Sterling and Wilson Renewable Energy Ltd

NSE:SWSOLAR

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Sterling and Wilson Solar Limited Q2 and H1 FY '22 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. [Operator Instructions] 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.

[Vishal Jain, Head of IR]

Good morning, everyone. I welcome you all to Q2 FY '22 and H1 FY '22 earnings call. Along with me, I have Mr. Amit Jain, Global CEO; Mr. Bahadur Dastoor, CFO; and Strategic Growth Advisers, our Investor Relation Advisers. 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.

[Amit Jain, Global CEO]

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 crores 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 executed -- executing some of the most complex projects globally will become an important part of solar value chain of Reliance growth. 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 a great opportunity to further accelerate our revenue growth.Now I will give you an update on our Waste to Energy business. We have -- 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 3 years, which will provide consistent revenue stream year-on-year. The facility will process 23.2 tonne of nonrecyclable solid municipal waste per hour, diverting over 185,600 metric tonne of waste each year and generate around 19.6 megawatt 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 USD 5.25 billion annually for coming 5 to 7 years. About 70 new plants are anticipated to come up every year until 2027. There is a robust pipeline for Waste to Energy business worth USD 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 that we have entered into battery energy and storage system. So battery energy and storage -- and energy storage system is expected to grow in next 4 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 5 countries. We've 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 continued to face headwinds due to unprecedented increase in cost of modules, commodities and freight cost over the last 1 year. It was earlier anticipated that situation would ease out and order finalization would pick up in H2 FY '22. However, the prices continue to rise, making the project for IPP's unviable, and hence, we anticipate that majority of order finalization will shift from current year to FY '23. 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% to 15% per annum. We have increased our focus on 2 large significant green energy markets, U.S. and Europe.The USA market is expected to add at the rate of 25 gigawatt in '22, 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-megawatt in U.S. Currently 2 large projects in U.S.A., aggregating 400 megawatts, are in progress and expected to be completed by Q1 FY '23. This has resulted in Sterling and 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 headquarter in Europe -- for European operations. 200-gigawatt 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 Ji enhanced India's target for installed renewable energy capacity by 2030 to 500 gigawatt and also pledged to make renewable energy 50% of the country's energy mix by the end of the decade. So the Indian solar power market is brimmed for enormous growth over the next decade. Our unexecuted order book as on November 13, 2021, stands at INR 6,730 crores, 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 supplier for the 2 projects aggregating 422-megawatt amounting to INR 765 crores.Now coming to our solar O&M business. Our portfolio as of date is 8.4 gigawatt 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 growth. Our enhanced value to customers through O&M differentiations like drone thermography, strong analytics and predictions, IV Curve Tracer, underground cable fault finder, et cetera, will help us to expand our O&M portfolio.With this, I will ask Mr. Bahadur, our CFO, to take you through the consolidated financial highlights. Thank you very much. Over to you, Bahadur.

[Bahadur Dastoor, Chief Financial Officer]

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 '22 has been INR 2,633 crores as compared to INR 2,405 crores in H1 FY '21. O&M constituted 4.3% of total revenue in H1 FY '22. The region-wise revenue breakup is as follows: Australia contributed 57%; Americas contributed 27%; followed by India, which contributed 13%; and balance 3% by MENA and Africa region.At the company level, the gross margin were impacted significantly in H1 FY '22 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 continued to remain lower on account of carryforward impacts of items which had affected FY '21.Recurring overheads for H1 FY '22 increased by INR 8 crores to INR 171 crores. 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. ICD's outstanding as at 14th August, 2021, stood at INR 741 crores. 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 '22. 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 advance and performance bank guarantees encashed by 3 customers.We have cash and cash equivalents 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 1 year as at September 30, 2021, stood at INR 412 crores compared to INR 445 crores due for more than 1 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 evolving. According to the credit rating agency, the upgrade reflects an improvement in SWSL's financial and liquidity profile at the stand-alone level, majority on account of an inflow of INR 741 crores 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 and Research have also upgraded the rating for commercial papers of INR 200 crores to ACUITÉ A2+.With this, we can now open the floor to questions and answers.

[Operator]

[Operator Instructions] The first question is from the line of Akash Mehta from Capex Investment.

[Akash Mehta]

Thank you for detailed update on the operations. The first question I had was that we had accounted for one-offs in our previous quarter results. And I just wanted to know why is there a spill over -- spill out over the same -- of the same in this quarter, right? And will it continue in the second half of FY '22 as well?

[Amit Jain, Global CEO]

I will take this question. So if you see, we have explained in our investor presentation that module prices have continued to increase -- and module suppliers have continued to increase their prices. We have faced effects of that. Also, freight costs were earlier between $7,500 to $13,500 per 40-foot container still continue to go up to $11,500 and $18,400 per 40-foot container. All of these price increases have led to the effect. So while we believe there were one-offs, which impacted us in March 2021, the increase continues even now affecting our performance for this 6 months.

[Akash Mehta]

Okay. And when can we expect the complete turnaround in terms of our operational metrics?

[Amit Jain, Global CEO]

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 the super cycle to come before we are in a position to give a prediction on how things will turn around.

[Akash Mehta]

Okay. Just last question will be how does the company plan to hedge itself against any future volatility in module, commodities and logistic prices? Any color on that?

[Amit Jain, Global CEO]

So 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. So 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 caustic, which we have been doing from a number of years, except for the commodity super cycle, which has existed over the last 9 to 12 months.

[Operator]

The next question is from the line of Mohit from DAM Capital.

[Mohit Jalan]

Congratulations on getting a marquee investor on your -- as a shareholder or strategic investor. Sir, my first question is, how does this new investor coming in, it changes our opportunity basket? And does it change anything in terms of strategy for us for the next couple of years?

[Amit Jain, Global CEO]

Yes. So as you know, with the new investor coming in, as you must have known, the 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. So a couple of years down the line, so we'll be able to source that, all the products from India, and that will reduce our dependency on the global markets. So that will give -- enhance our portfolio as well as reduce our risk significantly. So there this partnership will add a lot of value to our portfolio over the top and bottom lines. On the other hand, the Reliance is also committed to make India as a green energy hub. So they'll be adding significant capacities, so which will also add to our business top and bottom lines. So we see that -- and our balance sheet will grow stronger year-by-year. So we see that all the 3 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. So all the 3 areas put together will give a lot of impetus to the business. And we don't see any change in our strategy going forward. So we'll continue to maintain our global leadership in EPC space going forward as well.

[Mohit Jalan]

So I understand that the H2 is going to be challenging for us. So how do you see FY '23 in terms of order opportunity from international and domestic market? Do you see -- have you seen these clients floating tenders at least so that we can close it somewhere in FY '23, especially in the solar space? And if you can comment something on the Waste to Energy market, the tendering, which you believe is likely to close in FY '23?

[Bahadur Dastoor, Chief Financial Officer]

Yes. So as we have explained in our investor presentation and opening speech, that though the bids were there this year as well, but the decision-making has moved to FY '23 due to volatility in the global markets. So projects are not viable. But we see the markets also stabilizing and the -- all the pent-up demand, and we see the market growing at the rate of 10% to 20% -- 15% every year plus the decision-making, which is not happening this year, all the projects getting moved to FY '23. So we see a big movement and enhancement in order booking in FY '23. We see a very -- foresee it at this point of time if market stabilizes, it create good growth in our order booking in FY '23.

[Mohit Jalan]

And how do you see the Middle East in the H2 or FY '23, is it going to be a key market for us?

[Bahadur Dastoor, Chief Financial Officer]

So 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. But U.S. -- and U.S., Europe, Latin America, they are going to be very, very strong markets, and we see a lot of robust growth in those 3 markets, and they are our target markets.

[Mohit Jalan]

And now Australia, sir, right now...

[Bahadur Dastoor, Chief Financial Officer]

Yes. Same applies to Australia for FY '23 because lot of the -- many of the projects getting decided this year. So we see like regular growth plus the pent-up demand in Australian markets as well.

[Operator]

The next question is from the line of Abhineet Anand from Emkay Global.

[Abhineet Anand, Senior Research Analyst]

First, I wanted to know the Reliance association, obviously great news. But how does, I mean, investor in Sterling take this on the point of view that if modules are being sold from some of the entities in Reliance, where does -- how does this profitability in the 2 entities get adjusted?

[Amit Jain, Global CEO]

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. And as of right now, I would not say dependency because modules are available until such time as Reliance comes up with its factories. But we'll answer that question appropriately at the right time.

[Abhineet Anand, Senior Research Analyst]

Yes. Secondly, I think Bahadur sir did mention that even if you adjust for the one-off that we have had the gross margin in 1H would have been somewhere around 3% to 4%, right? If I'm not wrong, this is the number. So we used to do somewhere around a double-digit number in the last 2, 3 years. So what is needed from the company and the external environment point of view that we will go back to our double-digit gross margin numbers, say, in '23, '24, whatever the time line you think is suitable?

[Amit Jain, Global CEO]

Okay. First of all, the 3% is also because of the carryover effects of the one-offs, which we faced in Q4 of FY '21. 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% to 30% due to increase in prices. And these projects will come up for bidding next year. So 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.But 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.

[Abhineet Anand, Senior Research Analyst]

Yes, yes. I appreciate that. Thirdly, and this is my last question, see, domestically -- if you go 1, 2 years back, domestically, probably we were 20% or plus/minus 5% in terms of our order book and we used to be around INR 2,000 crores. If you see in the last 2, 3 years, I see -- I mean, I don't want to mention them, but Tata Power, for example, the EPC solely in India has an order book almost of INR 8,000 crores to INR 9,000 crores. So what exactly has been made in the domestic market, which itself is a decent market as of today, where we were almost #1 and now probably you have slipped a lot?

[Amit Jain, Global CEO]

No, we have not slipped a lot. We are still in the top 2 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 markets. Even right now, we have won orders in this year in the domestic market from 2 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. And 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 X modules, while Tata Power includes modules in its overall scheme of things. So that also brings into account almost a 40% differentiator in terms of turnover. We are also very highly sensitive in choosing of our customers, not to say they must not be. But we prefer to be cautious.

[Abhineet Anand, Senior Research Analyst]

And do we do public sector orders? Because I don't see -- there are a lot of public sector orders in India from the sites of, let's say, NTPC and from [ SJVN ] and others. Do we participate in tenders for them as well?

[Amit Jain, Global CEO]

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. So we do not do any orders with land.

[Abhineet Anand, Senior Research Analyst]

So is it rare as it with 10 gigawatt ordering -- orders in India, how much of that would include orders with sourcing or orders without sourcing of land? The ballpark number will suffice.

[Amit Jain, Global CEO]

We do not do any orders with land, none.

[Abhineet Anand, Senior Research Analyst]

And sir, is that if India is a 10 to 15 gigawatt market now, and it will grow, what percentage of that would be with sourcing of land and what percent without sourcing of land?

[Amit Jain, Global CEO]

We'll have to check and come back to you on this, Abhineet.

[Operator]

The next question is from the line of Samir Palod from AUM Fund Advisors.

[Samir Rameshchandra Palod, Co]

Just if you can walk us through when these -- when on your order book, solar module prices started going up and the logistic cost going up? What would be the behavior of your customers, your IPP? What sort of discussions have you had with them for letting some pass-throughs, et cetera? So I just want to understand the structure of the industry when this unprecedented volatility comes into being in your distinct business?

[Bahadur Dastoor, Chief Financial Officer]

So when this unprecedented volatility in module and logistics started coming in, we have initiated discussions with most of our customers where we are getting impacted, and discussions are in advanced stage, and some of our customers have given some compensation to us also. And the discussions are in advanced stage with other customers. And as a part, the module and the commodity risk is on us. But going forward, we are building some strategies to pass on to -- the risk to the customers and protect from the increase with our module suppliers as well. So that is an ongoing cost and that is in place.

[Samir Rameshchandra Palod, Co]

For the module from China, obviously you have not agreed to stick to their commitments. So how are you going to enforce anything against Chinese module suppliers? Is it going to buy our bank guarantees or...

[Bahadur Dastoor, Chief Financial Officer]

Yes. So 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 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.

[Samir Rameshchandra Palod, Co]

But isn't the customer and IPP who has built a particular power price and hence is very sensitive to any increases in the cost of the project?

[Bahadur Dastoor, Chief Financial Officer]

Yes. That's why this year all the projects are getting pushed out to next year. They are sensitive. But they are also working on strategies and building in tariffs. As you would see that this year, tariffs, most of the tariffs which biddings are happening, the tariffs have gone up by 10% to 20%. So 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.

[Samir Rameshchandra Palod, Co]

Okay. And my second question is for your unexecuted order value, how much more gross margin damage are you going to see? Or is that whatever is current prices have already been baked into the provisions you've taken? Or are we going to see extended gross margin level losses for the next 2 quarters as this order book gets executed?

[Amit Jain, Global CEO]

So I'll break up this into 2 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 2 projects, which is 420-odd megawatt aggregating to about INR 750 crores. Of 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 industrial control, things are fluctuating. So 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.

[Samir Rameshchandra Palod, Co]

Sir, if everything has already been taken at current prices, then why will gross margins not trend -- in the next 2 quarters itself trend 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 2 quarters? Is there anything that I'm missing?

[Amit Jain, Global CEO]

No, you're not. So 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 margins being higher in H2 as compared to H1 unless there is a module, logistics or commodity impact, which comes and hits us. So all things remaining constant, your understanding is absolutely right.

[Samir Rameshchandra Palod, Co]

So 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?

[Bahadur Dastoor, Chief Financial Officer]

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. And 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 crores (sic) [ $1,800 ] to INR 2,000 crores (sic) [ $2,000 ] for 40-foot container. They're at $18,000 and $11,000 -- sorry, $18,000 and $11,000 for 40-foot container now. These are phenomenal price, it's -- which no one can take. But again answering your question, in the next quarter, in the next 2 quarters, rather, if everything remains constant, for that quarter, the gross margin would be up. But on an overall year basis, it would definitely be suppressed.

[Operator]

The next question is from the line of Vipul Lamba from Lamba Investments.

[Vipul Lamba]

What is the base commodity for module prices? Because the price increase, which has happened is significant. And what is -- which is -- other than the base commodity, is there anything else in power demand by gap or anything else which is leading to such kind of increase? And what do you see as a future trend coming up?

[Amit Jain, Global CEO]

So the base commodity for modules is the polysilicon, the price of which has short more than 4x over last 1 quarter. So as you know, the major production of polysilicon is happening in China, and prices have got significantly impacted. And some of the facilities in China has under -- 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 in polysilicon what was the factor which has severely impacted over last 1 month is the power rationing and rationalization in China. So most of the manufacturing, not only in polysilicon and module manufacturing facilities, the other facilities are operating almost half their capacity. So 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. So this has led to a sharp jump over last 4 weeks itself. So we have seen significant increase there. So that's the immediate reason for the increase in module prices.

[Vipul Lamba]

And in terms of future trend, as the solar industry is dependent on this, what do you see? Because these kinds of challenges talking about considering the China economy, they may go on for some time. The untrust which is there or the slowdown, which is there in China right now, this may continue. So how do you see it as in the impact on the overall industry, including your business, even if you start passing on the cost of such increase or deal risk yourself from the module price risk, but how do you see the overall industry moving?

[Bahadur Dastoor, Chief Financial Officer]

Overall industry, I think the industry has realized that we have -- all the countries and globally, there is a moment that they are delinking from China and local capacities are coming up. And as we have said, in India, also, the -- huge capacities will come up in next 18 to 24 months. So as we see this -- the short term, it will continue to be challenging, but in the long run, we'll be de-linking ourselves from the -- global dependencies will reduce, and we were able to produce products from Indian market, and that will provide a significant risk reduction in our operations.

[Vipul Lamba]

Okay. And what do you see this Reliance deal getting completed? And is there a possibility of -- because they are buying 40%, how would the promoter share look like after that shareholding?

[Amit Jain, Global CEO]

I'll take that. It is broken up into 3 tranches. The first tranche is where there will be an infusion of about INR 1,100 crores 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 transfer.

[Vipul Lamba]

Okay. Okay. And from a future strategy perspective, in terms of the business, it is that we are trying best possible to derisk from the commodity price and be a more of a service player rather than the product business and is -- that's right?

[Amit Jain, Global CEO]

No, no. So 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. But everywhere else, we give balance of supply, or BOS as we call it, for the entire EPC offering.

[Vipul Lamba]

Okay. Sir, just last question. How much is the -- maybe I've missed it, how much is the backlog left where we have the old pricing and the cost implication is that, that we have to keep booking considering the change in the market prices?

[Bahadur Dastoor, Chief Financial Officer]

So 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, but all of our customer contracts are lump-sum fixed price.

[Vipul Lamba]

No, how much is the order book as 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?

[Bahadur Dastoor, Chief Financial Officer]

So in terms of modules, as I explained, it is about $100 million in this entire INR 6,730 crores. And roughly about INR 4,000-odd crores is the solar 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.

[Operator]

The next question is from the line of Anuj Jain from Globe Capital.

[Anuj Jain]

Sir, I just want to have one basic -- I mean, I'm just having one basic question, like the orders on which we are taking the hit, right, our cycle is generally of 12 to 15 months. So I am assuming those projects, which are there in the month of September, probably they might have initiated in the month of September 2020. And as per our cost escalation in terms of module prices and logistics, we have seen the cost overrun in the last 1 year. So I just want to understand while initiating contracts in the last -- after June 2020, I mean when we take that thing into account with the customer that costs are going haywire. So why didn't we take that kind of -- that floating kind of thing into our contract? Otherwise, it is a big problem. And as far as last con 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 overrun in the short-term contracts, which are not of much magnitude vis-à-vis the long-term contract. So 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 a little surprising. So can you please elaborate on those ones, sir?

[Amit Jain, Global CEO]

Okay, Anuj, I will draw your attention to Slide #8 of our investor presentation, which I will just speak about. You will see that we have booked orders of about INR 2,000 crores, out of which INR 1,500 crores is the Waste to Energy. So the orders of -- pertaining to solar, which is there in this entire UOV, which is booked in the current financial year is just about INR 500 crores. At the same time, you will also see that price variations of almost INR 200 crores, INR 183 crores to be precise, have been approved by various customers. So whilst we have mentioned that 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.So 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 crores to INR 760 crores in the entire UOV that we have as of now. Have I addressed your question, Anuj?

[Anuj Jain]

Yes, sir.

[Operator]

The next question is from the line of Vetri Raju from Equity Analyst. [Operator Instructions] As there is no response from the current participant, we move to the next question from the line of Manoj Dua from Geometric.

[Manoj Dua, Chief Executive Officer]

Sir, congratulations with your [indiscernible] with Reliance. And 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. So my question is when we suffer that kind of loss or kind of headwind we faced, which might be -- which may not repeat, and we may try to create a lot of hedges to protect that in the 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 further risk in the future in terms of the super commodity cycle?

[Bahadur Dastoor, Chief Financial Officer]

See, all business is fraught with risk. If 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. And 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 we'll continue to go forward and reap the benefits.

[Manoj Dua, Chief Executive Officer]

Yes, really appreciate that. This is what I was trying to think that we may not unnecessarily clear too many hurdles and reduce the margin. My second question is, can you explain me how the second tranche of shifting of shares to Reliance will happen? Will you do off-market or on-market? And provide some days to it. And if the -- Reliance doesn't get the shares and the open offer, then again you have to shift it to off-market or on-market?

[Amit Jain, Global CEO]

No, no problem. So the off-market, on-market will depend on the price which is prevailing on that day. So I cannot right now offer a comment on how whether it would be off- or on-market. As I have already explained, after Reliance reaches 25% and does the open offer, it depends on the success or not of the open offer, but 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.

[Manoj Dua, Chief Executive Officer]

Can I ask some more questions?

[Amit Jain, Global CEO]

Please go ahead.

[Manoj Dua, Chief Executive Officer]

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 a little bit worried about [indiscernible] because we invested for something like ESG for a longer term and that would fail our purpose to being invested in a Reliance Industry as a collective group. Is there any provision made that any merger won't happen?

[Bahadur Dastoor, Chief Financial Officer]

There is nothing that has been discussed on this front at the moment. And Reliance itself in its open offer and public disclosures have said that it only wants to have 40% in the company. And it is also held through Reliance New Energy Solar and not through Reliance Industries.

[Operator]

The next question is from the line of Mohit from DAM Capital.

[Mohit Jalan]

Sir, my first question is on the -- what is the usage of proceeds from the Reliance money?

[Amit Jain, Global CEO]

It will be utilized for working capital requirements of the company. And the rest, if -- as whatever surplus maybe there would be parked for future utilizations, expansions or strengthening of the balance sheet to bid for bigger projects.

[Mohit Jalan]

And when is this money expected to come?

[Amit Jain, Global CEO]

So 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.

[Mohit Jalan]

Okay. And sir, as a bank guarantee encashment is concerned, do you think -- in your mind, in your opinion, what are the chances of reversal of this bank guarantee?

[Bahadur Dastoor, Chief Financial Officer]

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 2 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.

[Operator]

The next question is from the line of Danesh Mistry from Investor First Advisor.

[Danesh Mistry]

Thank you for taking the time out, and congratulations on bringing on a marquee investor. You mentioned basically that the solar panels are about roughly -- solar modules are roughly about $100 million in your piggy that is left. Is this at current market prices? Or is this at the book value at which the order was booked?

[Bahadur Dastoor, Chief Financial Officer]

No, no. They are at current market prices, on the basis of the latest contract amendments that have been signed with the module suppliers. So all the latest prices that we are aware of and signed off this with have been considered. Of course, if something goes off there and then there is a further increase, then that is a completely different ballgame. But as of right now, that -- the latest amendment is what we have signed. If you see the amendments right now between $0.23, $.235, present market trends are $0.27 to $0.28.

[Danesh Mistry]

Got it. Got it. And just one more thing. So when we start supplying these modules, let's say, for example, the Chinese don't drain it on us and if we start supplying, then are these -- is the increase already booked in our P&L or as and when we supply the increase would get booked and accordingly margins get fed?

[Bahadur Dastoor, Chief Financial Officer]

No, the gross margin, which is shown today is after considering the increased cost of modules, which have been signed, right? So the -- 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.

[Danesh Mistry]

Got it. Got it. And just last question from my end. This INR 1,100 crores that will come in from RIL whenever it does and even the ICDs that came in actually...

[Bahadur Dastoor, Chief Financial Officer]

That is Reliance New Energy Solar and not RIL.

[Danesh Mistry]

Yes. Okay. I'm sorry. Yes, but, so let's say, for example, the funds that we got from the ICD, forget the fresh infusion, would that make us net debt free once we recover the bank guarantees from the customers?

[Bahadur Dastoor, Chief Financial Officer]

Well, if the bank guarantee were not there, we would be -- you can very clearly see that we would be net debt neutral. But 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.

[Operator]

The next question is from the line of Faisal Hawa from H.G. Hawa and Company.

[Faisal Hawa]

Am I audible, sir?

[Amit Jain, Global CEO]

Very much.

[Operator]

Sorry to interrupt, your voice is breaking up.

[Faisal Hawa]

Can you hear me now?

[Amit Jain, Global CEO]

Yes. Please go ahead.

[Faisal Hawa]

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 and how much remains? So I just want to know what is the kind of work, which is -- it can be had for the next 20 years or so?And second is that this Waste to Energy project that we have bought, this is worth around INR 15 crores. Now these are very big areas, and most of it is being catered by Japanese majors who are having the technology and the wherewithal to actually execute these kind of projects. So where do we see ourselves in this space? And can we get some more orders on that and how profitable it is? Is it more -- less commoditized than our solar module EPC business?

[Bahadur Dastoor, Chief Financial Officer]

First, sticking 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. And every year, we expected this market to grow in that market by $5.25 billion annually, and we have a good pipeline there. So -- and the space we are operating in, you are absolutely right [indiscernible] market -- and we expect that business to grow significantly. And the margin in that particular segment remain between 10% to 15%.

[Amit Jain, Global CEO]

10% to 15%.

[Bahadur Dastoor, Chief Financial Officer]

So that's where Waste to Energy market is there, and there's literally huge potential in that market. And thermal to solar is -- as you know, the financing is becoming a constraint for thermal plants going forward. So year-on-year, they are adding significant portion to the solar pie. And I see like roughly 15% to 20% of the market is getting added to solar by closure and noncapacity addition of thermal plants.

[Faisal Hawa]

There would be only 4 players in Waste to Energy at this point of time?

[Bahadur Dastoor, Chief Financial Officer]

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 has explained, our focus is majorly U.K. and Europe.

[Faisal Hawa]

Solar EPC itself would be definitely a good 20 years business to be had?

[Amit Jain, Global CEO]

So even I would say, yes, 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. So definitely, we saw this business going strongly for next -- more than the next decade and even up to 20 years.

[Faisal Hawa]

I really hope that [indiscernible] will have a lot of synergies with our top management, and we continue to have these con calls.

[Operator]

The next question is from the line of Vetri Raju from Equity Analyst.

[Unknown Analyst]

Can you hear me?

[Amit Jain, Global CEO]

Yes.

[Unknown Analyst]

Okay. I know most of my -- whatever I wanted to ask has been answered. I just have one question. With the customers getting very cautious and trying to delay the projects and maybe we, as a company, also very cautious in terms of not losing money, is it fair to assume that FY '22 revenues will be potentially lower than FY '21 revenues?

[Bahadur Dastoor, Chief Financial Officer]

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 '22 revenues will be at least 10% to 15% higher than what we had for FY '21.

[Unknown Analyst]

And just the previous -- for the previous question, I got the answer that green hydrogen is also a potential diversification of the company because largely the source of electricity is from solar or wind or something. So is there any concrete plans to get the engineering talent in that area or it's a few years away?

[Amit Jain, Global CEO]

Yes. So we are right now focusing on the renewable energy, which is associated with green hydrogen. So we are focusing on that part right of now. So -- and 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.

[Operator]

As there are no further questions, I now hand the conference over to Mr. Amit Jain for closing comments. Over to you, sir.

[Amit Jain, Global CEO]

Yes. 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 solutions, 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 Advisers, our Investor Relationship Advisers. Thank you once again, and have a great day.

[Operator]

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 connect your lines.