Premier Energies IPO: 12 key risks to know before subscribing to the issue

Premier Energies IPO: The ₹2,830.40 crore initial piblic offering (IPO) of Premier Energies, a manufacturer of solar cells and modules, opened for subscription today, August 27. The IPO, which will conclude on August 29 and has fixed a price range of ₹427 to ₹450 per share. Ahead of the IPO, the company has garnered ₹846 crore from anchor investors.

About the IPO

The issue is a combination of fresh issue of 2.87 crore shares aggregating to ₹1,291.40 crores and offer for sale of 3.42 crore shares aggregating to ₹1,539.00 crores.

As part of the offer-for-sale (OFS) in Premier Energies' IPO, South Asia Growth Fund II Holdings LLC (SAGF II) will sell 2.68 crore equity shares, South Asia EBT Trust will divest 1,72,800 shares, and promoter Chiranjeev Singh Saluja will offload 72 lakh shares.

Currently, the company's promoters hold a 72.23 percent stake, with the public owning 26.12 percent, including shares held by SAGF II. An additional 1.65 percent of shares are held by employee trusts.

In the IPO, 50 percent of the shares are allocated for qualified institutional buyers (QIBs), 15 percent for non-institutional investors (NIIs), and 35 percent for retail investors. Employees are offered a discount of ₹22 per share, with a minimum application size of 33 shares, requiring a minimum investment of ₹14,850 for retail investors.

The IPO allotment is expected to be finalized on Friday, August 30, 2024, with listing on BSE and NSE tentatively scheduled for Tuesday, September 3, 2024. The issue is managed by Kotak Investment Banking, JP Morgan, and ICICI Securities as book-running lead managers.

About the firm

Premier Energies Limited, established in April 1995, specializes in the manufacturing of integrated solar cells and panels. The company's product offerings include solar cells, solar modules, monofacial and bifacial modules, along with EPC and O&M solutions. Premier Energies operates five manufacturing facilities, all located in Hyderabad, Telangana.

In its red herring prospectus (RHP), the company lists Websol Energy System Ltd. as its only comparable peer.

From FY21 to FY23, Premier Energies' operating revenue grew at a compound annual growth rate (CAGR) of 42.71 percent. In FY24, revenue saw a remarkable 120 percent increase, reaching ₹3,143 crore. The company also turned a significant profit of ₹231 crore in FY24, a substantial turnaround from a ₹13.3 crore loss in the previous year.

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In the grey market, the IPO is trading at a premium of ₹378, which indicates an estimated listing price of ₹828, 84 percent higher than the issue price of ₹450.

'Grey market premium' indicates investors' readiness to pay more than the issue price.

Key Risks

The company identified some key risks that could materially impact its business:

Revenue Dependence on Limited Customers: The company's operations are heavily reliant on a small number of customers. Losing any of these customers could have a significant adverse effect on its business, financial condition, and cash flows.

Dependence on Core Products: The company’s success is closely tied to its solar cells and modules. A decline in demand for these products, particularly those using monocrystalline technology, could negatively affect business and profitability.

Geographical Concentration Risks: With all manufacturing facilities located in Telangana, India, the company is exposed to risks related to local and regional factors that could disrupt operations and impact overall business performance.

Financial Losses: The company incurred losses of ₹14.4 crore in Fiscal 2022 and ₹13.3 crore in Fiscal 2023. Continued financial losses could negatively impact its business and financial health, with several subsidiaries also recording losses recently.

Negative Cash Flows: The company reported negative cash flows of ₹15.53 crore in Fiscal 2023 and ₹41 crore in the first quarter of Fiscal 2024. Ongoing negative cash flows could strain financial resources.

Under-Utilization of Manufacturing Capacity: Inability to fully utilize existing and expanded manufacturing capacities could adversely affect the company’s financial performance, as higher capacity does not necessarily lead to higher revenues.

Capacity Expansion Amidst Unutilized Capacity: The company’s plan to expand annual installed capacity for solar cells and modules despite existing underutilization poses a risk. Insufficient demand could adversely affect business and financial results.

Decline in Solar Module Production: The company experienced a significant decline in the production and installed capacity of solar modules in recent years. Any future decreases could further impact business performance.

Past Non-Compliance with Regulations: The company has previously failed to comply with provisions of the Foreign Exchange Management Act and other regulations. Future non-compliances could result in penalties and affect business operations.

Intense Market Competition: The company faces fierce competition, which could lead to price reductions, reduced margins, and loss of market share, adversely affecting its financial condition.

Dependence on Government Projects: The company’s reliance on projects awarded by government entities exposes it to risks related to policy changes and project allocation, which could impact business opportunities and financial performance.

Risks Associated with Importing Machinery: The company imports key manufacturing machinery from China, exposing it to risks like tariff increases, import restrictions, and operational delays, which could adversely affect production and business operations.