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Sterling and Wilson Renewable Energy Ltd
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Ladies and gentlemen, good day, and welcome to Sterling and Wilson Solar Limited Q4 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 the guarantees of future performance and involve risk 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. Thank you, and over to you, Mr. Jain.
Good afternoon, everyone. I welcome you all to Q4 and FY '22 earnings call. Along with me, I have Mr. Amit Jain, Global CEO; Mr. Bahadur Dastoor, CFO; and Strategic Growth Advisors, our Investor Relation advisors.
We will start the call with an update on the acquisition of 40% stake by Reliance Group, along with the solar power industry update and the operational highlights for the year by Mr. Amit. This will be followed by financial highlights by Mr. Bahadur, post which, we'll open the floor for Q&A. Thank you, and over to you, Amit.
Yes. 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 industries and other allied renewable businesses and status on our business operations.
So the acquisition of 40% stake by Reliance Group has been completed. During Q4 FY '22, Reliance New Energy Limited, a wholly owned subsidiary of Reliance Industries Limited, completed acquisition of 40% stake in Sterling and Wilson Renewable Energy Limited via a combination of primary investment, secondary purchase and open offer. Reliance Group has also been classified as a promoter of Sterling and Wilson Renewable Energy Limited, along with the existing promoter and promoter growth. Reliance Group now holds 40% of the total paid up equity share capital of SWREL, while SP Group and KYD Group Holdings, 25.71% and 12.85%, respectively.
Reliance is committed to making India a global leader in green energy based on latest and most cost competitive technologies and development capabilities. SWREL, with its engineering talent, deep domain knowledge, global presence and experience of executing some of the most complex projects globally, will become an important part of solar value chain of Reliance Group. With the primary infusion done by Reliance Group, the company balance sheet has been strengthened. Being a part of Reliance Group has given a lot of confidence to our customers, suppliers, bankers and other stakeholders, giving us an opportunity to grab a larger share of the global solar market in the coming years.
Now coming to solar EPC industry opportunities. The unprecedented commodity super cycle over 2 years, coupled with COVID, has led to entire solar industry suffering huge losses and IPPs choosing to defer their projects by a year wherever possible. The shift in demand can be seen as an aberration, and solar industry is well poised for robust growth in the long term due to strong levels and the fact that LCOE for the solar plant is still cheaper than traditional sources of energy as well as the renewable sources of energy.
The stronger quality support from government in terms of tax incentives, favorable policies for renewable sector, coupled with ambitious climate targets announced for COP26 are going to drive demand for solar and energy to new records worldwide. With the Indian government accelerating its plan for clean energy transition, with Prime Minister Narendra Modi planning to build 500 gigawatts for renewable energy and ensure that half of our energy requirements will come from renewable resources. By 2030, we expect outstanding growth in Indian solar power industry in the years ahead. In the recent months, global tariffs have also started correcting upwards with the revision in prices and a lot of projects are going to be finalized in FY '23 including in H1. It is estimated that solar PV utility scale market is expected to grow at the rate of 15% over the next few years, with growth led by developed markets like U.S., Europe, Australia as well as Indian market.
Now I will give you updates on our O&M business. Our solar O&M portfolio as of date is 7.42 gigawatts with 1/3 is coming out of third-party customers. O&M constitute 4.3% of revenue in FY '22 and stood at INR 222 crores. The reduction in O&M portfolio during FY '22 is primarily on account of sale of plants by clients to customers having their own O&M team. We are focusing on increasing international O&M portfolio through both organic and inorganic route. Our enhanced value to customers through O&M differentiators like drone thermography, strong analytics and predictions, IV curve tracers, underground cable fault finders, et cetera, will help us to expand our O&M portfolio.
So there has been an increased focus of countries globally towards clean hydrogen mission. After the Government of India has launched natural hydrogen mission and announced its decision to transform India into a global household green hydrogen production. Additionally, the clients are focusing on round the clock renewable energy projects with battery storage, which is going to drive the demand for renewable plants, especially solar plants. U.S., Europe and Australia are the large market for focusing on large solar PV plus battery energy storage projects. We will leverage our client relationships to gain meaningful market share in these new businesses.
Now coming back to our order book and operations. As mentioned in our earlier investor calls, there have been significant delays in finalization of orders in FY '22 due to unprecedented increase in module, commodities and trade costs resulting in order finalization getting pushed to FY '23. The entire order book was INR 719 crores in FY '22 is from domestic market due to a sharp reduction in finalizations of orders globally. Due to unprecedented increase in input prices, the company has been cautious in picking orders in the international market.
Our unexecuted order book as on March 31, 2022, stand at INR 3,253 crores, which is mostly executable over the next 12 months. This UOV excludes solar EPC orders amounting to INR 2,030 crores, which will now be unviable for developers considering increased module and commodity costs and INR 1,500 crores order relating to waste-to-energy projects in U.K. Post the primary infusion in the company, our focus has shifted to scaling up the solar businesses to meet the huge demand, which will be generated due to the strategic investment. The Board of Directors have taken a decision not to pursue this contract at this point of time and focus our energies on our core business.
The module prices, commodity prices and logistic costs, which has started to soften slightly from January 2022, have again started hardening due to Russia-Ukraine war, and we anticipate them to remain elevated. However, the developers are geared towards projects in FY '23 after factoring the price increase. The opportunity pipeline for finalization during FY '23 looks robust in the domestic and international market. We expect our order booking to return to peak COVID levels in FY '23.
I would like to state that with our global reach, strong relationship with customers and lenders, as well as induction of Reliance Group as an additional promoter of the company, we are well positioned to capitalize on these growth opportunities.
With this, I will ask Mr. Bahadur, our CFO, to take you through the consolidated financial highlights. Thank you very much.
Thank you, Amit, and good afternoon, friends. I will take you through the consolidated financials for the year ended March 31, 2022. Revenue for FY '22 increased by 2.3% to INR 5,199 crores. O&M constituted 4.3% of the total revenue in FY '22. The region-wise revenue breakup is as follows: Australia 56%, U.S. 21%, India 11%, Latin America 9% and balanced 3% by the MENA and Africa region. Gross margins for FY '22 continue to remain impacted significantly primarily on account of increase in module prices, liquidated damages and increase in overhead and subcontracting costs due to extension in project time lines because of COVID and module delivery delays. Gross margins on unexecuted UOV as at 31st March 2022 is likely to be between 4% to 6%.
Recurring overheads increased by 6% in FY '22 majorly due to office setup in Spain and its associated cost to cater to the European market. The company has decided to invest in its manpower to take advantage of the tremendous growth opportunities in the domestic and international market. As part of the transaction with the Reliance Group, the company has signed an indemnity agreement with SP Group, KYD Group and Reliance Group on December 29, 2021. According to the agreement, the SP and KYD Group would indemnify and reimburse the company and its subsidiaries for a net amount if it exceeds INR 300 crores on settlement of liquidated damages pertaining to past and existing projects, old receivables, direct and indirect tax litigations, as well as certain legal and regulatory matters.
These amounts would be settled on 30th September of each succeeding year on the basis of the final settlement amounts with customers, suppliers and other authorities. SP Group and KYD Group are consequently entitled to net of the amounts payable with specific counter claims levied and recovered by the company and its subsidiaries on its customers and vendors relating to these matters. The company and its subsidiaries have already made provisions equivalent to INR 300 crore. Thus, there will be no further impact on the results of the company in future in these matters.
Now coming to the balance sheet. As on March 31, 2022, net worth stood at INR 905 crores and cash and cash equivalents stood at approximately INR 508 crores. The borrowings from banks stood at INR 435 crores, and thus, the company is net debt-free as at 31st March 2022. Advance and performance bank guarantees and cash by 4 customers amounted to INR 588 crores, with one customer we have signed the final settlement agreement and the encash amount of INR 176 crores has been refunded by the customer in January 2022. An additional INR 144 crores towards another project is expected by end of April '22.
With respect to the balance to customers whose projects are virtually completed, the company is confident of a mutually acceptable settlement in the coming quarters. As on March 31, 2022, we had a negative working capital of INR 302 crores as compared to negative working capital of INR 530 crores as on March 2021. Receivables due for more than 1 year as at March 31, 2022, stood at INR 251 crores. They comprise related party receivables of INR 19 crores, which is net of INR 196 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 Instructions] The first question is from the line of Abhineet Anand from Emkay Global Financial Service.
My first question is to Mr. Jain. I mean you mentioned in your opening remarks that you see your order be going back to pre-COVID times. If you can elaborate on the same with -- and I also add upon some of the regional, what do you expect in Australia, U.S., et cetera, in terms of prospects and your hit rate in those regions?
Okay. So as we have reiterated in our previous calls that the project pipeline continues to be robust itself that due to the uncertainties in the market, the orders closer by the clients have been shifted. So in international markets, we have a pipeline of close to 10 gigawatt, which we are pursuing right now, which remains open in various geographies, USA, Australia, Middle East, LATAM and Southeast Asia as far as the international geographies are concerned. And we are targeting to close this year close to 1.5 gigawatt of orders valued between $700 million to $1 billion. So that's our international target part.
So the U.S. pipeline continues to be around 3 to the U.S. and Europe are going to be around 3 gigawatts. Our target pipeline is there. And we expect to close from these markets somewhere between 400 to 600 gigawatts from both the markets. It can be there, and we get to know as we approach close to the deal closing. So that's where -- that's what we can expect. So we are fairly sure, that we'll be having reasonably good success in all the markets and we see the growth coming from all the markets. So that would be our projections from the international markets this year.
And in terms of the domestic market, there has -- there looks to be some uptick that can be seen for the next few years. So I mean, from the domestic side, what's your strategy to maybe gain market share or how do you -- given the increase in the size of the market itself, how do you plan to take more orders?
Yes. So the factors, which are like, though that we all know that Indian market is poised for a great growth. And the numbers are going to go big way. But the factors which are impacting international markets are impacting Indian markets as well as the commodity super cycle and module. But this year, we are sure of closing between INR 1,000 crores to INR 1,200 crores for the Indian market. And both the numbers which I've given you for international as well as the domestic market don't include the projects to be done by the third party.
Sorry. So Amit was not very clear towards the end. What we meant was that both these numbers do not include any captive work, which we may get for the Reliance Group.
Okay. So this domestic INR 1,000 crores to INR 1,200 crores, you are saying as an inflow or the revenue is more from the current order book, right?
So I will take that question. It is -- Amit is talking about order inflow and not revenue. Generally, it depends on which quarter the order comes in. Obviously, right now, we are projecting the order book for what is given for the full year. Over the succeeding quarters, we'll be able to give a better revenue guidance.
Okay. So basically, as I understand, you are talking about the $750 million to $1 billion, which is outside India and around INR 1,000 crores to INR 1,200 crores inflow in India. Is it right?
These are order booking numbers.
Yes, yes. I'm talking about order booking only, sir, for '23. Okay. Second thing is to Bahadur, sir, in terms of gross margin, I think you did mention in terms of unexecutable order book to have a margin of 4% to 6%, right? Given our fixed cost below the gross margin, is it fair to say that we will be EBITDA positive on these projects as of now?
You can't take the entire gross margin and attribute it to our 4% to 6% gross margin on a INR 3,000 crores because then you would not be EBITDA positive. Obviously, after factoring in the revenue inflows from the orders, which Mr. Amit did mention, we would definitely be EBITDA positive.
So any ballpark revenue guidance you would like to throw?
No, not at this stage, Abhineet. Maybe by the time we come to the next quarter, we'll be able to give a revenue guidance where we'll actually work out when the order inflows will come in and how much of that will be revenue for the year. So basically, what we are trying to say is we are targeting numbers which were close to what we were doing before. The revenue part, we'll just update in the next quarterly call.
Okay. Last thing from my side is what I understand from the indemnity agreement and what you didn't mention is that the company has taken all the provision, anything to do with up and down will be between RIL, SP and KYD Group and not to the company. There is no hit on the company, right?
There will be no hit on the company, but if the company's cash flows have been blocked by virtue of this. So any cash flows which come in, would come in into the company. There would be no profitability angle in this at all.
[Operator Instructions] The next question is from the line of Ankit Gupta from Alchemy Capital Management.
Sir, I missed the O&M portfolio side. Can you repeat it again? Hello?
Sir, can you hear us?
Yes. You want to know the O&M portfolio? As on 31st March, it is about 7.4 gigawatts.
7.4 gigawatts. And second, sir, the profits in the O&M side has been reducing in Q3 as well as in Q4 drastically. So can we expect the margins to again go up in FY '23 to earlier levels of 30%, 35%?
See, the gross margins on an average on running projects are 35%. As I had explained in Q3 -- in Q4, there have been certain costs where the revenue could not be recognized because the O&M will start from the first quarter of FY '23. Once that comes in on running jobs, the gross margin on a blended basis does continue to be 35%.
Okay. That's good to know. And sir, just to understand...
Am I audible or am I not audible?
Yes, sir. You are audible.
Yes, sir. You are audible. Last one from me is, how are the polysilicon prices now? In Q3, you told us that the prices have started to come down and they were around down by 10% in January. So what are the prices now in this -- after Q4?
So prices are -- prices of polysilicon are highly volatile, so that they're continuously fluctuating in the market. So as we have told in our -- during our speech, that they were started stabilizing, but the volatility has started again, and we'll get to know the trend within going next 1 quarter in which direction they are moving.
So because of the volatility, can we expect that the finalization of...
Sir, sorry to interrupt you. Your voice is not coming very clear. May I request you to speak through the handset.
Just a minute. Yes, yes, just a second. Yes, is it okay now?
Yes, sir. Thank you.
Yes. Sir, just last question, sir, because this increase in prices, should we expect the finalization of projects to even get delayed to second half of FY '23?
We are tracking the situation, but some of the places, even the tariffs, are going up. But we expect we have to watch the situation very closely and some of the orders are closing may shift to H2.
In H2. Okay. Okay. Okay. And sir, you talked about this captive projects from Reliance. Any idea what would be the scale of these projects? And they will be given entirely to SP Group only or they will also be like -- we have to bid for them?
So both the companies are still working on the strategy, and we are still under discussion. And we'll come up with more clarity and guidance on that in our next quarter call. So we are in discussions and still that is what kind of progress and we are still kind of finalizing what could be the volume.
The next question is from the line of Puneet from HSBC.
My question, again, is on your captive orders. Have you been asked to keep some spare capacity separate for Reliance orders? Or are you free to use whatever capabilities that you have for all your global orders?
No. So that's what I said. That's something which we are discussing and strategizing how to address that. In any case, considering the strong growth in Indian market, we are always in a position of capacity building and we can address a significant market. So we'll come out with more details during our next quarter call.
Okay. And in terms of order margins, is there an agreement as to how -- what margins you will get? Or is that also based on each project?
So there will be -- so I will request Mr. Bahadur to take that question.
This will be discussed on a case-to-case basis. There is nothing we can add at the moment right now. We have sufficient teams to cater to both the present order capacity as well as what we may need to do for Reliance in future. So we have been asked to gear up for large volumes.
Understood. So from the margin perspective, there is no, what we call, transfer pricing formula, which has already been defined as yet?
Obviously, there would have to be some kind of formula, but it is at early stages of discussion. I would say rather it is at a good stage of discussion.
Okay. Understood. And theoretically, if I were to say, what would be your capabilities in terms of executing orders in a single year in terms of gigawatt?
So let's just go back a few years, and you will see that the same company had got turnovers of INR 6,500 crores, INR 8,300 crores. So turnover is not the issue. Gigawatt is not the issue. There is sufficient capacity within the organization. And wherever we would need to augment, we would be able to do so and ramp up capacities.
The next question is from the line of Keval Ashar from DSP Investment Managers.
Hello, am I audible?
Yes, sir.
Yes. So just wanted to understand that you see the imports of solar module and solar cells In India. Do you see project prices to increase significantly as well as how do you foresee the demand scenario for utility scale projects in India post implementation of basic custom duty?
Can -- could you please repeat the last line of the question? I obviously can't seek...
How do you foresee the demand scenario for utility-scale projects in India. Post the implementation of BCD. That is on module and cells.
Yes. So I would like to say that the current projections we have and the plans Government of India has announced. So there is no doubt the demand for utility-scale project irrespective of any duty regime is bound to go up significantly. So -- but this question of BCD, there are various discussions are going on, but I don't see that there will be any significant impact and the volumes will be significantly higher. And all the domestic corporates are working to the addition of significant in-house manufacturing or tariff capacities. The various PLI schemes have been announced by the Government of India. So I think going forward, that will take care of all the duty issues. And we see that the demand for utility-scale projects will continue to be on upward trend only.
[Operator Instructions] The next question is from the line of Pritesh Vora from Mission Holdings Private Limited.
Hello, sir. Can you hear me?
Yes, you are audible.
Yes, we can hear you.
Yes. So I just want to understand how is the structure of contract worked out in this industry? Like when you take a EPC contract, would not be the material cost which you do not make PV modules and other things is back-to-back passed on to the customer? I do not understand why there was a gross margin negative in this industry. So generally, EPC industry when material is back-to-back billed to the client. So what has happened in the past where you have a gross margin negative? And can we understand that this is passed now and now all the contracts which you will execute will have a back-to-back arrangement of material cost transfer to the client?
So I will answer your question. Basically, it all depends upon what kind of marketing and what type of client we are closing the contract and contract format can be very different depending upon the market requirement. So far, what we have seen, as of excluding the creators of the super commodity cycle, we have seen that the module prices and the material prices were pretty constant, and we could predict what is the volatility is going to be in the market and is the same was priced in our contracts. So during the last 2 years were like of extreme volatility and no EPC company would have predicted that. And that's the reason the kind of the contract structure which you are signing.
And it's not back in all the contracts we were taking on the risk. And those are contracts for mixed, where we're passing on the request, but the module prices are passed through or we could -- and some of the contracts we had taken, that is. So that was a mixed model. But going forward, we'll be open to both our sector in which we'll be signing the passing on the risk back to back to our clients and somewhere. We will be accepting the risk with the proper mitigation strategy and risk sharing with the client as well as with our suppliers. So we have to address the contract structure going forward based on what the market conditions are, how the commodity prices are moving.
So we have to address based on that. And in the market where the nonrecourse funded projects are there, and that will move to the Western and the Middle East market. So there is no option, but we have to go for complete EPC projects, and there is no mechanism for pass-through models. But in all those kind of contracts, we are working out strategies with our clients and vendors to mitigate those risks going forward.
So how does the industry function in this? Suppose you get at the date -- a 0 date you get an order from your EPC client -- from the client. Would you not place the order back to back to the vendor the same price? How does the time lag happens? And why there is a lower erosion in terms of -- I mean, why there is a negative gross margin? I mean, how does it happen?
So no, actually, you're right. We have the strategy for placing the orders on back-to-back prices for most of the materials, and that's the basis we have worked on. But in the recent years, most of the tiny suppliers have reneged on the signed contract, and they have not respected or honored the contracts which we have signed. And that's the major reason we have taken the hit on our margins. And not only that, they also delayed the supplies, which has led to the erosion of the margins and our prices. So all that you are seeing has already been like part of our strategy. The orders are placed back on back, we take care of the pricing, but it is due to the reneging of contracts by Chinese supplier, which has created the situation, which has led to increase in prices and our overhead costs. But with other suppliers like cables, inverter, et cetera and other miscellaneous supplies, they honor their contract. And there, we have been able to withstand any kind of price variations.
Okay. So how we are sure, sir, that going forward, this will not get repeated? Like how we're sure that Chinese supplier now onwards will able to honor the contract and we will not have a problem in fulfilling the EPC order?
So in that case, if we take those risks, they will be under the Chinese supplier. The contract will be backed by much higher amounts of the performance guarantees. So they will be far more manageable and we'll be signing far more stringent contracts. So that's what -- if that strategy is there, and we'll try to involve our clients in finalizing the orders, so that there are no pressure both from the developer as well as the EPC and they are backing up their contracts with much higher amounts of the bonds.
Okay. And my last question is, sir, what can we consider the EBITDA margin, steady state EBITDA margin in this business? What is the current -- I mean if you consider the -- everything is back to normal, what can be considered a steady-state EBITDA margin in this business?
Yes. So Mr. Bahadur will take this.
I will take this question. So if you look at our gross margins in the past, they were between 10% to 11%. And if we are looking at overheads to be between 5% to 6% or even lesser than that, steady state EBITDA margin could be anywhere between 5% to 7%, more likely a 5% to 6% EBITDA margin is what we are looking. They may slightly go up also, but I'm just being a little conservative and I say the number like this.
[Operator Instructions] The next question is from the line of Faisal Hawa from H.G. Hawa and Company. Sir, sorry, we are unable to hear you. Your voice is breaking.
Can you hear me now? Can you hear me now?
Yes, sir.
So then we are starting out with a very small order book this year. So will we not find it very difficult to recover down from here...
You are not very clear.
Mr. Hawa, we lost your audio in the end of the question.
So we are starting out with a very small order book at the beginning of the year. So will it not be very difficult to really have any kind of a traction in this year for revenue growth? That is one. And secondly, will we ever get into kind of steady rate of manufacturing processes for, say, green hydrogen or new installer finance for that matter?
Yes. So Mr. Hawa, I would say you are correct. So this year, we'll not be able to match the revenues of FY '22. So there will be a reduction in revenues for the year FY '23. Could you repeat your last part of your question again?
So will we ever be getting into any kind of manufacturing for, say, green hydrogen or even for solar panel to cut out the risk of suppliers not...
So not at this point of time, we'll not be entering into any kind of manufacturing, but will be supported on our project going forward because as you must have heard Reliance, will be as planned for giga factories, for panels, batteries and hydrolyzers as well. So in future, if we go into the projects, it will be supported by the products of Reliance and there will be no dependency on China for our projects.
Just to add to what Mr. Amit said, this is more like the year of consolidation. So it is actually FY '24, which will be good with the order inflow of '23 plus the captive business that we have been talking about.
'23 plus what, sir?
It will be FY '24, which will be the real year of growth with the order inflow carryforward of FY '23 that we have targeted, plus captive business, which is what we are talking about.
And sir, any progress on the batteries front, whether are you developing any kind of proprietary technology with batteries or...
So Hawa can you -- your voice is not clear. Can you repeat this question again.
Any progress from the batteries front where we will get any kind of proprietary technology on the battery front from Reliance and we implement then end to end?
No. Actually, as we have said, because we are still discussing with Reliance, and we are not really up to speed on what kind of -- on the work which Reliance is doing on battery technology. But to give an update on our battery energy storage business, we are technology agnostic. And we are bidding for EPC projects in all our international geographies of Australia, U.K., Latin America, USA and Australia. So we are there. Currently, we have a big pipeline of 500-megawatt hour, which is valued to $125 million. And we see a pretty robust growth in this market, and we are addressing internationally this market. And with the RTC tender from Government of India, in coming years, we see a robust growth in Indian market with respect to better energy and storage space. But as far as the manufacturing is concerned, we are not going to get into any manufacturing on overall.
So now that we are broadly debt-free, are we changing banks? And are we getting some more bank guarantee limits also from our bank?
That is a work in progress. We are working towards ensuring that we have all the limits that we need for the business that we are looking at for FY '23 as well as FY '24. We are in the process of talking to newer bankers to increase our consortium size, both within and outside India.
[Operator Instructions] The next question is from the line of Akshay Kothari from Envision Capital Services.
Which are the geographies where we are facing aggressive bidding, if you may put some light on that?
So I would say that all the geographies are competitive. But with the Chinese coming in, the Middle East and Africa are the markets where I see the most fearless and aggressive bidding. So Middle East and Africa still continue to be dominated by Chinese with the kind of very, very low prices. But we see that in coming quarters or coming years, we will see the both corruption and even in this market because the players, which have backed the orders at very low prices, are not able to deliver, are not able to perform. So as of now, the Middle East and Africa, they are the most corrupted markets.
Okay. And on the second front, like where the Chinese suppliers have not honored their contracts. So are we taking some damages from them or what is the -- what are we doing regarding that?
So we are working on that. Wherever they have not honored the contract. We are working on recovering damages or renegotiations or how we can be compensated against the impact wherever they have damaged the contract.
[Operator Instructions] The next question is from the line of Alok Ranjan from IIFL Asset Management.
Just a couple of clarifications. So in terms of unexecuted order value movement, you have mentioned that INR 2,030 crores of contract is now unviable. So whether there is any claims which will be made by developers to us or is it the developer only who canceled the INR 2,030 crores of orders?
So it has broken up into 2 parts. In the case of part of it, the developer himself has said that the order is unviable and has canceled it in another part. We are also in discussions with the developer to say that it is unviable for you and unviable for us. Discussions are presently ongoing on that front, but we have excluded out of being conservative to say that we believe that it is, at the present, not going to be executed.
But sir, we have to execute that portion, then that will be executed at the losses in terms of, if the developer goes ahead with the project, right?
No, the developer will not be going ahead with the project. That's why we said we are under discussions with them. At the present, even he is suffering on various other grounds, not just the EPC part.
Got it, sir. And in terms of cost, in the normal scenario, you mentioned that 35% is the gross margin. And then in that case...
O&M. For O&M you mean.
O&M. Okay. Okay. And 15% for the projects, right?
No, no. I never said 15%. I said it is between 10% to 11% was what it was, which included the O&M. So if you were to just look at EPC, it could range depending on which geography you are, somewhere between 8% to 10% would be our EPC margin.
Got it, sir. So I just wanted to understand this 90%, which we procured from outside. What is the cost inflation that we have seen over the last, let's say, 18 months?
Sorry, could you repeat that? 90% of what that we get from outside?
So the COGS part, which is, let's say, 90%, what is the inflation that we have seen in the overall basket that will procure?
So they're not really COGS because we do not supply goods here. We are into project manufacturing. If you see our investor presentation in Slide #9, we have given the inflationary trends for steel, for logistics, as well as for module prices over there.
So can we say that the inflation has been close to 50%, 60% around that in that overall basket blended?
No, no, no. It is different. So your module prices, which were $0.17, $0.18 have gone up all the way up to $0.27, $0.28, cool down and now gone up again. Logistic pricing, which has freight, which has been somewhere around $2,500 per 40-foot container have gone up all the way up to $17,000 plus per container before cooling down. Same is the case with LME as well as with steel and other commodities. So there is no one ratio that will fit all. There are different increases happening for different items of cost.
Got it, sir. I was just trying to understand the price variation INR 325 crore approval that you have got. Will it be catering to the unexecuted order value at the end of 31st March, which you have, at least it will be catering to what inflation that we have seen or there will be impact, which will be continuing like the way you are mentioning, '23 is a consolidated year of something.
The price variations have -- which have been considered are those which have already been approved. They were part of the order book, some of which has seen revenue in the year FY '22 and some of which will remain in the UOV, the balance portion will remain in the UOV for FY '23.
Got it. And sir, in terms of receivables, the way you have mentioned for more than 1 year, INR 251 crores is there. Can you help me understand this 49% Argentina, INR 123 crores, which is there. You have mentioned that this is covered under promoter in the...
Your voice has once again cracked. I missed you after Argentina.
So to understand this INR 123 crore portion out of INR 251 crores, whether there is any impact from the company that can happen if this INR 123 crores cannot be recovered.
There will be no impact on the company. As we have mentioned before, this is covered under the indemnity agreement. And therefore, anything beyond INR 300 crores, the impact doesn't fall on the company. All provisions up for INR 300 crores have already been made. So therefore, anything happening on this Argentina front or even the matter under NCLAT front will not affect the profit and loss account of the company.
Got it. Perfect. Sir, just last question from my side. In case of China, the kind of the contract, just wondering that we have seen, is it like it happened across the Chinese solar companies or it was with few weaker companies in the China, which we might be dealing with in the last year?
I will just start off and then Mr. Amit will add. First of all, we do not deal with any weak module manufacturers. The ones we deal with are all the top Tier 1 module manufacturers only because that is the kind of module manufacturers that even our global clientele look for. The reneging has happened across the board with a number of EPC contractors and developers. Mr. Amit can add further if I have missed anything.
No, no, Bahadur you have perfectly stated the right position that we use only Tier 1 contractors, the reneging was across the board, and we are not the only one who suffered. So we have seen that phenomena globally across other EPCs as well as our clients in multiple geographies, which they have suffered by reneging of contracts by Tier 1 Chinese module manufacturers.
Sir, just a follow-up to that. In such kind of scenario where the contracts are not getting monitored by a Chinese company, how global counterparts for you like developers are imposing any condition that you have to procure from a part of that from x China or something in the new contracts?
No, that's what we told that both developers as well as EPC are working together. So we are working together with our clients to develop any strategy where the modules has to be procured by us and the various new mechanisms are being included in the contracts wherever EPCs have to buy these modules directly from Chinese suppliers.
The next question is from the line of Abhinav Bhandari from Nippon Life Asset Management.
A couple of questions. One is, while one understands that you're not giving a revenue guidance for FY '23 because of things getting decided, just to understand on the overhead side, where we had exceptional items the entire last year. Obviously, there was that extra expense because of Spain office set up as well. How should one look at overheads for FY '23?
Overhead should be slightly higher, maybe 10% to 15% higher. That is what we presently envisage as compared to FY '22.
Sure. And any specific areas where we are investing more because FY '22 base itself was quite high? So just understanding that. And most of the provisions you've already taken, which are in that base, actually.
Correct, Abhinav. So what is happening is the company is not going to invest too much in the development cycle that we are looking at in certain markets like U.S. and Spain. Those expenses are not expected to be high. However, at the same time, you will understand that there is always inflation, increase in remuneration, et cetera, which happens from time to time. And there is also the captive business of Reliance, which we have to gear up for. So keeping all this in mind, we believe that we will have to build up overheads, especially keeping FY '24 in mind.
Got that. Got that. And the other...
It will gradually fall as the revenue goes up. Right now, it is 6% on a INR 5,000 crores. Obviously, in FY '24, when things are much, much better as we believe they would be, our revenue -- our overhead to revenue percentage would be much lower.
Sure. And just on the working capital cycle as well since there are a lot of stuck items in the working capital cycle, sitting in both the receivables as well as other assets, other current assets. Would this release be sufficient to take care of our requirements for FY '23, given that we are -- an which was not looking for a bigger growth year in FY '23?
Release of -- you mean all of these items which are stuck? It will take some amount of time because -- sorry, say that again, please, Abhinav?
So I was saying part days itself should be good enough for us to understand?
It may not be. The company would need to borrow in the near term just to ensure that it takes care of its cash requirements for ongoing projects as well as overheads. If all of it were to be released, obviously, it is far more than enough than the company requires.
The next question is from the line of Mohit from BAM Capital Advisors.
Sir, two questions. So first is, any color on when you expect the captive module capacity available for us to peak domestic and global demand?
I would say that like that is still under discussion and Reliance is working on the plan. So we'll update you on this particular step in coming quarters.
Understood, sir. My second question is given that, let's say, our captive module capacity is functioning for FY '23, will you be available -- will you be able to supply that module for your global demand. Do you think there is some gestation period before you demonstrated the new product so that the product will have a greater acceptability with the clients.
Actually, that part has been handled by Reliance. So as I already said, that we'll be able to share more details on this particular aspect in next few quarters. At this point of time, all the discussions are happening, but we are not in a position to share more details at this point of time.
And sir, can I expect by the next quarter results? Or do you think it will take 2, 3 quarters.
No, I'm not sure by the next quarter because that's a process with -- like the plants are being set up. So I'm not sure about the details as and when the discussions with the clients conclude on that front, we'll come back to you, maybe next or maybe Q1 or Q2 call, that we are not sure of. But as and when we have update, we'll definitely come back to you.
The next question is from the line of Abhineet Anand from Emkay Global Financial Service.
See what I understand that the domestic EPC strategy that we had, we never bid for projects where land et cetera was involved, if I am -- correct me if I'm wrong. And so with Reliance as one of the promoters. Is there a safety in our domestic EPC strategy.
As of now, our strategy with respect to land is continued to be the same. But if there is any development after discussion or change in strategy will be reconfigured our strategy. But as of now, we'll continue without the land risk on our domestic EPC market.
Okay. Secondly, you did mention that Middle East and Africa, market has become very competitive, right, largely from the Chinese side. So I mean, what this competition, I'm just trying to maybe dissect in terms of these because the module price, module guys itself are competing or basically that the EPC guy is making a 0% or 1% margin and being very competitive. So which end of that competition, is it the EPC guy or the module guy who is basically sacrificing the margin for that?
I would say that the EPC guys are highly subsidizing the numbers, which they are quoting to various developers. And what we would have seen in the market trends in the last 2 years is that Chinese EPC players taking huge hits in this market. So that is very significant that they have taken very aggressive calls bidding without margins or sometimes at negative margins. And now we see that even on those numbers, there is a huge, huge fit they are taking and a lot of projects are underperforming. So that's very clear from that where it is coming from.
Sir, is it fair to understand that, that policy of players will not survive for medium term, right? It might be a near-term strategy because of whatever reasons. But it is fair to understand when this market stabilizes, because we have done good work in this region earlier? Just trying to understand whether this, in the medium term, remains as a good opportunity size for Sterling.
Absolutely. Absolutely, we are hoping for that, but because as most of the major players are not able to deliver in this market on the scale of projects which we have delivered in the past. So we are -- we remain very hopeful and optimistic that this market will come back to us. And we have to just wait and watch maybe next few quarters or next year, that's difficult to comment on. But definitely, we remain a strong contender for this market and it is definitely going to come back to us. And what we see that even the market size would grow significantly in Middle East because of the green hydrogen. And Chinese will not be able to address everything in any scenario. So we see -- let's see how the things unfold. And we remain like very bullish for the future quarters or years for this market.
And lastly from me, you did mention captive from RIL, is the green hydrogen power also going to be dealt with the EPC arm for that? Or is this too early to state?
As you have said yourself, it is too early to comment on green hydrogen part.
Thank you very much. I now hand the conference over to Mr. Amit Jain for closing comments.
Yes. Thank you. With the robust backing of Reliance Group and Shapoorji Pallonji Group, we endeavor to accelerate our growth trajectory by aggressively pursuing large international markets, that is U.S. and Europe, where we foresee a huge potential of growth. And these two has reached an inflection point from where we anticipate the growth of solar power industry. To garner further pace and momentum, we would like to reiterate that the opportunity pipeline for finalization during FY '23 looks robust in the domestic and international market, and we expect our order bookings to return to pre-COVID levels in FY '23.
With our deep-rooted client relationship, global presence, ability to provide customized solution, strong track record of executing complex and large-scale projects supported by robust balance sheet and 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 touch with Mr. Vishal Jain or Strategic Growth Advisor, our Investor Relations advisors. Thank you once again, and have a great day. Thank you.
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.