Hwyl can be either a sail or a festival. (http://welsh-dictionary.ac.uk/gpc/gpc.html)

Hwyl fawr can thus mean 'a big/large sail' or 'big fun/mood/hilarity'; in the second case it has become a common farewell greeting. Although the more casual 'hwyl' on its own is often preferred.

Yes technically, thought the "Hwyl" in the phrase "Hwyl fawr" is actually the word for "Fun".