviations, technical terms in details approximately in 500 words): Sterling and Wilson Renewable Energy (SWREL) is a company that builds and operates renewable energy projects like solar and wind farms. The company had taken loans from banks and other lenders to finance its operations. As per banking rules, borrowers need to pay back the money on time as per the loan agreement. If the borrower misses payments for 90 days, lenders are required to classify those loans as Non-Performing Assets (NPAs) on their books. This means the loan is at a high risk of default.

SWREL missed loan payments of 135 crore rupees that were due on September 30. As a result, lenders could have classified the company’s loans as NPAs by December 30. To avoid this, SWREL’s promoters (main owners) brought in 418 crore of their own funds on November 30. This money will be used to clear the missed payments and avoid NPA classification.

The promoters had to do this because of an earlier agreement they signed during SWREL’s stake sale to Reliance in 2021. As per this, the promoters would reimburse SWREL for any net liabilities above 300 crores related to earlier project penalties. By infusing funds now, the promoters have fulfilled this obligation.

Original Analysis:

The last minute infusion of funds by SWREL’s promoters raises concerns over the company’s financial health. Missing loan payments implies tight liquidity conditions and possible cash flow issues in operations. That promoters had to dip into their own pockets also shows the precarious situation.

The reasons behind the cash crunch need to be further examined. SWREL has claimed that bank guarantees were wrongly invoked by clients leading to net liabilities crossing 300 crores. But delays in project execution cannot be ruled out. The sector also faces headwinds like rising interest rates and uncertainty over renewable purchase obligations.

That said, the promoter funding provides temporary relief. It averts the NPA tag which would have cut off further lending options and hurt business viability. Banks can also avoid higher provisioning needs for now. But this highlights the over-dependence on promoters and lack of sufficient buffers at SWREL.

The planned equity raise of 1500 crores will improve the capital structure. But timely execution at optimal costs is critical. The 40% stake by Reliance also lends some credibility. However, governance standards and transparency around past execution issues need clarity. Until the company demonstrates stable operations over 2-3 quarters, concerns around financial stress remain. Banks also need to keep close vigil.

Impact on Retail Investors (detailed and organised analysis in 500 WORDS): The GWREL stock has corrected over 60% in 2022, primarily due to the uncertainties highlighted. Retail investors would likely be nursing losses. The high volatility also makes forecasts difficult.

For those already holding the stock, the promoter funding provides temporary relief. But retail investors should avoid averaging existing positions. Full clarity is needed on the reasons for project execution delays, disputes over bank guarantee invocations and the company’s working capital situation. Steady state operations have not yet been achieved.

Prospective investors should also not see the stock correction as value emergence. Turnaround execution remains challenging in the context of rising interest rates and uncertain renewable energy regulations. Stronger confirmation over 2-3 stable quarters is required before considering fresh exposure. Debt reduction also needs to materialize.

Overall for retailers, GWREL remains a risky bet. Speculative trading opportunities may emerge if stock overshoots on either side. But investment requires more financial stability and earnings growth visibility which will take time to demonstrate after a challenging year.

Impact on Industries:

The liquidity crunch at GWREL has ripple effects across the renewable energy value chain in India. As a prominent EPC player, GWREL has significant solar and wind projects under construction or in the pipeline across states.

Delays in existing projects can put operational timelines at risk for customers. This includes renewable power producers and corporates investing in clean energy capacity. Lost revenues here can also trigger disputes and lawsuits – further stretching the finances of all parties.

There is also a signalling effect on the renewable sector’s access to financing. Bank trust is vital to fund the capital intensive projects. Lenders turning cautious can both raise borrowing costs and cause delays in financing. Tighter credit may result if occurrence of defaults rises.

The impact further flows downstream to equipment manufacturers, construction contractors etc. Working capital gaps can emerge if customer payments get held up amidst disputes or due toconstrained liquidity.

To summaries, GWREL’s situation has the potential to slow down execution timelines for India’s ambitious renewable energy rollout plans envisaged by both the central government and corporates. Care needs to be taken to ringfence viable projects and cope with market reverses at single players.

Long Term Benefits & Negatives:

In the long term, the incident highlights the precarious state of some renewable energy players in India in current times. While India aims to reach 500GW of non-fossil fuel capacity by 2030, these targets greatly hinge on access to affordable financing. Rising interest costs are already delaying renewables projects. Further vulnerabilities among prominent firms can create investment setbacks.

At the same time, for companies with sound financial cushions and execution track records, opportunities are tremendous as Indía builds greater renewable capacity. Consolidation among players may also ensue, allowing stronger players to gain market share. But overall sector progress may face intermittent disruptions amidst any major default events.

For GWREL specifically, the long term outlook remains challenged unless its cashflows and execution recover meaningfully from the current uncertain state. However, promoters’ backing and Reliance stake provide a buffer. If fresh equity raise materializes as planned, the financial structure can meaningfully strengthen over time. But this also depends on the company improving its customer contracts and project management mores. A special asset reconstruction firm may also take over debt if situation deteriorates. Overall, GWREL is at a critical junction currently and its future viability will depend on how credibly and stably it builds execution momentum in coming years post the current turbulence.

Short Term Benefits & Negatives:

In the near term, the 418 crore promoters’ infusion allows the company to avoid default and possible business disruptions. Lenders do not have to classify the debt as NPA which would have cut-off further credit access. The company can also use this period to pursue its plan of raising 1500 crores of equity capital. Success here would provide two benefits – reducing debt burden by doing some pre-payments and also having growth capital for new projects. It also buys the company time to resolve disputes over cancelled bank guarantees and renegotiate terms with customers and creditors if needed. Operations can thus run in going concern basis temporarily instead of accelerating towards distress.

However, there are risks if the situation is not resolved in the next 6 to 12 months. Markets may perceive that the company has been given a temporary lease of life. If gross debt continues to remain high and challenges persist in getting new projects on favourable terms, the stock price can remain under pressure even after any initial relief rally. Lenders may also become wary and deny fresh loans/guarantees to fund new projects. If financial performance remains strained as a result, it poses serious challenges to viability. Thus early action on the equity raise plan and improvement in cashflows is critical for the stock’s prospects in coming quarters.

Companies will gain from this:

  1. Tata Power Renewable Energy Ltd. : As one of India’s largest renewable energy producers, Tata Power Renewable Energy Ltd. (TPREL) stands to benefit if SWREL continues facing execution issues. Several key projects can potentially be reallocated towards TPREL given the Tata brand’s project management credentials. Rising working capital issues and disputes may also result in SWREL losing key talent and customers. TPREL can gain from hiring displaced employees skilled in critical solar/wind project development and engineering functions. Lastly, if the crisis at SWREL persists, lenders may also favor Tata Power’s relatively stable balance sheet by offering favorable financing terms for new capacity addition.
  2. Adani Green Energy: The Adani Group has the strongest balance sheet among Indian renewable players with billion dollar overseas equity capital raise last year. With established overseas backers, project funding access remains robust for Adani Green. If domestic banks turn wary of lending to weaker Indian renewable firms, Adani Green can gain market share. Distressed assets of players like SWEL could also potentially get acquired by Adani Green at favorable valuations.
  3. Larsen & Toubro L&T: is India’s largest EPC contractor with impeccable credentials spanning decades. It is also now increasing its own renewable energy generation portfolio. If SWREL fails to resurrect operations, several of the engineering and construction works can flow towards L&T benefitting its order book visibility. Its financing access also remains favorable to fund working capital needs even if sector liquidity tightens.
  4. Inox Wind: As one of the leading wind turbine manufacturers, Inox Wind supplies equipment to various renewable energy operators. If SWREL continues on a weak footing, Inox may stand to gain from reallocation of wind power capacity among players. Inox may also hire some of the skilled talent related to wind farm engineering and operations displaced from SWREL.
  5. Indian Energy Exchange (IEX): The increased penetration of renewable energy generation sources benefits electricity exchange platforms like IEX which offers an efficient marketplace of power trading. Though SWREL’s troubles may cause uncertainty in the short term, the long term trajectory of renewable capacity addition in India remains robust. Hence electricity volumes on IEX can continue growing steadily benefitting its financial performance.

Companies which will lose from this :

  1. Sterlite Technologies Limited : Sterlite Tech manufactures the cables and wires needed to transmit electricity from generation sites to end users. If renewable energy projects by players like SWREL slow down amidst tightening liquidity conditions, cable orders can shrink damaging Sterlite’s revenues. Its working capital cycle can also stretch if delays in customer projectExecution hold up payments. Being commodity products, pricing pressures may also emerge for cables and wires if demand moderates.
  2. JSW Energy: As a key private sector renewable energy producer, delays in broader industry capacity addition affects JSW Energy. Its equipment suppliers or engineering partners could Face liquidity pressures due to situations at players like SWREL, increasing JSW’s own costs/risks. Banks turning cautious towards the sector due to any default events also tightens financing access for JSW’s own projects.
  3. Orient Green Power: Another renewable energy operator previously facing debt issues itself, OGP’s recovery can get pushed back if the renewable energy investment climate worsens. Any resolution timeline for its existing stressed assets can also get delayed if more projects across the industry fall into distress. Acquiring assets at favorable valuations also becomes difficult with equity investors turning risk averse.
  4. Indowind Energy: A mid-sized wind power producer, Indowind faces much higher business uncertainty if sector-level financing dries up. Being smaller, its access to credit easily gets choked compared to larger peers. Even the receivables timeline from state electricity boards worsens when counterparty financial troubles emerge. Overall viability to fund operations and maintenance costs takes a hit.
  5. Bharti Airtel/Reliance Jio Infocomm : Telecom operators like Airtel and Jio face higher electricity costs as renewable energy penetration drops amidst funding issues. Being large electricity consumers, any demand-supply disruptions also increase grid power tariffs eventually charged to telcos. Their backup power requirements also rise increasing overall costs.

Additional Insights:

The SWREL situation highlights the need for Indian renewable players to have stronger corporate governance compliance, risk management and internal controls. Overcommitting aggressive capacity targets without robust project feasibility analysis and contingency planning has possibly led to the current precarious state for some participants. Companies also need to hedge risks better via insurance covers, advance customer payments, diversified supplier bases etc rather than depend excessively on external debt alone. Banks on their part also need to improve their monitoring rigor beyond standard covenant rules to stay better informed on early warning signs of stress.

Conclusion:

The last minute promoter infusion helps SWREL avert default for now but immediate equity capital raise, reducing debt dependence and improving cash flow visibility remain vital moves to de-risk the company’s future. Beyond the fortunes of a single entity, there are ripple effects across the renewable energy value chain. Success of India’s sustainability transition requires course correction across aspects like financing access, dispute resolution mechanisms, risk governance standards and supply chain resilience. Progress cannot afford intermittent shocks even if challenges at a particular enterprise.

Citation : Mehta, Sangita. “Sterling & Wilson’s Promoters Infuse ₹418cr to Pare Debt.” The Economic Times, 3 Dec. 2023,

error: Content is protected !!
Scroll to Top

Subscribe to Profitnama to access all articles, explanations, stock analysis
Already a member? Sign In Here