CRISIL Research has assigned a CRISIL IER fundamental grade of 3/5 (pronounced ‘three on five’) to Swan Energy (Swan). The grade indicates that the company’s fundamentals are 'good’ relative to other listed equity securities in India. The fair value of the stock is Rs 67 a share. At the current market price of Rs 61 a share, our valuation grade is 3/5 indicating that the fair value is aligned to the current market price. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument’s future market price or its suitability for a particular investor.

The assigned fundamental grade reflects Swan’s established position to exploit emerging opportunities in the real estate and energy sectors. It has been investing aggressively in these two sectors and plans to continue to do so to drive future growth and to cater to the increase in domestic demand for housing and natural gas in the long term. The grade takes into account Swan’s monetisation of its land bank in Mumbai and successful ploughing back of the returns in real estate opportunities in tier-I and tier-II cities over the past seven to eight years.

The grade is constrained by the challenges Swan may face in the execution of its floating storage and regasification unit (FSRU)-based liquefied natural gas (LNG) terminal and raising funds for it considering this is its maiden venture and offtake agreements with the customers are yet to be closed. Swan is expecting cash flows from its residential real estate projects and additional equity fund-raising to fund its 51% equity contribution in the FSRU LNG terminal project. Hence, delay in the execution of the residential real estate projects (expected to be launched in H1FY15) is a monitorable.

CRISIL Research expects revenues to increase at a two-year CAGR of 39.1% to Rs 6.7 billion by FY16, driven by the sale of residential properties. While the textile segment’s EBITDA margin is expected to remain at 7-8%, the real estate projects are expected to increase the overall EBITDA margin to 20.2% and 31.4% in FY15 and FY16 respectively. We estimate PAT margin of 5.5% in FY15 and 5.4% in FY16.