Sterling and Wilson Renewable Energy Ltd

NSE:SWSOLAR

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Sterling and Wilson Renewable Energy Limited Q2 FY '23 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Sandeep Thomas Mathew, Head, Investor Relations, for his opening remarks. Thank you, and over to you, sir.

[Sandeep Mathew, executive]

Thank you, everyone. I welcome you all to the Q2 FY '23 earnings call. Along with me, I have Mr. Amit Jain, our Global CEO; Mr. Bahadur Dastoor, our CFO; and SGA, our IR advisors. We will start the call with an update on the solar power industry and operational highlights for the quarter by Mr. Amit, followed by the financial highlights by Mr. Bahadur, post which we will open the floor for Q&A.

Thank you, and over to you, Amit.

[Amit Jain, executive]

Thanks, Sandeep, and a warm welcome to all the participants on this call. I would like to give a quick update on the solar power industry, other allied renewable businesses and status on our business operations.

Now coming to solar EPC industry and opportunities. The global solar market is growing exponentially. It took around a decade for worldwide solar capacity to reach 1 terawatt from 100 gigawatt in 2012. In just 3 years, Solar Power Europe predicts global power to more than double 2.3 terawatts in 2025. Solar remains the fastest growing renewable energy, representing over half of the 302 gigawatts of renewable capacity installed internationally in 2021. With 168 gigawatt of addition, solar installed over 70 gigawatt more than the next greater installer wind and more than all non-solar renewable combined.

The role of solar in the global energy transition is getting more and more prominent, considering that in 2021, solar alone installed more capacity than all other renewable technologies combined. In 2022, global solar is expected to continue the decade long record-breaking streak installing more than 200 gigawatts of solar for the first time.

Solar's success story over other technologies has many reasons. But a key factor is a steep cost reduction curve over the last decade, which has made solar a global cost leader. While the cost of solar has been lower than fossil fuel generation and nuclear for several years, it is also now lower than wind in many regions around the world. Bloomberg NEF estimates for the global for LCOE for utility scale will be stood at $45 per megawatt hour in the first half of 2022.

Despite losing some ground, this still marks an 86% reduction since 2010 in nominal terms. Now wind-solar projects are now around 40% lower than BNEF's global benchmark for new coal and gas-fired power, which are at $74 and $81 per megawatt hour, respectively. The trend with conventional generation technology is widening considering that the cost of coal, gas and nuclear went up.

Despite the record increase in modules, commodities and trade over the last 24 months, the LCOE solar plant is still cheaper than the additional source of energy as well as the renewable source of energy. There are strong levers which will drive robust growth globally over the coming years: stronger policy support from the government in terms of tax incentives; favorable policies for renewable sector coupled with ambitious climate target announced for COP26 are going to drive demand for solar energy to new records worldwide.

Solar industry is well poised to grow in long term as ITPs have huge plans for global capacity additions, but global tariffs have already corrected up front with a revision in prices and a lot of projects are expected to get finalized in FY '23, especially H2 FY '23.

Indian solar power capacity has surged over 17-fold to 59 gigawatts since Hon'ble Prime Minister Narendra Modi came to power in 2014, the Indian Government has accelerated its plans for clean energy transition with Prime Minister Narendra Modi pledging to build 500 gigawatts of renewable energy, with 60% of it coming from solar. This is to ensure that half of our energy requirements will come from renewable resources by 2030. Thus, we expect outstanding growth in wind and solar power energy in the years ahead.

The public sector has been called upon to join the cause to reputational giants such as NTPC, NHPC, SJVN, NLC India Limited, Coal India Limited, et cetera, crafting solar plants and indicating a strong pipeline. The government is also persuading and incentivizing the private sector to shape India's clean energy future and make it a sunrise sector, just like IT services after 1991 economic reforms. Major Indian conglomerates have announced investments and commitments to our renewable energy target with about 151 gigawatts of renewable energy expected to be added by private clean energy companies alone.

India has also announced a road map to become a hub for the production and export of green hydrogen made from water and renewable electricity. India has set a 5 million tonne green hydrogen production targets by 2030 to help bolster its geopolitical hast and be a game changer for the country's energy security. With the government promoting the new age emission-free fuel, Reliance industry has also shown significant interest in the space. With this development, we expect huge increase in the scale of average project size in the Indian solar industry.

Utility scale for the market performance was mixed in the second quarter. A total of 2.7 gigawatts were installed in Q2, just 500-megawatt more than Q1, constituting a 25% decrease from Q2 2021 and a 17% increase from Q1 2022. Though the first half of the year, deployments are at their lowest level since 2019, supply chain constraints and trade policy issues continue to suppress utility scale solar installations.

The U.S. utility scale segment experienced a volatile period over the last several months, first time visible orders remain new tariffs was released, which allowed one of us to resume activities at Southeast Asia manufacturers could restart mobile shipment to U.S. But then U.S. LPA, the OTR post level prevention implementation led to retention of several module shipments, further constraining supply and hindering project construction. Post that, the historic passage of the inflation reduction at IRA in August will prove to be a massive growth catalyst for the solar industry.

However, due to the near-term supply chain constraints, according to Wood McKenzie report, most 77% of the effect of IRA will be materialized in utility scale segment after 2024. The lack of equipment availability has led to a continued project delays that were decreasing the 2022 forecast at 600 megawatts to 8.1 gigawatts, the lowest annual total since 2018. The industry will continue to navigate the UFLPA requirements during the rest of the year and supply is expected to return to its previous state at some point in 2023, more than 30 gigawatts of renewable power projects are expected to be permitted on BLM launched between fiscal year 2022 and 2025. The vast majority of the capacity will be solar-powered.

In Australia, the torrential rains adversely impacted the solar EPC activity. It is also facing resource shortage of white and blue collar manpower. However, the recent election has been a game changer in terms of the policy support for renewable energy. The new labor government has plans to unlock renewable investments, upgrade the grid and bring federal policies more in line with states and territories, many of which have more ambitious climate goals.

Labors main energy policy, Rewiring the Nation, includes plans to funnel AUS 20 billion into new transmission links to accelerate the uptake of more clean energy. The plan is part of labors pledge to part Australia's 2025 level greenhouse emission 43% by 2030 projecting renewable reach and 82% share, which was earlier 69% in the national electricity market guideline. The government also raised a migration cap in September 2022 to address the issue of skill and labor shortages. Global data says in a new report that solar installation in Australia could grow by a factor of 4 by 2030. It estimates that the country will reach a solar capacity of 80.22 gigawatts in 2030 from 17.99 gigawatts in 2020.

In June 2022, the EU Energy Ministers agreed to increase the share of European energy consumption coming from renewables such as solar or wind power to 40% by 2030. The impact of the Russian war on Ukraine and the accompanying energy security challenges alongside EU climate goals are deriving the continent's renewable transition with 25 off 27 EU member states set to install, more solar in 2022 than 2021.

As the continent released from the Russian war in Ukraine, the EU has refocused its attention on the role of renewables in energy security, where EU expected to install 39 gigawatts of solar power this year. The real acceleration will happen in the medium term with upward of 100 gigawatt of annual installations by 2025, paving the way to 1 terawatt of solar by 2023.

As for the International Energy Agency, by 2026, global renewable electricity capacity is estimated to rise more than 60% from 2020 levels to over 4,800 gigawatts, equivalent to the current total global power capacity of fossil fuel and nuclear combined. Renewables are set to account for almost 95% of the increase in global power capacity through 2026.

With solar PV alone providing more than half, our focus is to drive a large share of EPC capacity additions in FY '23, like 23 gigawatts in U.S.A, 16-gigawatt in Europe, 3 gigawatts in Australia and 16 gigawatt in India. It is estimated that solar PV utility scale market excluding China is expected to grow at 15% CAGR over the next few years, the growth led by developed markets like U.S., Europe, Australia as well as the India market.

During the recent 45th AGM, Reliance Industries announced plans for starting production of solar cell, battery packs and clean hydrogen from the Dhirubhai Green Energy Giga Complex. Reliance plans to commence manufacturing of solar photovoltaic cells and modules by 2024 with an annual capacity of 10 gigawatts. That will be scaled up to 20 gigawatts in a phased manner by 2026. Reliance is already one of the largest producer of grey hydrogen globally and aims to progressively start the transition from grey hydrogen to green hydrogen by 2025.

Importantly, Reliance plans to have 25 gigawatts of solar energy generation by 2025 for its own captive needs. We expect to get a meaningful pile of work from Reliance's new energy goals. I would like to state that with our global reach, strong relationships with customers and lenders as well as the induction of Reliance Group as an additional promoter of the company, we are well positioned to capitalize on these growth opportunities. Reliance Group investment in company has led to strengthening of complete balance sheet and increased confidence to customers, suppliers, bankers and other stakeholders.

I will continue the overview of our solar O&M business. Our solar O&M portfolio as of date is 7.2 gigawatts with third-party O&M constituting approximately 1/3 of the portfolio. While our portfolio has increased vis-à-vis March 2022, we anticipate about 1.8 gigawatt of the portfolio, which is currently under construction commissioning phase to start contributing to the top line by Q4 FY '23. O&M constituted 5.4% of the revenue in H1 FY '23 and stood at INR 82 crores, we are focusing on increasing international O&M portfolio through organic and inorganic route.

With more and more processes and procedures digitizing O&M, we are unlocking the value of predictive maintenance and making increased use of it, which results an improvement in efficiency and general reduction of our levelized cost of electricity. We aim to further increase our market share in our O&M segment by identifying profitable opportunities through global customer mapping. We are also leveraging our strong partnership with global ICTs.

Now I will present you with the best opportunity. With the increasing clean energy capacity in the grid and its subsequent decarbonization, ramping up energy storage has become critical and extreme necessity. Moving forward, on a global scale at 20x growth is estimated in energy storage by 2030. And till 2040, a 60x growth has been projected compared to 34 gigawatts of energy storage currently available.

According to Vision 2030, report of India energy storage aligned, at least 160 gigawatt hours of energy storage will be needed by India by 2030 to integrate a targeted 500 gigawatts of nonfossil fuel energy based on its analysis of India's energy sector and outlining the requirement of energy storage in the country.

We recently entered into an MoU for an EPC project, which includes battery energy storage system for total installed capacity of 455-megawatt hour in Nigeria. We have added a team of battery export sales and execution team to capture this market opportunity, and we have bid pipeline of 1.4 gigawatt hour across U.S., Australia, U.S. and LatAm. We see pretty robust growth in this market and with RTC tenders. Due from Government of India in the coming years, we see a robust growth in the Indian market as well with respect to battery energy and storage space.

With this, I will ask Mr. Bahadur, our CFO, to take you through the order book and consolidated financial highlights. Thank you very much.

[Bahadur Dastoor, executive]

Thank you, Amit, and good morning, friends. Speaking about the order book, in August '22, the company emerged as the L1 bidder for the BoS package comprising 4 blocks of the solar PV plant of NTPC Renewable Energy Limited at Khavda RE Power Park, Rann of Kutch, Gujarat with an aggregate capacity of 1,570 megawatt DC. The total bid value including O&M for 3 years aggregated to INR 2,212 crores inclusive of taxes. The contract agreement for the project has been signed between the company and NTPC Renewable Energy in October 2022.

In September '22, the U.S. step-down subsidiary of the company signed a memorandum of understanding with the government of the Federal Republic of Nigeria along with its consortium partner, Sun Africa, for the development, design, construction and commissioning of solar PV power plants aggregating to 961 megawatts at 5 different locations in Nigeria, along with battery energy storage system with total installed capacity of 455-megawatt hours.

Financing for these projects is under negotiation between U.S. EXIM, ING and the Government of Nigeria. The transaction is expected to consummate by Q4 FY '23. Here, I would like to add that Sterling and Wilson Group has a strong presence in Africa, and has an excellent reputation in Nigeria for successfully executing projects in the power sector.

Our unexecuted order book as on September 30th stands at INR 2,654 crores with nearly 78% domestic EPC, which is executable over the next 12 months. Our order bid pipeline remains robust, and we are still awaiting results of approximately 19 gigawatts of bid that are likely to be announced in H2 FY '23. We are on track to achieve and may exceed our earlier given FY '22 guidance of USD 1 billion in new orders other than those of group companies.

The prices of modules, commodities and logistics costs, which are hardened due to geopolitical tension in the first half of the year, have begun to moderate. A lower cost curve is likely to help tendering activity gather momentum, which should help result in more order finalizations in the second half of FY '23.

I will now take you through the consolidated financials for the half year ended September 30, 2022. Revenue for H1 has been at INR 1,520 crores as compared to INR 2,630 crores in H1 FY '22. Revenue and margin trajectory in the EPC business is anticipated to normalize from Q1 of FY '24. O&M constituted 5.4% of total revenue in H1 FY '23. New site additions to O&M portfolio is likely to start contributing to top line from Q4 FY '23.

Company level, the gross margin remained suppressed primarily on account of international EPC projects. In the U.S., labor costs increased due to shortage of labor supply, and in Australia, labor cost and site overheads increased due to loss of productivity on account of extreme weather conditions. Further, there was a translation loss due to adverse movement in exchange rate between the USD and the INR and the AUD-INR compared to March '22.

O&M margins were impacted by projects where O&M costs were incurred. However, revenue recognition has not commenced due to clients delaying final handover. O&M margins were also impacted by nonrecurring costs of about INR 10 crores during the quarter. While we anticipate revenue to be recognized on a retrospective basis, we have provided for the cost incurred upfront.

Coming to the balance sheet. As of September 30, 2022, the net worth stood at INR 338 crores on a consolidated basis, and cash and cash equivalents stood at approximately INR 428 crores. Our net debt stood at INR 885 crores. We expect net debt to decrease with new order inflows and completion of U.S. and Australia projects. Advance and performance bank guarantees encashed by 4 customers amounting to INR 588 crores. With 1 customer, we have signed a final settlement agreement and the encashed amounts for 2 projects totaling to INR 350 crores have been refunded by the customer. With respect to the balance 2 customers whose projects are completed, the company is in discussions with them.

As on September 30, we had negative working capital of INR 272 crores as compared to negative working capital of INR 302 crores as on March '22. Receivables due for more than 1 year as of September 30 stood at INR 362 crores compared to INR 261 crores as on June 30. They comprised related party receivable of INR 30 crores, which is net of INR 175 crores that the company needs to pay back to the related party against advance received for the Waste to Energy project.

With this, we can now open the floor to questions and answers.

[Operator]

[Operator Instructions] The first question is from the line of Abhineet Anand from Emkay Global.

[Abhineet Anand, analyst]

Just wanted to understand on the Nigeria MoU. Can you give some details in terms of the size, in terms of value and our share given that we have probably bidded with Sun Africa as a partner?

[Amit Jain, executive]

Abhineet, so to start with Nigeria opportunity, Sun Africa is a very restricted developer which is developing projects across multiple geographies, including Africa. They're developing projects in Europe, they're developing projects in Africa, and in Africa particularly, they're very active in Angola and Nigeria. So they have developed a portfolio of 5 projects in Nigeria, in which we are cooperating with them and has entered into alliance to develop and carry out EPC activity on those projects. We have signed the MoU with the Ministry of Government of Nigeria for construction of these projects, and we are in negotiation to conclude the EPC agreement with them.

[Abhineet Anand, analyst]

Any color on the order value, sir?

[Amit Jain, executive]

We have given that the values to the tune of like we are expecting, but still negotiating. But we expect it to be close to $1.5 billion.

[Abhineet Anand, analyst]

Okay. And then that itself takes as, Bahadur did mentioned that for the current year, we are expected to exceed our earlier guidance of $1 billion of inflows, right? That itself you're saying. And this $1.5 billion that you are saying is our share?

[Amit Jain, executive]

Yes. $1.5 billion is a share for both the partners.

[Abhineet Anand, analyst]

And what's our share in that, sir?

[Bahadur Dastoor, executive]

Our share, Abhineet, would be in excess of about 95% of the total value, There's being on account of development. But as Mr. Amit has mentioned, this is still under various stages of negotiation. The range though is what is the number that he has mentioned.

[Abhineet Anand, analyst]

Okay. So then it takes to the point that probably our guidance looks to be significantly below what we probably might achieve. Obviously, it's in negotiation stage. But if I have to just add here that if we were to look into a 2-year perspective rather than just 1 year at what guidance we have seen, what could be a realistic number in terms of inflows that one can have, 2 year or 3 years, whatever is suitable to you guys?

[Amit Jain, executive]

Yes. So as we are stating in our various conference calls, that domestic market is significantly moving up and we have recently backed 1.5 gigawatt orders from NTPC. The value of that order net of taxes is approximately INR 1,800 crores-plus. So -- and we have stated that Reliance would be carrying out worth of 20 gigawatts, and we expect to get a meaningful bio factual. So that value can be extrapolated from that aspect, what kind of inflows can be expected. We are negotiating deal in Nigeria and kind of international and both domestic markets, other than these particular projections continue to be robust. So we expect that the value -- the guidance of $1 billion, which was provided earlier, we can significantly expect to move up. And -- but revenues inflow will grow significantly in the next 2 years.

[Bahadur Dastoor, executive]

And Abhineet to add further, that would be the kind of target that we are aspiring to work on towards the next 2 to 3 years, of course, trying to exceed that as well.

[Abhineet Anand, analyst]

Okay, sure. And Bahadur, just on the balance sheet side, if you see your last -- first half, basically, almost our net worth has come down from 600 to 300-odd largely because of the loss that we have incurred. Though we have a bit of cash, do you think that there will be a need of some either raising your debt or equity infusion that will be needed this year? Given that inflows will probably happen in H2, so revenues will probably start kicking in 1Q '24.

[Bahadur Dastoor, executive]

There would be some amount of funding that would be required to complete the existing projects. The company is also internally having discussions in terms of the network. We will be able to provide guidance on what exactly needs to be done by the time we have to call for the next quarter, but there will be a certain increase which will happen right now in the funding requirement, which the company has more or less tied up with to close the existing process.

[Abhineet Anand, analyst]

Okay. Last one from me. Amit did talked about the battery storage part, right? India is still in a nascent stage and there is a lot of growth opportunities that we feel are there. If you can highlight from your international experience as to the pricing, what's in the other parts of the world and what pricing that India is presently having and what can -- so per unit, how will the battery power look like if we use battery storage today in India? And globally what's happening in the pricing front?

[Amit Jain, executive]

See, so as far as the battery pricing is concerned, so the major battery suppliers will continue to be from international markets. So as far as the -- and the major part of the cost comes from the battery supply part. And -- but the EPC portion or the construction portion constitutes only 15% to 20% of that part. And the cost of tax continues to be $250 per kilowatt hour. For the battery supply portion and the total EPC part is around $300 per kilowatt hour.

The -- per unit it depends upon the usage, what kind of usage and what kind of RTC requirements clients have or what kind of grid requirements it would be used for. So it's an extremely variable, and various multiple business models are evolving in the rest and same will be emulated in India. So the per unit cost of stored electricity also on that model will be rated as per the user and the customer requirements.

[Operator]

Next question is from the line of Faisal Hawa from H.G. Hawa & Company.

[Faisal Hawa, analyst]

Sir, this Nigeria order as well as the new NTPC order, what are the kind of estimations we have made for the gross margin in these 2 projects? And if at all -- if you could also mention what the ultimate EBITDA will be from these projects? My second question is that we are now going for a multi-country execution. And just also in the case of Nigeria, there are almost like 3 counterparties involved: the Government of Nigeria, then Sun Power and also U.S. EXIM. So we have these various countries that we operate in and there are various vagaries, like you just said that U.S. employee cost has risen, Australia, there are some problems of rain.

So mathematically, how will we see to it that the Sterling and Wilson is not affected due to this? Because one project failing and our EBITDA margins don't really allow for any kind of deviation. And there are so many factors which are just beyond our control. So how will we do it? Because this is like multi-country and then there are multi-risks.

[Bahadur Dastoor, executive]

So I'll start out, Mr. Hawa and then maybe Amit can pitch in a little later. I'll try and answer all your questions one by one. See, I wouldn't want to go down to project level margins and say what kind of margins we are obtaining in Nigeria or what kind of margins are there in NTPC. Suffice to say, it would be close to what we have been historically doing in the range, and that's what we are aspiring to do. That is to answer your first question.

Second, as far as the seasonalities of rain that have happened as well as -- in Australia as well as labor costs would have gone up, the company has now strengthened its risk metrics. We earlier used to also take this into account, in the case of Nigeria as well as in the case of NTPC, most of it is subcontracting. It is not something that is going to be self-performed. And therefore, all those risks, we would as an organization also pass on to the subcontractors.

As far as pricing is concerned, yes, while there would be pricing, which is there even for modules in the case of the Nigeria job, the NTPC job is without modules. There are firm commitments which are being taken from vendors, having learned from all our experiences in the past to ensure that there is no slippage of margins. When we talk of margins, Mr. Hawa, we always talk of gross margin because for us, the overheads are basically a total cost across the various entities of this organization.

So we don't look at EBITDA level margins for projects. That would be at an organizational level. That number is in the range of INR 400 crores to INR 450 crores. And as your turnover increases, which you can see from the order book, your operating leverage is obviously going to kick in, which gives you a greater EBITDA margin.

We will, of course, need to be more careful in Australia and U.S. We will be more selective and risk-averse in these geographies. Though historically, in India and Africa, we have always made good margins even in the toughest of times.

As far as the Nigeria job is concerned, it is funded through U.S. EXIM or it is proposed to be funded through U.S. EXIM. And most of the suppliers would be U.S. suppliers. Contracts there are extremely strong. And U.S. EXIM has already done funding of a similar project in Angola of a very large size. If I have missed anything, Mr. Hawa, please just remind me and Amit can pitch in if I have missed anything.

[Amit Jain, executive]

Yes. So Bahadur you have summarized it wonderfully, you have captured practically all the things. So Mr. Hawa, as you're saying in multi-geography now, as Bahadur alluded to, the risk metrics are being reviewed and we are changing our risk profile. So in negotiating the contracts and building contingencies around the increment rather or labor shortages. So we are bidding selectively and we are like taking care of the risk profile we are taking so that the margin cement in fact, whichever geography we are working in. And all the geographies, wherever we are working, we have put in very, very strong team so that the execution risk is minimum and we pass on the rest through subcontracting model to our subcontractors.

[Faisal Hawa, analyst]

So in any of these 2 contracts, will we have to give some kind of bank guarantees also to the counter parties?

[Bahadur Dastoor, executive]

Yes, of course, Mr. Hawa. Bank guarantees are always part of every contract.

[Faisal Hawa, analyst]

So at least can you tell me what are the gross margins we have targeted in these 2 projects? Because that gives very much important because we have to as investors also get into our calculations various vagaries that will come through in future. So whatever steps we might take, but these vagaries are such that many times even the management cannot budget further. You have seen in the past that it is not only the solar modules, many times, one of the projects has affected our entire year's performance.

[Bahadur Dastoor, executive]

So I would just like to say this much, Mr. Hawa that the mix gross margins for all new jobs would be low double digits combining all contracts together. I would not want to go into discussing project-level margins, at least my project.

[Faisal Hawa, analyst]

And I mean, what is our realistic target for orders now? Because we have already achieved the target for the year. So how many more orders will we take so that we don't go too far into the future where prediction of raw materials and all may become much more difficult? Or will we just take all the orders and then just -- and make the counter bookings with the suppliers?

[Bahadur Dastoor, executive]

So I'll start off by saying that most of the orders that we generally take are having a closure period of between 15 months to 2 years. So it is not something that we would take and then sit on the order for the next 2 to 3 years. That's not how the solar business operates. We have presently. So while it is an MoU, you can say that we are looking at exceeding our targets. However, that does not mean that we are shutting shop. We are right now involved in bids, as has been mentioned by Amit as well as me, for a very large portfolio across the world.

Plus, there are a lot of bids coming in India. India has always been our strength. Our domestic margins continue to be protected. They were so in March, they are so in June quarter as well as in September quarter as part of our investor presentation. And it is something that we are aggressively pursuing so long as our blended margins that we internally have are taken care of.

[Faisal Hawa, analyst]

And what is our hiring program for engineers for the next 2 to 3 years -- for the next 1 year, at least?

[Bahadur Dastoor, executive]

So we have mentioned, Mr. Hawa, that we are looking at increasing our total team size to take care of all of these new ones -- new jobs. We're already looking at increasing our domestic headcount to about 1,500 from the present headcount that we had in March of about 467. At the same time, there have been some reductions in places like Australia where jobs are coming to an end. That is to, of course, be very efficient and lean in terms of our operation.

But right now also, we are looking at increasing our headcount for design and engineering by about 195 people; construction, 615; project management, about 120. You will see that the corporate headcount, the back end is just about 40 people because as a back end, we already have enough strength to take care of the projects that we are looking at.

[Operator]

The next question is from the line of Siddharth from MK Ventures Capital.

[Siddharth Shah, analyst]

So my first question is on the gross margins again. You guided for low double-digit margins. Just wanted to understand the difference between the projects where you have taken with solar modules and the projects where we are not taking with solar modules. If you can just give some bifurcations. There'll be no further, whenever we win project, what kind of gross margins we'll make on those projects?

[Bahadur Dastoor, executive]

We always get margins even on the modules, though module prices being known to everyone, the module -- the profit margin on modules is a little lower as compared to if you were to BoS margin. When we are giving you this number of low double digit, it is considering a blend. Though if you were to look at it purely from a BoS perspective, it would be maybe a slight higher number as compared to the one with modules.

[Siddharth Shah, analyst]

Sure. And the captive projects -- I mean, the Reliance project, wherever -- whenever we win, those projects will be also at similar margins, low double digits probably?

[Bahadur Dastoor, executive]

We hope and expect that they will be because both parties have to come to a conclusion on what the margins will be. But yes, that's our aspiration.

[Siddharth Shah, analyst]

Great, sir. Also second question is on the order book now. So as of now, 12th October you had, I would recall...

[Bahadur Dastoor, executive]

Just to add that both NTPC as well as Reliance will be all BoS. There are no modules in that. Sorry, I missed saying that before.

[Siddharth Shah, analyst]

Yes. So that will be literally higher margins from just percentage terms?

[Bahadur Dastoor, executive]

Yes. We will try to upgrade our margins.

[Siddharth Shah, analyst]

Okay. And the current order book as of now, which is booked at INR 2,600 crores. So out of this, how much is the legacy orders where there is still some losses, sir? And what can be the extent of these losses, which will flow through our P&L in the next 2 quarters?

[Bahadur Dastoor, executive]

So let me put it in a little bit of perspective. So out of the order book that we have, we have roughly between INR 550 crores to INR 600 crores of the legacy orders, where there is no loss but there is no profit there. They are at more or less a breakeven because we have -- we always account for all the losses up to a point in time. To give you a perspective of this INR 500 crores, INR 600 crores, it is only about 6% to 7% of the total order values of all of these legacy orders. So today, we are at the fag end of all of this. We are hopeful of closing...

[Technical Difficulty]

And at the time of closure, we don't expect any major liabilities to arise at the end of these projects?

[Operator]

Participants, please stay connected, the line for the management dropped. Participants, please stay connected while we rejoin the management back to the call.

Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Sir, please go ahead.

[Siddharth Shah, analyst]

Yes. So sir, are you suggesting that we'll not have any further P&L losses or cash flow -- cash outflow of the legacy orders from now? Or we are now mostly provided for all the losses?

[Bahadur Dastoor, executive]

Losses we have accounted for, whatever we had to. And wherever we had any subjectivity, we have given that in the notes to the financials. As far as cash outflow is concerned, yes, we would require to do a certain incremental borrowing to complete those existing projects. So right now, we have done borrowings of about INR 700 crores, of which we have about INR 400 crores lying as a cash and bank balance. Over and above that, there will still be a requirement because one is accounting for the loss and second is paying for those payables to complete the projects. We will be doing that. Part of our borrowing plan, most of it which is already tied up with participating banks.

[Siddharth Shah, analyst]

So sir, how much is the cash outflow, which will happen on these legacy projects going forward. I mean, a broad range, if you can share guestimate?

[Bahadur Dastoor, executive]

That figure would be in the range of a further INR 300 crores to INR 400 crores over and above the bank balance that we have.

[Siddharth Shah, analyst]

And this is after the indemnity agreement which we had with erstwhile that is crystalized.

[Bahadur Dastoor, executive]

It is after the indemnity claim for crystallized items as on 30th of September 2022.

[Siddharth Shah, analyst]

Okay. Okay. So Sir, broadly -- the last question from my side. So broadly we have, say, INR 885 crores of net debt and the customer advances of say INR 300 crores, negative working capital of INR 300 crores. So we are in a way around INR 200 crores of borrowing. And further, INR 300 crores is -- INR 300 crores to INR 400 crores is the maximum liability which can arise. So by the end of this year, when we are done with all the legacy projects, we can have INR 1,500 crores of liability if we exclude the customer advances. Is that broadly correct, sir?

[Bahadur Dastoor, executive]

Yes. But it also depends on the advances which we will get from the new jobs that we are working on right now, which will go to reduce that. We are looking at it at a gross level. There will always be customer advances from the jobs, which we'll go to bring it down.

[Operator]

The next question is from the line of Anupam Goswami from B&K Securities.

[Anupam Goswami, analyst]

Sir, my first question is on the NTPC order that we got it.

[Operator]

Anupam, sorry to interrupt you. You are not -- hello?

[Anupam Goswami, analyst]

Hello, yes. Sir my first question is on the NTPC order that we have received. So what I was checking, it was about INR 1.3 per megawatt order. So is it like a full EPC contract? Because that's a bit of low in my understanding. So if you can throw some light on it?

[Bahadur Dastoor, executive]

Could you just repeat your question one time, please? I missed something in the mid.

[Anupam Goswami, analyst]

Yes. Sure. So the NTPC order of INR 2,200 crores for 1,600 megawatts, so it's coming about INR 1.3 per megawatt. So is it the whole EPC contract that we understand? Or there is any clause or conditions in that partially, if there is anything?

[Bahadur Dastoor, executive]

INR 2,200 crores or 1.5 gigawatts includes O&M for 3 years and includes the taxes. If you take that out, the value comes. If you exclude all of this out, the value comes closer to about INR 1.2 per megawatt, INR 1.2 crores per megawatt, which is the average BoS price. It is not a full EPC contract. If one were to do EPC, it would be upwards of INR 3 crores a megawatt. So this is a BoS.

[Anupam Goswami, analyst]

Right, right. Okay. So it's a BoS.

[Bahadur Dastoor, executive]

Yes, please.

[Anupam Goswami, analyst]

Okay. I understand, sir. And sir, how much margin are we commanding on BoS supply?

[Bahadur Dastoor, executive]

I already answered that question a little before that I don't want to go to project level margins. But on an average, it is low double digit that we worked towards.

[Anupam Goswami, analyst]

Okay. And sir, my last question on the kind of module prices we have. So our EPC contracts, domestic, if we see, what kind of margins do we see going forward? Do we see any challenges in that to maintain the margins?

[Bahadur Dastoor, executive]

So modules does not have, for us, an impact as far as domestic is concerned because almost all our orders in the domestic front are without modules. So the margin profile that I gave you includes what we do in India as well.

[Anupam Goswami, analyst]

Okay, okay. And sir, where are we sourcing mostly for our equipment and modules?

[Bahadur Dastoor, executive]

Modules worldwide would obviously have China as a great factor. As far as the job that we are working on in Nigeria, since it is U.S. EXIM funded, we assume that U.S. EXIM will have a great role to play in determining who are the major vendors for that particular job.

[Operator]

The next question is from the line of Manoj from Geometric Wealth Advisors.

[Manoj Dua, analyst]

Congratulation, sir, on winning a lot of orders and winning back company on the order front. My first question is, let's assume go forward for 2, 3 years, when the company balance sheet is more strong. Hypothetically, if you're getting INR 30,000 crores of order in a particular year. So is there any capacity constraint in terms of labor or in terms of sourcing, how to think of it in terms of capacity of taking orders?

And similarly, how much -- like we are taking orders around $1.5 billion this year, hypothetically. Okay, the project should release 15 to 24 months. How much we can execute in a particular year? Can you take an NTPC example in that? It will be very helpful.

[Amit Jain, executive]

Yes. So as we explained earlier during the call that we are increasing our capacity, we are increasing our bandwidth to address the increased market size. So this year itself, we are adding people in excess of more than 1,000 people. We are strengthening our engineering procurement and project execution team to address the increased market size and the increased order book for which we anticipate.

So any time we are negotiating any particular order book, so we have some time in hand and we have a clear visibility in which quarters we are going to book and what would the execution plan look like. So we start working in advance and start adding capacity. Like NTPC, we had -- time of like execution, time is 18 months. And we have sufficient bandwidth to execute that order in that particular time frame. If you see historically, we have achieved the turnover of around in excess of INR 8,500 in particular year, if you address, that we can easily handle a turnover of INR 10,000 crores to INR 12,000 crores without much increase in our overhead. And we had that bandwidth.

So we are very, very well placed to handle any increase in the order book, and we are very well-placed for that and our organization expansion plan based on anticipated order books are well in place.

[Manoj Dua, analyst]

Okay. So let me give a summary of that. For having more order, we need more employees for that, means a major part you are saying.

[Amit Jain, executive]

No, what I said, like we need employee for execution. But our back end, for the management teams are in place. But wherever we need, like most of the work will be carried out through subcontractors and where we ever need to execute in-house. So we are very well positioned for that expansion, and we are expanding our engineering team. And we'll be able to tackle that. But it will not lead to any significant increase in overheads.

[Manoj Dua, analyst]

I understand. So coming back to my question, any looks like we are going through a lot of orders from our Reliance Group also, and we are bidding more area. And there's a long tail build also in this sector. So if that kind of orders we want, if you are getting INR 25,000 crores, INR 30,000 crores, we can increase our capacity for that. Is it possible for organization Sterling?

[Amit Jain, executive]

Absolutely it's possible to expand the capacity to that. It is absolutely possible, and we are working towards that. And if we foresee that, that kind of order booking is happening, that will be addressed accordingly.

[Manoj Dua, analyst]

Okay. Great. And my second question is, for the time being, we can take a fixed recurring over at cost of INR 400 crores. Is it my right assumption?

[Bahadur Dastoor, executive]

Between INR 400 crores to INR 450 crores over the next 2 to 3 years, considering inflation or some little addition to back end, is the kind of range that we are looking towards.

[Manoj Dua, analyst]

Okay. And my last question is regarding this raw material, how much still we are fragile or dependent on the China thing? Is the situation improving? And what do you see going forward with a lot of capacities being put in India?

[Amit Jain, executive]

Yes. So can you repeat yourself again, once again? What's the question?

[Manoj Dua, analyst]

Okay. My question is in terms of procuring raw material, how much dependency this still solar industry have on China? And how much do you think going forward in 2, 3 years, it can be reduced as a lot of people are putting capacity in India and outside also.

[Amit Jain, executive]

So as far as the module sourcing is concerned, at this point of time, there is a major dependence on China because China controls most of the capacity of solar modules. But as you, yourself has said, there's a lot of capacity addition is happening, not only in India, but major of -- most of the other parts of the world. So I see a lot of capacities coming online in the next couple of years in India and other parts of the world, which would significantly reduce dependency on China. And we'll be able to source the modules and have all the other materials from either India or multiple other markets. .

[Operator]

Next question is from the line of Shantanu Mantri from Think Investments.

[Shantanu Mantri, analyst]

So I have 2 questions. So my first question is on a -- with a broader perspective. So...

[Operator]

Shantanu, sorry to interrupt you, but your voice is breaking. May I request you to come in a better reception area please.

[Shantanu Mantri, analyst]

Yes, is it fine now?

[Operator]

Yes.

[Shantanu Mantri, analyst]

Yes. Yes. So my first question is that last couple of years, our projects in Australia, U.S. we faced yield losses. And now we're coming to kind of fag end of all those orders. The quantum of these losses were massive. Like we've just eroded almost our entire network. Having said that, now we signed at a point where we have these big orders coming in from Nigeria and we have the whole Indian domestic story.

So my -- coming on to my question is that what are the few big risks you see in this Nigerian order that can affect us? Or rather what is the comfort you have that whatever we've seen in the past will not repeat again? If you can just share like how we've changed on our risk analysis will be really helpful.

[Amit Jain, executive]

Yes. So as you have started the question with U.S. and Australia, I would like to point out that the last 2 years were exceptional for the whole world because of the pandemic, the breakdown of the entire supply chain and the entry restrictions in those geographies where we could not supplement the teams with expertise and workers. So they were very, very different circumstances. And we are over that. That particular part of the order book stood up again, and we do see projects are about to be over.

As you are aware that we have a strong presence in Africa and we have executed projects successfully, we've won more than 10 countries in Africa. We have already had a huge presence in Nigeria. Our group companies have carried out projects in Nigeria, selling some solar has already executed on a smaller scale for projects in Nigeria. So as far as the African and Nigerian execution piece is concerned, we are very, very confident and we are one of the most successful contractors in Africa.

Now coming back to the supplier part, this job is -- Nigeria job is funded by EXIM Bank of U.S. and most of the suppliers are going to be from U.S. or the allied countries. And the contract -- entity of the contracts in those geographies is very, very high. So right, it's not the kind of problems which we faced in Australia that the suppliers reneged on their contracts, that is not going to happen from the Nigerian contract.

And as far as the further -- coupled with our execution experience in Nigeria, most of the jobs, construction jobs will be subcontracted and risk sharing will be done with the subcontracts. So I feel that as far as the Nigerian piece is concerned, we are very well protected and we have been sensed our risk -- most of the extent on Nigerian projects.

[Shantanu Mantri, analyst]

Got it. Got it. Okay. That's really helpful. And my second question is more on our balance sheet, particularly our debt. So I see right now, we have around some INR 850 crores, INR 880-odd crores of net debt. I believe that this will increase by another INR 300 crores by end of March. So we'll be around -- somewhere around -- this is excluding any advances from the NTPC order. I don't want to get into those advances.

But on a pure legacy order, whatever we've executed, we'll end up somewhere around INR 1,100 crores or INR 1,200-odd crores of net debt. Now -- just if we take this number, I wanted to understand based on the indemnity agreement, what would be the total number that either are third parties who have to pay us? Or in case it comes up on the promoters, what would be the total number that we can expect, obviously, this will happen when the liability materializes. But I just wanted to know that what would be the inflow to the company that will knock off against this INR 1,200-odd crores net debt, say, probably in the next 12 to 15 months? If you can just give some color on that.

[Bahadur Dastoor, executive]

Yes, I'll try to answer that question. So the total indemnity inflows, which would come in either from the promoters or the customers or the authorities would be approximately to INR 600 crores to INR 650 crores on account of liquidated damages, and perhaps about another INR 300 crores to INR 400 crores on other items, including things like receivables or if you have any of your input stuck with the authorities. So we're talking of a ballpark number of items covered in the indemnity to be between about INR 1,000 crores to INR 1,200 crores.

[Shantanu Mantri, analyst]

Okay, okay. And the time line for this could be in the next 12 to 15 months or much earlier?

[Bahadur Dastoor, executive]

It can't be because we have to raise indemnity claims only once in a year. So after considering the INR 300 crores, which had to be borne by the company, the company has already raised an indemnity claim for 30th September '22. The earliest we can raise the next claim and the number that I'm talking about is not what is included in the presently. It is only going to be September '23. So it will definitely not be all fructified in 15 months, something fructified in 12 months, 24 months or, if there are legal cases, then it may take longer to fructify as well.

[Shantanu Mantri, analyst]

Okay, okay, okay. But -- so maybe the time lines would be different. But on a number-to-number basis, so we have almost INR 1,000-odd crores. That should eventually come into the company. And so whatever debt we have generated now...

[Bahadur Dastoor, executive]

INR 1,200 crores. INR 1,000 crores to INR 1,200 crores. And a pretty significant portion may come in not just from the promoters but even from the customers with whom we will finalize our LD settlement for the next 12 months.

[Shantanu Mantri, analyst]

Right. Sir, any realistic number you would want to give us for next September '23, that some -- or maybe not a realistic but a conservative number that this should definitely come in by September '23?

[Bahadur Dastoor, executive]

So if it was already crystallized, I would have already taken it in my September '22 claim. So I don't want to put out any kind of number conservative, realistic, pessimistic. I've given you what is the overall number. We are all striving to see that we recover everything as fast as we can, not necessarily from the promoters but even from the customers or the authorities, wherever it is stuck.

[Operator]

I now hand the conference over to Mr. Amit Jain for closing comments.

[Amit Jain, executive]

Thank you. With the robust backing of Reliance Group and Shapoorji Pallonji Group, we endeavor to accelerate our growth trajectory by aggressively pursuing large markets globally, where we foresee a huge potential of growth. India to has reached an inflection point from where we anticipate the growth of solar power industry to garner from the pace and momentum.

With our deep-rooted client relationships, global presence, ability to provide customized solutions, strong track record of executing complex and large-scale projects supported by robust balance sheet and the strong parentage of Reliance Group and Shapoorji Pallonji Group, we are confident of regaining our leadership position.

I would like to thank everybody for joining the call. I hope we have been able to address all your queries. For any further information, kindly get in touched with Sandeep Thomas Mathew or Strategic Growth Advisors, our investor relationship advisors. Thank you once again, and have a great day.

[Bahadur Dastoor, executive]

Thank you.

[Operator]

Thank you very much. On behalf of Sterling and Wilson Renewable Energy Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you. .