Swan Energy: Company Stock Analysis

Analysis from Ventura: 14 Nov 2023

Swan Energy Ltd (SWEL) has established an explosive path of capex led growth which should pole vault the fortunes of the company to another level. While the path to growth is in unrelated verticals yet the demand potential / supply constraints of these sectors provide a huge opportunity:

• SWEL’s takeover of Reliance Naval & Engineering Ltd (RNEL) via its INR 2,133 cr NCLT bid marks its foray into the business of ship repair, building and breaking. With this opportunistic foray SWEL has got a readymade asset at the throwaway price.

• India is a net importer of gas for its energy needs. SWEL’s 63% subsidiary, SWAN LNG Pvt Ltd, has successfully onboarded a 5.0 MMTPA FSRU with 4.5 MMTPA of capacity already tied-up. It is in talks with potential customers for tying up a further 5.0 MMTPA which should double its capacity even as it proposes to order another storage unit (FSU). Since the business model is a pure tolling take-or-pay contract, there is no risk for SWEL from fluctuations of commodity prices.

• Veritas India Ltd (VERITAS), a chemical trading company (55% subsidiary acquired in May 2022), is investing INR 1,800 cr to set up a 150 MMTPA PVC plant and 360 MMTPA PMB capacity at Dighi Port. Both these high growth verticals suffer from acute supply constraints and provide VERITAS with a good medium to long term opportunity. 125% capex subsidy in addition to state GST reversal over 9 years ensures visibility of return of capital while the demand supply mismatch should ensure steady cash flows.
VERITAS is also building a throughput terminal (1.4 MMTPA) and bottling plant (60,000 MTPA) at Dighi to cater to every increasing demand for LPG. All ongoing VERITAS projects are set to be operational by FY26. Furthermore, SWEL is planning for increasing value-added services in Verasco FZE (100% subsidiary of VERITAS) to boost its profitability in Hamriyah, UAE.

• The existing commercial properties in Hyderabad and Bengaluru are generating consistent and steady cash flow, while the ~1.9 lakh sq ft housing project is expected to be completely monetized in FY24 itself.

• The steady cash flow generating textile business is expected to benefit favorably from the fast-improving fortunes of the textile industry.

Since these opportunities abound in the infrastructure space, it is paramount that execution is timely. In our opinion, SWEL is well on track for timely completion across most of these projects and hence the concern stands significantly vitiated.

We initiate coverage on SWEL with a BUY for an SOTP based price target of INR 810 per share (11.6X FY26 P/E), representing an upside potential of 91.7% over the next 24 months.