Battery Energy Storage And Wind EPC Entry Will Unlock Markets

Key Takeaways

• Diversification into battery energy storage and wind EPC could enhance revenue streams amid rising demand.
  
• Operational efficiency improvements portend potential earnings growth and better profit margins, supported by a strong domestic order pipeline.
  
• Strong domestic EPC competition and international challenges, including regulatory, supply chain, and currency issues, could impact Sterling and Wilson's margins and profitability.

Catalysts

Engages in the provision of engineering, procurement, and construction (EPC) services to solar power projects.

• Sterling and Wilson Renewable Energy Limited's order inflow has seen a healthy growth, particularly in the domestic market, with a significant portion coming from the private Independent Power Producers (IPPs). This is expected to bolster future revenues.
  
• The company has entered the battery energy storage solutions and wind EPC markets, signalling diversification and expansion into areas with increasing demand, which is likely to enhance future revenue streams.
  
• With a strong pipeline of expected orders in India and a strategic focus on select international projects, there is potential for increased order book and revenue growth over the next few quarters.
  
• The ongoing shift in India's energy market towards integrated solar, wind, and storage solutions is expected to create new opportunities for the company, potentially increasing its future revenues and improving net margins due to the higher value of such projects.
  
• The scale-up in execution and operational efficiency demonstrated in recent quarters suggests a potential increase in earnings and profit margins as the company continues to streamline operations and enhance execution capabilities.

Sterling and Wilson Renewable Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sterling and Wilson Renewable Energy's revenue will grow by 21.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 6.2% in 3 years time.
• Analysts expect earnings to reach ₹7.0 billion (and earnings per share of ₹29.87) by about May 2028, up from ₹814.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.8x on those 2028 earnings, down from 77.8x today. This future PE is greater than the current PE for the IN Construction industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.53%, as per the Simply Wall St company report.

Sterling and Wilson Renewable Energy Future Earnings Per Share Growth

Risks

• The competition in the domestic EPC sector is strong, which could impact the company's ability to maintain margins and consistent revenue growth.
  
• Delays in the Nigeria project due to potential import restrictions, local content policies, and currency challenges pose a risk to future revenue recognition and international expansion efforts.
  
• Nonfund-based limits are essential for project growth and execution; any difficulty in increasing these limits could limit revenue potential and execution capability.
  
• Regulatory and supply chain challenges, such as the domestic content requirement for solar cells, present risks to pricing and availability, potentially impacting margins and earnings.
  
• The company faces potential foreign exchange losses from international operations, which could adversely affect net margins and overall profitability.

Valuation

• The analysts have a consensus price target of ₹570.0 for Sterling and Wilson Renewable Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹870.0, and the most bearish reporting a price target of just ₹400.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹112.7 billion, earnings will come to ₹7.0 billion, and it would be trading on a PE ratio of 28.8x, assuming you use a discount rate of 14.5%.
  
• Given the current share price of ₹271.4, the analyst price target of ₹570.0 is 52.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.