Inox Wind IPO: YES. Inox Wind IPO: high, but justifiable premium

Investors with an appetite for risk and a perspective of 2-3 years can subscribe to the initial public offer of Inox Wind Ltd, a manufacturer of wind turbine generators (WTGs). At the price band of ₹315-325, the stock discounts its annualised earnings for the nine months ended December 2014 by 29-30 times on the post-issue equity.

The valuation seems to be a bit on the higher side. Suzlon, the only listed peer in India is loss-making and is still recovering from debt and liquidity crunch issues. But global wind equipment majors such as Gamesa and Vestas trade at 18-20 times their estimated 2015 earnings, according to Bloomberg estimates. With many multi-nationals including Gamesa, WindWorld and Regen Powertech operating in India as private companies, Inox has had about 10-15 per cent market share in the last two years in India, lower than these foreign entities.

But the premium demanded by Inox can be seen in the light of lack of quality listed alternatives in this space. Besides, while global markets for tapping wind power may be more mature, India is still in the nascent stage.

Given this backdrop, a strong order book, project execution capabilities, double digit operating margins and diversified clientele make Inox Wind an attractive bet.

Inox Wind, promoted by Gujrat Fluorochemicals (GFL), manufacturers towers, rotor blades, nacelles and hubs for WTGs, across its facilities in Himachal Pradesh and Gujarat.

Through its wholly owned subsidiaries, Inox Wind Infrastructure Services and Marut-Shakti India, the company has also entered into providing turnkey solutions including services such as wind resource assessment, site acquisition, etc.

As of end December 2014, about 324 WTGs produced by Inox are operating, with an agggregete capacity of 648 MW, predominantly in Rajasthan, Gujarat, Maharashtra and Madhya Pradesh.

The company is raising ₹700 crore from this offer to fund expansion and upgradation of existing facilities, working capital needs and for investment in subsidiaries to develop power evacuation infrastructure in the project sites. In addition, GFL expects to raise ₹315-325 crore through an offer for sale of 1 crore shares.

The wind energy sector has received a new lease of life in the last two years. Accelerated depreciation benefits was reintroduced in the 2014 Budget in July last year. Besides, generation-based incentives for wind power producers were also brought back in 2013-14. The target for wind power capacity was raised to 60,000 MW by 2022 in this year’s Budget, well above the expected wind capacity of only about 25000 MW as at the end of March 2015.

Inox Wind is well-placed to benefit from these moves. At present, it has an order book worth 1,258 MW, two-thirds of which are executed binding contracts. A little more than half of this (692 MW) is for both supply and erection of wind turbine generators. Assuming that a turnkey project could cost about ₹6 crore a MW, this alone amounts to about ₹4,200 crore, covering annualised nine months sales for 2014-15 by about 1.75 times.

From a 100 per cent dependence on GFL and group company Inox Renewables for business in its initial years (2010-2012), Inox Wind now boasts of a diversified clientele including several independent power producers (IPPs) and utilities. The client mix favouring IPPs provides a good opportunity for developing its turnkey business. This is because IPP project sizes are generally 50MW and above and hence, these producers continue to look out for good project development services.

Between 2011-12 and 2013-14, consolidated revenues grew at a CAGR of 58.7 per cent. Consolidated profits grew at 15 per cent (CAGR). Ebitda margins have ranged from 11-18 per cent in this period. Thedebt to equity ratio is at a reasonable 1.2.The offer is open from March 18-20. Minimum investment is 45 shares. Retail investors get a ₹15 discount on the issue price.

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