BlackRock's Strategic Bet on Swan Energy: Unveiling a Midcap Powerhouse

Recently, the investment landscape buzzed with news of BlackRock's interest in midcap stocks. Following its notable investment in a railway company, BlackRock, the world's largest asset manager, has now acquired a stake in Swan Energy through a series of block deals. This move has once again placed BlackRock in the spotlight of investors. Here, we dissect the details of this significant investment, explore Swan Energy's historical growth, and assess its future potential.B

BlackRock's Investment in Swan Energy

On Monday, BlackRock acquired a substantial stake in Swan Energy. Specifically, the BlackRock Emerging Frontiers Master Fund and BlackRock Global Funds India Fund purchased 0.8% and 0.6% stakes in the company, respectively. This equated to 2.46 million shares at ₹668.3 per share by the Emerging Frontiers Fund and 1.8 million shares at the same price by the Global Funds India Fund. Combined, these transactions amounted to approximately ₹2.9 billion.

In addition, the BlackRock Strategic Funds – BlackRock Asia Pacific Absolute Return Fund – acquired 280,000 shares valued at around ₹190 million. Notably, BlackRock held no stake in Swan Energy at the end of the March quarter, highlighting the significance of these recent acquisitions.

The sellers in these block deals included notable entities like 2I Capital PCC, Dovetail India Fund, EOS Multi-Strategy Fund, Epitome Trading and Investments, and Paulomi Ketan Doshi.

Market Reaction

Following the announcement, Swan Energy's share price surged by 5%, with foreign funds showing renewed interest in the stock. This rally underscores the market's positive reception to BlackRock's confidence in Swan Energy's potential.

Swan Energy: Evolution and Milestones

Early Years and Diversification

Swan Energy began its journey in 1992 as Swan Mills, a composite textile mill engaged in spinning, weaving, and processing in Mumbai. By 2004, the company diversified into real estate, partnering with Piramal Holdings to develop its land holdings in Mumbai.

In 2008, the company rebranded as Swan Energy, signaling its diversification into the energy sector. It established Cardinal Energy and Infrastructure as a realty subsidiary. By 2012, Swan Energy further expanded into the oil and gas sector, initiating the development of a floating storage regasification unit (FSRU) based LNG terminal at Jafrabad, Gujarat, through its subsidiary Swan LNG. Moreover, Pegasus Ventures, another subsidiary, acquired semi-finished properties and land parcels in South India.

Strategic Acquisition in 2024

In June 2024, Swan Energy acquired a 49% equity stake in Triumph Offshore Private Ltd from the Indian Farmers Fertiliser Cooperative Ltd (IFFCO) for ₹4.4 billion. This acquisition increased Swan Energy's stake in Triumph to 100%, making it a wholly-owned subsidiary. This move aims to solidify Swan Energy's position in the FSRU sector while providing an exit option for IFFCO. The completion of this acquisition is expected by August 10, 2024, with shares priced at approximately ₹16.8 each.

Triumph Offshore, which operates an FSRU vessel on charter, has shown remarkable financial growth with turnovers of ₹4.8 billion in FY22, ₹20.4 billion in FY23, and ₹64.7 billion in FY24.

Financial Health and Proactive Debt Management

Debt Reduction Initiatives

Swan Energy has taken significant steps to mitigate financial risks associated with debt. On March 4, 2024, its subsidiary Swan LNG prepaid ₹22.1 billion in loans, reducing its debt to ₹16.1 billion and saving approximately ₹2.5 billion in annual interest costs. Prior to this repayment, the group’s total debt stood at ₹38.2 billion as of December 2023. This prepayment was facilitated by Swan Energy providing ₹22.1 billion to Swan LNG.

Additionally, on December 27, 2023, Swan Energy repaid ₹400 million in debt for its textile unit to a consortium of banks led by Union Bank of India, which included Bank of Baroda, Punjab National Bank, and Mehsana Urban Co-operative Bank. Furthermore, Swan Energy prepaid ₹3 billion for its FSRU project through its subsidiary, Triumph Offshore, funded from internal accruals. These actions reflect the company’s strong cash flow management and commitment to minimizing financial obligations.

Financial Performance

Over the past four years, Swan Energy has showcased robust financial performance, driven by strategic initiatives and operational efficiencies. From FY21 to 9MFY24, the company's total income surged at a compound annual growth rate (CAGR) of 141%, rising from ₹3.2 billion in FY21 to ₹36.9 billion in 9MFY24. This substantial increase underscores the company’s ability to scale its operations and capitalize on market opportunities.

Similarly, EBITDA grew impressively with a CAGR of 143% over the same period. The EBITDA margin improved from 22.1% in FY21 to 22.3% at the end of 9MFY24, reflecting enhanced operational efficiency.

Exceptional FY24 Performance

For the full year FY24, Swan Energy reported a total income of ₹51 billion, a 254.2% increase from the previous year’s total of ₹14.4 billion. The profit after tax (PAT) also showed a remarkable turnaround, with a net profit of ₹5.9 billion in FY24, compared to a loss of ₹0.7 billion in the previous financial year.

Stock Performance

Over the past five years, Swan Energy's stock has delivered impressive returns, making it a multibagger midcap stock. The stock price has surged by over 600%, with a 176% increase over the last year alone. In 2024, the stock has already risen by more than 42%. Swan Energy’s 52-week high was ₹782.6 on February 27, 2024, and its 52-week low was ₹214.4 on August 2, 2023.

In Conclusion, Swan Energy’s transformation from a textile mill to a diversified conglomerate is marked by strategic acquisitions, significant debt repayments, and robust financial growth. The recent investment by BlackRock underscores the company's potential and attractiveness to foreign investors. With a diversified business portfolio, proactive financial management, and strong operational efficiencies, Swan Energy is well-positioned for sustainable growth. Favorable sectoral trends, such as increasing global demand for energy and sustainable textiles, along with government initiatives for infrastructure development and green energy, further bolster the company’s prospects.

BlackRock's investment in Swan Energy signals confidence in the company's future, making it a compelling story for investors looking for promising opportunities in the midcap space.