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.
Assume:
Ballpark 5.5 Cr/MW pricing for the WTG’s.
Net Margins (conservatively) of even 10% (average NPM FY11-FY17 is about 12%) to account for margin contraction due to the lower tariffs
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.
Also, the following link gives some counter views from Gamesa India Head on reverse auctions as well as potentially what drove the lower bids in SECI 2
When the state governments cancelled the PPAs, is there no legal recourse for companies like Inoz Wind and Suzlon ? Or the PPAs have clauses to exit at anytime ?
It can never stand in a court of law. However, if IPP’s do end up challenging them in court, it ends up in a long protracted battle and a distraction for everyone. The unfortunate part is that the Govt has not done enough to step in and restore confidence of the investors in Wind Power. So its a bit murky, but clearly the law is definitely not on the side of the State Discoms.
What is required is a framework so that the older WTG’s that form part of the older PPA’s and installed in Tier 1 windy sites, can be replaced with the latest technology with better LCOE’s. Win win for everyone. Hopefully that gets sorted out eventually.
I don’t know what you guys are fretting over. Andhra cabinet has passed a resolution for implementation of earlier PPA overruling the objection from State discoms…and Karnataka govt has over ruled the state regulator which refused to accept PPA based tariff…
Both of the above have been widely reported in newspapers too…
So when the problem is resolved, then why fret over it…
I think it would be prudent to wait and watch for a couple of quarters to
see the impact of the SECI auctions on the margins. If the company has bid
very aggressively to maintain market share at the cost of margins, then
it’s not good from an investment perspective.
Thanks for pointing this out. However if this was the case, then the order book of these companies would have gone up again, which does not seem to be the case.
Also, from the link that @kauban has posted, it seems that the state government order only over-rules part of the orders (Out of 599 MW signed PPAs, only 270.5 MW which has been executed before 31 Mar 2017, will be honoured at old price). So while this is definitely some relief, it is still not enough to restore confidence of the companies to invest in India if there are such uncertainties.
Two bidders, namely Adani Green Energy and KCT Renewable Energy Private Limited, quoted the L1 tariff of ₹2.85 (~$0.043)/kWh to develop 75 MW of wind projects each.
Inox Wind, Mytrah Energy, and Hero Wind Energy Private Limited quoted a tariff of ₹2.86 (~$0.044)/kWh. While Inox Wind won the bid to develop 50 MW, Mytrah Energy Private won the bid to develop 100 MW and Hero Wind Energy Private Limited won the bid to develop 75.60 MW.
BREAKING: Winning Bids of ₹2.85-2.87/kWh Quoted in MSEDCL’s 500 MW Wind Auction
The MSEDCL had fixed ₹3/kWh ($0.047) as the upper tariff ceiling for this tender
the 5000 MW is the total land bank that Inox has (in terms of MW), whereas the order book is the WTG supply orders that they have secured. where is the confusion?
@kauban does it makes sense to invest at the current price points?. Looks reasonably priced / undervalued at the moment - assuming other drivers kickin (debt reduction, receivable reduction etc.), sort of makes sense to get in / average out.
Also, what is the time frame for the current 950 mw of order book to flow through the P&L?.
Its difficult for me to answer that question for you. All I can see is that the industry vols are set to multiply significantly, not just from last year’s levels, but also materially from previous years. However there are other factors at play as well - margin pressure, technology (very importantly), market share (overall, not just for auction based capacity, but PSU’s and captive power producers). Also as I heard in the Inox call, the execution of the vols is not going to happen overnight, so if you have the patience and a horizon of at least a few years till the target of 60GW is met, then its worth investigating. I do not know for sure if the pain is over price wise at least.
