Is the worse over for Inox Wind?
The worse is not over for Inox. Their falling share prices (52 wk lo/hi 131/253) are not as steep as their falling marketshare (23% to 11%). Most analysts are keeping it under close review with a negative bias. Changes in regulatory environment have resulted in a tight position for all wind energy players. However, it is noteworthy that none of the other two major players (Gamesa & Suzlon) have had as big an impact as Inox.
There are two critical factors that work against Inox in the current competitive landscape:
Lack of technology to match the LCOEs required in the industry to mitigate the risks of falling prices and eroding margins. Other players already have established R&D bases to leverage from.
Lack of experience and established relationships is another fallout for the company. If Inox would have managed their relationships better, then their FIT based orders would not have become irrelevant. Suzlon (as claimed) have been executing their FIT orders even after the regulatory changes.
Inox has to up its game and they have to do it quick. They have lost the ability to compete in the short-term. However, without some hard decisions, they may well have to bear worse in future.
The biggest impact of this move was felt on wind power producers like Inox Wind whose order book shrank overnight. With no signing of PPAs, there were no investors willing to buy wind power generators.
It would take time to build relationships as they progress. And relationships may play a lesser role in acquiring orders going forward as the auction-based system takes precedence over FIT system. However, Inox’s challenges with technology require immediate attention.
Inox claims that vertically integrated value chain and R&D Focus (Innovation) is its competitive advantage.(Source: Inox AR 16, Pg. 3)
Research & Development
However, upon digging deeper, I found that:
(Source: Inox AR 16 Pg. 3)
- The company has not spent a single rupee on In-house R&D
- They have a licensing arrangement with foreign players who have supplied technology to Inox, which they have customized to fit local needs
To get a fair comparison, I went to Suzlon’s annual report and found the following:
(Source: Suzlon AR 2016 Pg. 40-41)
Suzlon has continued spending heavily on R&D despite heavy debt and other financial constraints.
What explains the dichotomy? The results and the management commentary indicate that Inox Wind has been aggressive in recognizing order inflows.
Suzlon, which has been in the system for quite some time now (more than two decades), has been more cautious.
According to Kirti Vagadia, group chief financial officer, Suzlon reduced the risk of contract or order failure through risk management practices such as better planning and other processes.
Vertically Integrated Value Chain
Inox claims to have a ‘vertically integrated value chain. However, the continuous-evolving wind technology has become a primary activity in the value chain which directly contributes to the lowering cost and improving margins. In such a scenario can we truly attribute the benefits of a vertically integrated chain to Inox?
Inox will have to ramp up technology and close the gaps with competitors. Failing which they may not be able to quote competitive prices against other bidders and may risk losing orders. It would be an even bigger risk to bid competitively (just to get orders to save marketshare) against well-equipped competitors (who have pre-bid arrangements with technologically-sound partners). Not only would they lose margins in such a scenario but may even end up adding unviable projects to the order-book.
There are several ways to ramp-up technology:
Fast tracking In-house R&D - This would incur huge cost, time and effort. At the same time, this is the most sustainable way to survive and grow in the long run. It involves taking short-term pain for long-term gain with bleak chances of revival in FY18 and probably even FY19. Also, a need for capex may push them to take debt which increases leverage in future. Trouble is that even if they are able to catch up with the competitors, building technology as a competitive advantage would be difficult.
Licensing arrangement – Company can continue to have licensing arrangements with foreign players. This would be a costly affair and they will never be able to become self-dependent.
Strategic Partnership/JV – Company can get into a partnership with another foreign player to leverage its local market knowledge in return for the foreign partner’s technology. This would be a very feasible solution for Inox. Such a collaboration should take care of its short-term technology needs and give them enough headroom to build inhouse R&D capability. As Suzlon benefitted (purely in terms of technology) from its association with Senvion, Inox may take a leaf out of the same book. Such arrangements however are not long-lasting. Once the foreign partner is well versed with the local geography, it would either ask for a premium for their technology or would part ways and go solo. Within that time frame, Inox should be able to build its technological competence to survive on its own.
Acquisition – With the backing of a strong Inox Group, Inox Wind can manage the resources to consider buying a wind turbine company (probably a foreign player), which in turn will give it the capabilities in technology and global scope of operations. It is less expected though, as the company must have taken a lesson from Suzlon’s financial trouble following the company's acquisition spree. Also it might ring bells in the other well-performing subsidiaries of Inox Group too.
Inox will have to take a necessary step towards matching up with its competitors. Going forward the competition will only become more intense and there are serious questions upon Inox’s capabilities. Inox has destroyed shareholder value throughout its short history. The ever falling Inox share price is an excellent example of the notion that probably the market knows more than us and we must always respect the market. One can only hope to see the carnage end. Good luck!
Disclosure: Not invested in Inox Wind. Invested in Suzlon