Both Suzlon and Inox Q2FY18 results are out. One thing to notice is their order books and market shares. Looks like both have about 25% each of the total SECI bids so far (and maybe safe to assume Gamesa has a lion’s share of the rest).
Wind Order book as of 30/9/17
- Inox: 550MW
- Suzlon - 540 MW
Another 4.5 GW of auctions expected in H2FY18. Assuming Inox is able to maintain this share in the forthcoming auctions in H2FY18, then another 1100MW gets added till end of this fiscal. so, total is 1500-1600MW.
Net Profit ~ 770 Cr.
Assume Price = 14x earnings, Market Cap ~ 10700 Cr
Current Market Cap ~ 3000 Cr
Even if you assume lower market shares and margins, there is still a lot of undervaluation reflecting the negative sentiments surrounding wind sector right now. But if one were convinced that the right steps, albeit painful, have been taken by the govt to make this industry stand on its own feet rather than always depend on SOPs and subsidies, then there is a potential to take a contrarian view.
The main risks according to me:
Technology - Gamesa/Suzlon WTG’s have better LCOE’s so in a game of sliding prices have an advantage. But beats me how Inox is able to outbid other WTG manufacturers in the auctions. Is its cost of production really the lowest as claimed by mgmt and is it enough to offset the better PLF’s from Gamesa and Suzlon? Else it is just undercutting its margins in desperation to win business. We will get to know once FY19 financials start playing out I guess.
Inox has won market share because it has outbid others in the auctions. It still has to find buyers for the project since it claims to be a WTG manufacturer only and has sold its wind farms business earlier. So far the company claims it has been able to sell the first 250MW it won in SECI 1.
Disc - Invested in Inox, but from a much higher level, so currently still holding on despite significant losses on this counter.