Sterling and Wilson Loses The Perception Battle

As India has emerged to become the world’s third-largest solar market, it was but natural to expect firms based on the country to make a name in EPC work too. Sterling and Wilson did just that, and more. Riding on the boom in Indian solar and the strong group background in the construction sector, the firm was considered a leading jewel in India’s solar sector, with over 70% of revenues coming from outside the country.

As of now, the firm claims to be the leading EPC player in India, the Middle East and Africa, with a global market share of 4.60 percent, making it the no.1 overall EPC player globally.  In doing that, the firm has collected an impressive list of achievements too. Starting with the world’s largest single-location solar plant, the Noor Abu Dhabi solar plant of 1177 MW.

A presence in 25 countries that has seen it deliver 8888 MW worth of projects, and an O&M capacity of almost 6903 MW.

A firm with such a huge amount of experience and the numbers to show for it should have had a pleasant and even informative conference call to discuss their results on November 15. Incredibly, Sterling and Wilson managed to turn it into a virtual inquisition of the promoters, with barely any discussion at all of the numbers, their views on the business, or anything else. It takes some doing to achieve that in the current economic environment when possibly everyone yearns for a good economic story that the firm indeed offered.

So what happened? In the words of one of the main protagonists and promoter/s of the firm, Khurshed Daruvala,  it all started with the firm’s Initial Public Offering in August. The issue, which was meant to raise Rs 4500 crores on the back of the firm’s stellar track record and the more than solid reputation of the promoter group, was eventually scaled back all the way to Rs 2850 crores due to poor market conditions at the time. Setting off a chain of events that, combined with poor judgment and especially poor communication, could have a lingering overhang on the firm, especially its stock price, for years.

The IPO proceeds, as committed by the firm in its Draft Red Herring prospectus (DRHP), were meant to do two things. Provide ‘liquidity’ to the promoters, and help the promoter group repay its loans to the firm, in the form of inter-corporate deposits advanced by Sterling and Wilson Solar.

In the event, the promoters failed to meet both the promise to the firm, with barely  Rs 250 crores of the loan amount repaid, leaving a gaping Rs 2300 crore hole, an amount that was supposed to make the firm debt free after the IPO.  While blaming the delay on market conditions and at the same time an assurance to come up with a ‘plan’ to repay by December 31, 2019 (without any indication or roadmap on likely period of repayment, besides Rs 750 crores by December 31), the firm’s promoters have done massive damage to the S&W brand, and its long term reputation.  It was obvious in the aggressive questioning the management had to face from normally polite equity analysts, as well as the massive sell-off the stock has faced on the bourses, hitting the lower circuits of 20 percent.  As on date, the stock was down at Rs 400per share, a full 48% down over the IPO price of Rs 780, a level it has barely touched after listing. For minority investors who hoped to ride India’s growing solar story on the back of one of its most successful firms, the ride would have been a huge jolt, and in doing this, S&W has probably queered the pitch for a whole host of other firms that were looking to follow in its wake with their own IPO’s.

With their international exposure, the promoters couldn’t have been unaware of the ramifications of their actions, which is perhaps why, despite strong numbers, and an even stronger order book, they face a real crisis of confidence in their ability to run the firm responsibly. As it turns out, the word ‘intent’ was used more than once to express the promoter’s plans to repay the money owed. It’s a word that will carry a lot more weight when backed with action on the ground. Assuming that the promoters get a chance to display it. There are serious fears that the worst may not be over yet, especially if market watchdogs like SEBI (The Securities Board of India) decides to take action for the firm’s missteps. December 31 could be yet again, a date too far in that case.