ValuePickr Forum

INOX Wind

@varadharajanr

Its a wrong inference that Inox ‘rode on the white space’…Agreed Suzlon had its own set of problems because of which it was not able to focus on India…but, that can’t be said for other players like Gamesa, ReGen, Leitwind, etc…if you read annual report of parent of gamesa it was not that it wanted to slowdown in India but instead it was finding difficult to grow in India for the respective period…same is the case with other players like ReGen and Leitwind…It infact seems more the result of the effective business strategy of the company than other things…also, as the company was not having huge capacities and was just beginning that must have helped but that could have backfired also but it didn’t which is commendable…Its a fact that company grew in a shrinking market where except suzlon everyone was eager to win contracts…

Agree on your negative cash flows side and that’s a concern for me also but I think being this fiscal only sixth full fiscal of operation and having grown at a CAGR of ~140 % since inception, company deserves to be given slight time…However, there is no denying of the fact that other industry players are also facing the same situation. Provided below is OCF situation of top 3 players of the industry :

If a company even after quoting most favourable terms can operate at industry best margins then its a good thing, especially when the sector seems to be on the verge of revival…Also, if I look at client list then they are very reputed names from which company has won orders like Continuum, Tata Power, CESC, Renew Energy, Green Infra, etc…key is again generation of positive OCF and FY16 might be crucial for that…

@jk321

(1) Yes…high wc days is the norm of the industry especially because of the way it works but key is profile of clients…most of the clients that I can see are most reputed names in the industry and are backed by good funding source…however, there is no denying of the fact that if a large client defaults bad debt can be an issue…

(2) This doesn’t seem to be a larger issue atpresent especially at the scale at which company is operating…already ~4000 MW inventory is already built up by the company…also, except top 5 players, other players lack the required financial muscle to built up the huge project sites inventory…

(3) What I have assumed is that at worst companies might get valued at 9-11x EV/EBITDA in FY17-end when second round of fund raising might take place…the key downside risk is if company goes to average industry margins of 10-12 % EBITDA or if there is significant negative government directive wrt. sector and these risks will remain…

Rgds.

Note:
This is just part of a general discussion and in response to specific query by forum members. Wind Energy sector in general and Unlisted & Listed Wind Power Solution providers in particular are discussed with statistical facts & figures here and there is no investment/divestment opinion aimed to be constructed out of this. No Buy/Sell/Hold decision should be made on this post as this is just for information purpose and nothing else. No one should make any investment/divestment decision based on this post.

Discl. - Invested in Inox Wind

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@Mahesh sir, As usual great analysis. There are some queries that i have and they are related to the technical aspects. Do they have manufacturing facilities for all of their products ? Has there been any complaints regarding their supplies till date ? Have you looked at a company from sort of a similar space , albeit unlisted, Mytrah Energy ?

@Ravenrage
Company’s main product is WTG…it has manufacturing facilities for all the key components of WTG viz., Nacelles & Hubs (550), Rotor Blade (400), Towers (150 which will be enhanced to 300 in FY16)…MP plant which they are planning to commission this fiscal (FY16) will be fully integrated and will manufacture all key components at one place viz., Nacelles & Hubs (400), Blades (400) & Towers (300)…It will be great if you refer the prospectus of Inox Wind…you will find all info there.

I haven’t heard any negative feedback for the company yet…but its better all the members activate their ground feedback machine and gather as much info as possible…

Mytrah Energy is I think IPP and not a wind power solution provider…in simple words its a client of wind power solution cos. like Inox Wind…

Rgds.

Discl. - Invested in Inox Wind

I would ask investors to go through prospectus and answer following issues:

  1. What is cash investment by Inox Group in the company? While the management is good reputation, it worth noting that during FY12 and FY13 substantial sale happen to Inox group. The profit generated from this group sale has created profit balance which was utilised by the company to issue bonus shares and reduce its cash cost substantially which was later divested through offer for sale at substantially high price. While nothing wrong in that, personally, I did not like divestment at very high price. Same was case with Reliance power.
  2. Technology. They have sourced technology from some European company which was in financial problem. One can not have business model which is constrained by technology in this sector.
  3. Why not to investment in Gujarat Flouro which is positive cash flow and diversified company then Inox Power? Any market price change shall indirectly also benefit parent company.

I do not hold any shares in company but did evaluated investment in the company and passed due to above cited reason. Individual investors are advised to take their own decisions after reading all information.

The more I dig here, the more skeletons I find out

AMSC has decent WTG technology but by no stretch of imagination can it be called a market leader. Infact, regen for eg., has gearless technology (again franchised out). long term performance of AMSC turbines in India is yet to be tested out.

the group actually sold down their stake. when i looked at the pre-IPO financials, I actually thought for a moment if this was a candidate restructuring program - the numbers looked that bad. Sans the IPO, the company would be in CDR now.

Lowering promoter holding, increasing leverage, negative cash flows, stretched receivables - now where have we heard that before - infra/ real estate in 2007, suzlon in 2009/10.

I would not put my money into a business that cannot generate positive operating cash flows, leave alone free cash flow - remember that in this sector 40% of sales aas receivables is the norm, this company has 50% - and that 10% is the difference in margin between it and its peers - Just saying, red flags galore in this - if you look through it from the view of a cash flow prism.

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Pls have a look at the ambit report on inox wind . highlights several issues 20150617 - Inox Wind - Visit Note - Ambit.pdf (431.0 KB)

  1. poor cash cycle
  2. no provision for warranty claims and ZERO R & D show exalted EBITDA
  3. AMSC, its technology partner itself is under financial duress - from the checks I have done, AMSC has a really poor reputation for its technology and its earlier technology partner ghodawat energy ran into problems with installations. None of inox’s wind installations are more than 5 years old. Its technology is not a patch on suzlon or gamesa - a fact I independently veritified with a retired wind mill veteran.
  4. inox brand itsself is not owned by the company - which is ridiculous.
  5. 50-60% of its installations so far have been for its own group entities - for earning carbon credits and hence true blue third party customers are of less than 3-4 year vintage.
  6. they have zero installations in TN/AP - which have the highest power of wind power in India and are the toughest markets to compete in.
  7. inox’s land banks are limited to central and western india and this is expected to be a bottleneck going forward.
  8. unlike suzlon, inox’s technology agreement prevents it from exporting wind turbins which is a big road block - hence, they have the smallest capacity of all the wind mill guys

net, net it’s a business that just had a good time imho, when suzlon was struggling and the large majors did not focus on india given the withdrawal of subsidies and issues around land acquisition in india - while FY 16 looks promising, market checks indicate that suzlon is rapidly booking new orders and visibility beyond FY 16 seems hazy.

If orders slow, cash flow issues will come up soon enough and negative OCF’s which have been ignored by the market will start exerting pressure on the balance sheet.

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One of the most comprehensive report on Inox Wind…excellent work by the ambit team…kudos to them…

Vardha on your points…

(1) Completely Agree.

(2) Completely Agree.

(3) Partially Agree…infact my feedback suggests no problem with the quality of Inox’s products…only problem with the limited range of products company offers which could work to its disadvantage…

(4) Disagree…this is not a major risk as its a umbrella brand and not company specific brand…all entities combined form Inox group.

(5) Partially Disagree…I think you haven’t gone into detail…out of 1244 MW so far executed since inception, only 255 MW or 21 % belong to group entities…but yes all third party installations must not be more than 3 years old.

(6) Disagree…infact this could in another sense actually be advantageous for the company…

(7) Partially Agree…but is not a major risk…

(8) Again, this could be in a way good for the company…at one point we are concerned of tech.partner’s financial strength and on the other we are concerned of not deep relationship with the partner seems contradictory…

Again Vardha, although you could be right, but I don’t find this argument logical but that only time can tell…look at the profile of clients…IPPs involved do proper due diligence before awarding any contracts…look at the order execution track record…look at current order book which again is 96 % from IPPs…look at the breakup of order book which is 47 % only equipment supply…look at the order size…all these doesn’t seem just a flash in the pan…

Agree Suzlon is getting aggressive but it’s more of the Dilip Shanghvi support that is working in favour of Suzlon as otherwise suzlon’s name has become very bad I the industry…

Completely agree if orders slow it could be a disaster for the company and FY16 is therefore crucial for the company…if it can have even a gross order inflow of 1200 MW in FY16, it might silence all critics…also key to watch will be Suzlon vs Inox order inflow…that might be key determinant of market valuations as in FY16 Suzlon is expected to put its best foot forward. Let’s keep our fingers crossed and watch the story as it unfolds in Indian wind energy solution provider space.

Rgds.

Disco.- Invested

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Varadharajan,

Excellent report. :thumbsup:

Management answers some issues raised in the report namely competition, customers, warranty claims etc here–

you did a better job I wish you started a new post on INOX than continue what I just started as a formality during the time of IPO. I feel your analysis is complete and deserves a standing ovation. I feel that financially also(after few years), apart for the story which you have at length covered, the stock can do very well farting heavy dividends on the way for value investors like us.

Motilal Oswal has come out with a research report on Inox Wind.

http://www.motilaloswal.com/Financial-Services/Research/Detailed-Report/Initiating-Coverage/13269/539083

Conference Call - from Capital Markets

Inox Wind
Ebidta margins excluding forex movements stood at 14.9%
The company held its conference call on 27th July’15 and was addressed by Deepak Asher, Director and Mr. Devansh Jain Executive Director

Key Highlights

• Sales volume including equipment and turnkey supply, in Q1 FY’16 stood at 120 MW as compared to about 66 MW YoY. Commissioning however stood at 78 MW as compared to NIL for Q1 FY’15. There are about 200 MW of wind turbines yet to commission and will be commissioned during rest of FY’16.
• Of the total revenue of Rs 635.83 crore for Q1 FY’16, about 92% of revenue came from sale of products and rest from sale of services, as compared to the entire revenue of Q1 FY’15 of about Rs 304.37 crore from sale of products.
• As per the management, Ebidta margin has come down from about 15.5% in Q1 FY’15 to about 13.6% in Q1 FY’16, primarily due to forex movements ie in Euro currency. There was a forex loss of about Rs 8.2 crore, as compared to about Rs 4 crore gains for Q1 FY’15. Excluding forex movements, Ebidta margin for Q1 FY’16 stood at 14.9% as compared to 14.1% for Q1 FY’15. The margins have improved on account of better economies of scale and operating leverage. Margins are expected to improve further as per the management.
• Total order book as on June’15 stood at 1220 MW which is to be executed in 12-15 months. About 162 MW of orders added in June’15 quarter as compared to execution of about 120 MW of orders in June’15 quarter. Of the total 1200 MW orders, bout 800 MW are binding government contracts (firm commitment).
• About 97% of total order book are third party orders and are pretty diversified and with reputed clients including Green infra, Tata Power Renewable, Bhilwara Energy, Renew Wind Energy, Hero Future Energy, NHPC, RITES, Continuum etc. Large enquiries of orders are coming and management expects further orders to come in as FY’16 progresses.
• About 60% of total order book is Turnkey, while rest is Equipment sale orders. State wise, about 39% of orders are to be executed in Rajasthan, 47% in Madhya Pradesh and around 14% in Gujarat.
• The company has sufficient land bank for installation of aggregate capacity of more than 4500 MW as on June’15. The company is in process of increasing land bank in existing States as well as new States like Tamil Nadu.
• The company’s proposed Blade plant in MP is ready to commence operations as on Aug’15. This plant is amongst the largest in Asia and this will double the overall installed capacity of Blades for the company to about 800 blades.
• In terms of Technology Upgradation, the company has launched 100 Rotor dia blade from earlier 93 Rotor dia blade. This increases the overall generation capacity, reduces costs of energy and would give further better margins to the company.
• Government’s thrust on Renewable energy continues to remain. RBI notified Renewable energy lending under Priority sector in Q4 FY’15. Government aims to add about 10 GW of power capacity every year through wind sector.
• As per the management Lot of action is seen from States like MP, AP, and Gujarat in terms of signing the PPA’s from wind power while Rajasthan has slowed down. More States are expected to participate.
• As per Crisil, the wind power equipment supply market is expected to be about 3600 MW in FY’16 and about 4100 MW in FY’17.
• While Solar power is catching up faster, returns from wind is always higher by 15-20% compared to solar. Further, land acquisition is a big issue in Solar, as solar needs much more land compared to wind.
• Globally competitive bidding has failed across the boards for wind power projects. As per the management, if competitive bids do take place in India, it will be more beneficial to players like Inox Wind.

Disc: Not Invested

Call add by Deepak Asher,Director &Mr.Devansh Jain ED.Highlights Capital Mkt
Sales volume including equipment and turnkey supply, in Q2 FY’16 stood at 212 MW as compared to about 114 MW YoY. Commissioning however stood at 140 MW as compared to 30 MW for Q2 FY’15. There are about 160 MW of wind turbines yet to commissioned and will be commissioned during rest of FY’16.For 6 months ended Sep’15, the sales volume including equipment and turnkey supply stood at 332 MW, an increase of about 84% on YoY basis. For 6 months ended Sep’15, commissioning stood at 218 MW an increase of about 627% on YoY basis.Of the total revenue of Rs 1008.2 crore for Sep’15 quarter, about 92% of revenue came from sale of products and rest from sale of services, as compared to the entire revenue of Q1 FY’15 of about Rs 304.37 crore from sale of products.
During Sep’15 quarter, about Rs 194 MW of orders were added as compared to about 212 MW of orders being executed. About 71% of total order book of 1202 MW is from Turnkey and rest from Equipment supply. About 39.1% of order book is from MP, about 38.3% from Rajasthan, 21.8% from Gujarat and rest from Andhra Pradesh. The order book has an execution time frame of about 12-15 months.The company has sufficient land bank of capacity more than 5000 MW as on Sep’15. The company is in process of increasing land bank in existing States as well as new States like Tamil Nadu. As per the management lot of action is seen from States like MP, AP, and Gujarat in terms of signing the PPA’s from wind power while Rajasthan has slowed down. More States are expected to participate.
Orders are from clienteles such as Tata Power, Sembcorp Green infra, Bhilwara energy, CESC, Renew Wind Energy, Ostro Energy, Continuum Wind and PSUs such as GMDC, NHPC, RITES, GACL etc.The Blade plant at MP got commissioned in Sep’15 quarter. The Tower plant in MP is on track and will get commission in H2 of FY’16. The new 100 meter Rotors have higher efficiency and higher energy yields which will result in higher margins for the company. 113 meter turbines which will be launched in H2 FY’16 will also result in higher margins for the company.Ebidta margin for Sep’15 quarter stood at 13.6% as compared to 16% for Sep’14 quarter. Excluding forex fluctuations on like to like basis, Ebidta margins stood at 14.1% as against 15.3% for Sep’14. Lower margins were on account of higher employee costs and site related activities for future upcoming facilities. As per the management, margins are set to improve only from here on.Net working capital days fell to about 148 days as compared to 169 days as on June’15. Lower inventory levels and receivable days together with steady order intake, helped in improvement in working capital days.Government’s thrust on Renewable energy continues to remain. RBI notified Renewable energy lending under Priority sector in end of FY’15. Government aims to add about 10 GW of power capacity every year through wind sector.Overall management continues to remain optimistic for rest of FY’16.

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An article relevant for Renewable energy companies:

Google steps up its purchases of renewable energy:

http://www.ft.com/cms/s/0/68e01302-99b2-11e5-9228-87e603d47bdc.html

Re: Inox Wind – Concall Update

Technology tie-up with AMSC – Key Features
• Company got license to manufacture Electrical Control System (ECS) indigenously – Exclusive License from AMSC to manufacture ECS in India. Will pay one time license fee of $12mn to AMSC which will be capitalized. Fees will be paid in phased manner over next 1 year as the technology gets transferred. Further, Company will have to incur Rs 2-3cr capex to setup assembly unit at its existing facilities.
• Long term supply agreement of ECS from AMSC to secure sourcing of the equipment – Here AMSC will supply 50% of the ECS requirement of Inox over next 5-6 years at a fixed price (balance will be manufactured by Inox in India). As per AMSC’s press release, such agreement is valued at around $210mn (including license fees) over the agreement period – around $40mn annually (assuming 5yr agreement)
• Collaboration for 3MW turbine technology

Benefits of ESC tie-up
• Company was dependent on AMSC for ECS supply which was seen as a risk given the questionable financial health of AMSC. With this deal, company not only secured the supply of key component but also secured technology to manufacture it indigenously.
• Company will save significant cost both from cost of ECS as well as logistics/supply chain perspective
• Mgmt said ECS cost is around 8-10% of the imported cost of turbine, which is around 35% of total wind turbine cost. So cost of ECS is around 2.8-3.5% of total wind turbine cost.
• Mgmt did not divulge cost savings but the rough guesstimate would be around 50bps to 75bps/MW savings can be achievable (of 2.8-3.5% cost – 50% will remain unchanged due to imports, benefit will come in balance 50% indigenous ECS - cost saving, logistics savings, WC savings)

Benefits of 3MW turbine technology
• Mgmt said India market is not ready right now for 3MW turbine due to various factors including logistics
• However, company has secured technology to be future ready as and when India is ready for 3MW
• Will be able to roll out in next 18-24 months

Other aspects and Concerns addressed:
• On provisioning for spares and warranty: Management indicated that for outsourced components they have back to back guarantee with the suppliers. For indigenous components which company manufactures, company has insured all products for any mfg defects. Still against industry practice of providing provision every year.
• On AMSC’s health: Securing technology for key component and long term agreement, clears some air around the same.

Disclosure: Not invested

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Is there an updated view from @varadharajanr and @Mahesh given the steep correction? Trades at 13x NTM P/E vs 17x for Suzlon.

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@peguy

No significant updates except that the recent strong correction in good quality mid/small cap stocks might make it even more of a long term story of say 3- 4 years than 2 years that I thought before. Also majority of the peers are getting aggressive on solar front while Inox seems to be sticking to its core which might be perceived negative by the market for the time being.

Dicl. - Invested. Have sold some quantity over last few weeks as a portfolio reshuffling exercise and nothing else. Company forms ~3 % of family portfolio.

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CONFERENCE CALL - from Capital Markets

Inox Wind

Expects pick up in order inflow in Q4FY16

Inox Wind held a conference call on Feb 9, 2016. In the conference call the company was represented by Deepak Ashar, Director (Corporate Finance).
Key takeaways of the call

Order intake in Q3FY16 is about 110 MW. So order book of the company as end of December 31, 2015 was 1146 MW. Current order book will be executed in next 12-15 months. Of the order book about 40% is from the state of MP, 20% from Rajasthan, 20% from Gujarat and rest from AP.

It also sees significant traction in order inflow during the coming quarter. The government of India’s thrust on the development of renewable sources of energy is emphasized by the revised tariff policy which levies no inter-state transmission charges and losses for power from renewable sources and introduces the Renewable Generator Obligation. With a supportive regulatory framework, India’s wind market is expected to be one of the world’s fastest growing.

With tariff policy coming for expiry in March 2016 for about 3 states, the clients hold back order finalization for want of clarity. Now with lot of clarity emerging of what the new tariff policy would be, the next couple of weeks in Q4FY16 will see strong order inflow.

Sales for the quarter and nine month ended December 2015 stood at 166 MW and 498 MW respectively. Minor procedural delays affected volumes for the quarter and the company expects significant pickup in sales going forward. Some components struck in customs for 7-10 days without clearance. So manufacturing, despatch and billing of about 80 MW WTG which was scheduled and site is ready for installation got shifted to next quarter. The impact of delay on top-line of Q3FY16 is about Rs 247 crore as certain part of the turbine could not be billed. Its impact also felt in the profitability of the company.

Q3FY16 has been a momentous quarter for the company with several developments that offer the company substantial long term benefits. Foremost among them is the licensing agreement with AMSC that assures continual supply and offers security in sourcing of one of the critical components of a Wind Turbine Generator.

The blade manufacturing plant (of 800 MW capacity) at the company’s world-class integrated manufacturing facility in Madhya Pradesh was commissioned during Q3FY16.

The company has also further commissioned 400 MW common infrastructure facilities at Rojmal, Gujarat In January 2016. The company has also commissioned the common power evacuation facilities (200 MW) at its Nipaniya site in Madhya Pradesh. The commissioning of the common infra facilities at Lahori (200 MW+ at Madhya Pradesh) is also ready.

With significant ramp-up in execution activities going forward, the company expect growth to accelerate over the course of the remaining year.

The company has strong land bank for wind installations and the company has acquired land in AP for 4500 MW of WTG installations.

Inox Wind continues to strengthen its position and increase market share across IPPs, PSUs, Utilities, corporate and retail customers.

Renegotiated rates for components kick started in Q3FY16 onwards and the lower steel prices, which witnessed a weighted average prices was lower by 20-25% has kept the material cost lower. Higher other expenses is largely due to booking of new plant commissioning.

Q4FY16 margin will have the benefit of lower material cost, operating leverage and better mix.

The market could see 3000 MW of WTG commissioning in 2015-16 and the market may grow by 20-30% next fiscal depending on policy environ

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Below are important key takeaways…Q4 will be a good one for the company. Although wind business is very much dependent on the govt policies, I think it will do well. What separates Inox wind from competition is its strong execution and strong balance sheet. Its a delight to see how they have scaled up and managed the finances well.



Discl- Small position in Gujarat Fluoro

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I think what company has achieved in 5 years is remarkable. Of course, high receivables are there, but that’s the nature of the business. Also, government has focus on renewable energy and also accelerated depreciation benefit has been restored. I think this company has a good future.

Disc : Invested in Guj Fluoro.

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