Acuité downgrades short-term rating of Sterling and Wilson Solar Limited

Acuité has downgraded its short-term rating to 'ACUITE A2' (read as ACUITE A two) from 'AUITE A1+ (read as ACUITE A one plus) on the Rs.200.00 Cr Commercial Paper Programme of Sterling and Wilson Solar Limited (SWSL).

The downward revision in the rating is driven by the ongoing challenges faced by SWSL in maintaining adequate liquidity buffers. The company's operations have been severely impacted in FY21 on account of the outbreak of Covid - 19. This had led to a significant deterioration in the operating cash flows of the company on the back of the disruption in execution activities across some of its project sites. While the operations of SWSL are geographically diversified, the impact of the pandemic driven disruption has been much higher than Acuité's expectations. SWSL has been facing challenges for timely completion of projects particularly in Australia. This is majorly on account of the bankruptcy filed by the sub-contractor in that specific project and to the unavailability of labor due to the lockdown. Further, the significant increase in solar module prices (~30 percent) and freight charges (~120 percent) are also likely to impact the profitability margins in FY2021 and partly in FY2022. While SWSL continues to conduct negotiations with its clients for a pass through of the sharply increased raw material prices, the risks in project delays have increased along with unfavourable operating costs, leading thereby to a substantial erosion in operating margins.

The outbreak of Covid pandemic and the associated lockdowns since early FY2021 has affected both the domestic and the global operations of SWSL. The operating revenues was significantly impacted in 9MFY2021 which stood at Rs. 1,875 Cr. as against Rs.3,493 Cr. in 9MFY2020, more importantly, the profitability has been under severe pressure with an operating loss of ~Rs.49 Cr. for 9MFY2021 as against operating profit of ~Rs. 145 Cr. (~4.15 percent) in 9MFY2020. Acuité expects a continuation of such profitability pressures not only in Q4FY21 but also in a significant part of FY22. Due to these operating losses in 9MFY2021, the company has heavily relied upon the interest income on ICDs extended to its group companies. Further, the debtors outstanding as on 31 March 2021 stood at ~Rs.796 Cr. of which ~Rs.401 Cr. (~50 percent of total debtors) is outstanding for more than a year. The realization of these debtors remains uncertain over the near term.

During the previous rating review, Acuité had expected a significant inflow of ICDs extended to its group companies. While Acuité takes note of the partial reduction of ICDs in FY2021 and Q1FY2022, the outstanding ICDs continue to be high at Rs.885 Cr. as on 31 March 2021 as compared to Rs.1160 Cr. as on 31 March 2020. The redemption timelines for these ICDs have been extended twice by the management of SWSL in the past two years. The timely inflow of these ICDs will remain a key rating monitorable.

Acuité also understands that the company has approached its consortium lenders for the release of additional limits to tide over the current liquidity pressures. The timely release of these additional lines by the lenders will partially mitigate the near-term liquidity pressures of SWSL. Further, in order to maintain a healthy liquidity profile, timely inflows of ICDs, reduction in legacy debtors, and a significant recovery in profitability will be critical.

Source : Equity Bulls

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