Inox Wind

capital market | Mumbai |

Making most of strong tail-winds

CM RATING45/100
The Inox Group commenced operations in 1923 and operates in the industrial gases, engineering plastics, refrigerants, chemicals, cryogenic engineering, renewable energy and entertainment sectors. The Inox Group includes two publicly-listed companies, Gujarat Fluorochemicals (GFL) and Inox Leisure. Promoted by GFL and part of the Inox Group, Inox Wind is India's 4th largest wind turbine generator (WTG) manufacturer.

Inox Wind provides turnkey solutions by supplying WTGs and wind resource assessment, site acquisition, infrastructure development, erection and commissioning and also long-term operations and maintenance of wind power projects. It has a perpetual and exclusive license from AMSC Austria GmbH (formerly Windtec GmbH), or AMSC, a leading wind energy technology company based in Austria, to manufacture 2-MW WTGs in India. It also has non-exclusive licenses from WINDnovation Engineering Solutions GmbH (based in Germany), or WINDnovation, for custom-made rotor blade sets.

The company manufactures the major components of WTGs including nacelles, hubs, rotor blade sets and towers, at their in-house facilities. Its manufacturing plants are located near Ahmedabad (Gujarat) for blades and towers and at Una (Himachal Pradesh) for hubs and nacelles. Components not manufactured in-house are sourced either on a purchase order basis or pursuant to negotiated supply agreements with the suppliers. The electrical control system, which is the heart of WTG, is sourced exclusively from AMSC.

The company is in the process of constructing a new integrated manufacturing unit at Barwani, Madhya Pradesh, to manufacture 400 nacelles and hubs, 400 rotor blade sets and 300 towers. The project costs is expected to be around Rs 200 crore and will be funded through internal accruals and bank loans and will be commercially available in FY 2015-16. After giving effect to the expansion of their existing manufacturing facilities and the construction of the proposed Barwani unit, the total production capacity is expected to be 950 nacelles and hubs, 800 rotor blade sets and 600 towers.

As of December 31, 2014, 324 WTGs produced and sold by the company were operating, with aggregate production capacity of 648 MW, comprising 386 MW in Rajasthan, 134 MW in Maharashtra, 96 MW in Gujarat, 4 MW in Tamil Nadu and 28 MW in Madhya Pradesh. As of December 31, 2014, the company had produced and sold 42 WTGs that had been erected as part of projects that had not yet been commissioned and an additional 156 WTGs that had not yet been erected and commissioned.

As of December 31, 2014, the order book included orders for WTGs with aggregate capacity of 1,258 MW. These comprised orders for supply and erection of WTGs with aggregate capacity of 694 MW, including a 50-MW order by IRL, a group company, in addition to orders for supply of only WTGs with aggregate capacity of 564 MW.

There is continuous increase in the wind project sites in Rajasthan, Gujarat, Andhra Pradesh and Madhya Pradesh, which are suitable for installation of nearly 4,050 MW of capacity. The company intends to develop these project sites for wind farm developers and will continue to pursue further wind sites for development opportunities.

The Offer and the Objects

The public issue of Rs 700 crore comprises equity shares of 2.22 crore of face value of Rs 10 each at lower price band of Rs 315 per share and equity shares of 2.15 crore of face value of Rs 10 each at higher price band of Rs 325 per share. In addition, there is an offer for sale of 1.0 crore of equity shares of Rs 10 each by GFCL, the promoter.

The issue offers a discount of Rs. 15 on the issue price to retail individual bidders. The minimum bid lot is 45 equity shares and in multiples of 45 equity shares thereafter. The issue will be through a book building process and will open on 18 March and will close on 20 March, with anchor investor bidding date of 17 March 2015.

In addition to achieve the benefits of listing the equity shares on stock exchanges, enhance the visibility and brand image among existing and potential customers and provide liquidity to the existing shareholders, the company intends to expand and upgrade the existing manufacturing facilities and spend about Rs 148 crore. It intends to expand the capacity of the rotor blade manufacturing facility from the current capacity of 256 rotor blade sets to 400 rotor blade sets per annum, including adding the capability to produce 100 meter rotor diameter rotor blade sets, and also intends to expand the capacity of the tower manufacturing facility from the current 150 towers per annum to 300 towers per annum. It also intends to invest in new equipment at their nacelle and hub manufacturing facility with a view to optimizing the capacity of the Una unit. It further intends to invest about Rs 132 crore in wholly owned subsidiary Inox Wind Infrastructure Services, for development of power evacuation infrastructure and other infrastructure development and about Rs 290 crore for long-term working capital requirement and rest for general corporate purposes.

Strengths

The government is keen to ensure that the share of energy generation from renewable, particularly from wind, energy increases significantly in comparison with the growth in power generation from conventional sources. The government has a target of around 10,000 MW by 2017 compared with the size of the industry of about 2,100 MW in FY 2014.

The company has outperformed the industry significantly. In FY 2013, when wind turbine market in India de grew by 10%, the company was able to grow by more than 40%. In FY 2014, when the industry grew by around 4%, the company was able to grow more than 45%. Depending on the support of the government and based on external study reports, the industry is expected to grow at CAGR of around 12% by 2020.

The cost structure of the company is among the most competitive in the wind turbine manufacturing industry. The operating and net margins are relatively high and the operating and total cost per MW is relatively low compared with a number of major wind turbine manufacturers inside and outside India.

The exclusive license to use AMSC technology reduces the research and development expenses and enables the company to focus on execution and supply of wind turbines.

The company will continue to avail Section 80IC benefits of the Income Tax Act, 1961, to the extent of 30% of the profit derived from production in Una, Himachal Pradesh, from FY 2015-19. Till FY 2014, the entire 100% of profit was exempt from this manufacturing site.

Accelerated depreciation for wind projects, generation-based incentives for wind power, and renewable energy certificates (REC) are some of the measures providing a thrust on the sector. Moreover, wind projects qualify for mandatory 2% CSR activity by the corporate.

Weaknesses

The company has limited track record and started this business in FY 2011.

About 85% of the company's sales in the nine months ended December 2014 and 65% of the total order book of the company end December 2014 came from the top 5 customers. The company's sales are dependent on repeat orders from a few customers.

The margin declined in FY 2014 as company had to rely on third-party sourcing of land in Maharashtra for development of wind power as it did not directly own any land in that geography. The success of the company is to garner the maximum sale of sites at locations owned by it in states such as Rajasthan, Gujarat, Madhya Pradesh and Andhra Pradesh.

There was a negative operating cash flow in the nine months ended December 2014, FY 2014 and FY 2013 due to increase in debtors due to payments not received from customers. Net sales in the nine months ended December 2014 nearly doubled to Rs 1779.49 crore and so did debtors from Rs 586.66 crore to Rs 1162.63 crore end December 2014.

Solar power, which at one point of time was unviable due to higher cost per unit, is slowly catching up. Although power per unit cost of wind energy is still cheaper, at between 20-25%, solar power, going forward, with further reduction in equipment prices, can give tough competition to the wind sector.

Sales of wind power sites would depend on the economics of the wind energy project and government incentives and thrust. The company and the sector has not much control over this and any reduction of government incentives can affect sales of wind power sites and, thus, growth rates.

The business is working capital intensive and the company needs to hold the wind project inventory unless it finds a farm developer. For increase in land inventory and considering the higher amount of debtors' days, it would require higher working capital in future as well.

This business is dependent on financial status of state electricity boards (SEBs). If SEBs do not pay wind power generators (WPG) on time and fully, WPGs' investments in fresh capacity additions will get affected in spite of all the thrust and incentives of the government.

The company does not have its own technology. AMSC, the technology licensor, has experienced publisized adverse developments including financial difficulties and potential loss of key customers and changes in senior management. Such developments can adversely affect company's market price and prospects.

Valuation

In the nine months ended December 2014, consolidated revenues stood at Rs 1779.49 crore, up by 100% over the year. Consolidated PAT stood at Rs 179.30 crore compared with Rs 85.28 crore in the nine months ended December 2014. In FY 2014, net sales grew 48% to Rs 1567.20 crore, while PAT de grew 13% to Rs 131.46 crore.

At a price of Rs 325, post issue diluted equity share capital of the company works to Rs 222.20 crore of the face value of Rs 10 each. On a post issue share capital of Rs 222.20 crore of Rs 10 each, the EPS for FY 2014 works out to Rs 5.9. EPS for the nine months ended December 2014 on an annualized basis works to Rs 10.8. However, the company's business is seasonal.

Generally, Q2 and Q4 are the peak quarters due to the advantage of accelerated depreciation and high peak wind season. For example, annualized nine months ended December 2013 EPS was Rs 5.1, but FY 2014 EPS was Rs 5.9. Thus, actual EPS for FY 2015 should be higher than Rs 10.8. At a higher price band of Rs 325, the annualized EPS of Rs 10.8 is discounted 30 times. Largest player Suzlon India has been and is making huge losses (hence cannot be compared). Other large players Gamesa India and Regen are not listed.

For a company with limited track record, without its own technology and operating in a highly working capital intensive and negative cash flow business, the offer P/E of 30 is very high. However, renewable energy is the new government's thrust area and Inox Wind will be the only profit making listed player till Suzlon comes out of its financial problems.

Inox Wind: Issue highlights

For Fresh Issue Offer size (in no of shares )
- On lower price band2.22 crore
- On upper price band2.15 crore
Offer size (in Rs crore )700 crore
For Offer for Sale Offer size (in Rs crore)
- On lower price band315.00
- On upper price band325.00
Offer size (in no. of shares )1.0 crore
Price band (Rs)*315-325
Post issue capital (Rs crore)
- On upper price band222.20
- On lower price band221.50
Post-issue promoter shareholding (%)85.5
Issue open date18/3/2015
Issue closed date20/3/2015
ListingBSE,NSE
Rating 45/100
*For Retail Investors there is a discount of Rs 15 on the price

Inox Wind : Consolidated Financials

1303(12)1403(12)1312(09)#1412(09)#
Net Sales1058.911567.20877.391779.49
OPM (%)18.6%11.2%13.8%15.9%
OP196.47175.49120.78282.81
Other in. 4.779.147.9415.49
PBDIT201.24184.63128.72298.30
Interest38.6746.0038.0046.45
PBDT162.57138.6390.72251.85
Dep.8.9011.608.6314.73
PBT 153.67127.0382.09237.12
Tax (including Deferred Tax)3.25-4.43-3.1957.82
PAT150.42131.4685.28179.30
EPS (Rs)*6.85.95.110.8
*EPS is on post issue equity capital of Rs 222.2 crore of face value of Rs 10 each on higher price band of Rs 325
EPS is annualized but there is strong seasonality in business and second and fourth quarters are peak quarters
Figures in crore
Source: Capitaline Databases

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