57% upside target! Loss-making Sterling & Wilson gets thumbs up from Nuvama. Here's why

Nuvama Institutional Equities has initiated coverage on Sterling and Wilson Renewable Energy with a ‘buy’ rating and a target of Rs 454 that suggests 57 per cent potential upside over Monday's closing of Rs 288.75.

Given its accreditation in 17 international geographies with high entry barriers, Sterling and Wilson is well-positioned to leverage global solar capacity growth in excess of 15 per cent CAGR, Nuvama said.  In addition, Sterling and Wilson enjoys India’s inherent edge of lowest solar EPC cost (half of even China), it said adding that domestic solar capacity is expected to rise 5 times by 2030.

Nuvama said a veritable revival in industry fortunes to 2–5 times current levels and change in parentage to Reliance group shall energise a fourfold surge in Sterling and Wilson's EPC order book in two years. This coupled with negative working capital and high operating leverage will lift return on equity (RoE) to a new trajectory—past historical high of 76 per cent, it said.

Nuvama forecast a V-shaped earnings turnaround from FY24 as old loss-making orders get grandfathered and new, large and profitable orders power operational leverage.

"Negative working capital shall spur strong positive cash flow and a net cash balance by FY25E. We feel the initial V-shaped recovery could speed up to a hockey stick curve if the mammoth green hydrogen and Middle East-like opportunities materialise. We argue V-shaped earnings turnaround presents a high- risk- high- return opportunity—currently, loss-making with erosion in shareholders equity; a turnaround in its fortunes hinges on lumpy order inflow," Nuvama said.

The brokerage values V-shaped earnings turnaround at 6 times versus 8 times for multi-business global EPC companies players to reflect higher risk.

"This yields a target of Rs 454. We initiate with a Braveheart BUY. We believe, arguing Nuvama is an early opportunity in the nascent, but potentially gigantic environmentally positive New Energy space, which is currently devoid of pure-play opportunities," it said.

Nuvama said long-term prospects are super-charged, given India’s inherent and rapidly growing “Sun & Sand” edge (lowest solar EPC cost), potentially catapulting the country to becoming the Middle East of green hydrogen (G H2) over time.

The company reported a consolidated loss of Rs 298.71 crore in September quarter and a net loss of Rs 915.76 crore in FY22. On Tuesday, the scrip rose 6.45 per cent to hit a high of Rs 307.40 on BSE.

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