Inox Green Energy Services Ltd (IGESL) had a muted debut on the bourses on November 23, 2022. The stock of this wind-based operations and maintenance (O&M) company got listed on BSE at about 7 per cent discount against its issue price of ₹65. Most of the IPO’s proceeds of around ₹370 crore will be utilised for pre/repayment of the company’s debt.

At the issue price of ₹65, IGESL was valued at around 11 times its revenue. In our IPO research notedated November 11, 2022, we recommended not to subscribe at such a high valuation. Further we had cautioned that the IGESL was burdened with unresolved legacy issues pertaining to parent company Inox Wind, and hence investors could give the IPO a miss.

After listing at around ₹60.5, the stock has further fallen to around ₹59.55, a eight per cent discount to the issue price. The stock currently trades at more than 10 times its FY22 revenue, which is very expensive as the company hardly delivered any revenue growth in recent years and remained unprofitable. Despite the company having EBITDA margins of around 50 per cent, it could not generate profits at net income level. This is on account of high interest costs and depreciation owing to the company’s legacy issues. Investors should not invest in the stock at such valuation levels and allottees can exit from the stock.

Business and legacy issues

The company is involved in the business of O&M of Wind Turbine Generators (WTGs) and common infrastructure facilities such as substations and transmission lines. The company’s revenue currently depends entirely on Inox Wind Ltd (IWL)’s 2,792 MW WTG customers as it provides O&M services on a long-term basis ranging from 5 to 20 years. The business is generally an asset light and low debt one, but the same is not the case with IGESL. Along with O&M, IGESL is carrying assets of legacy business in its books - common infrastructure assets for EPC and wind power generation SPVs which it aims to transfer to customers. However, the infrastructure-based assets remained in the books of IGESL, and the debt associated also remained in its books on account of covenants placed by the bank as per the management.

Financials

On account of the impact of unrelated businesses in the company’s books, it had a net debt of around ₹863 crore (prior to IPO proceeds) with a net debt-to-equity ratio of around 1.1 and net debt-to-EBITDA at an uncomfortably high eight times despite O&M being an asset-light business. The company’s revenue from operations has remained stable in the last three years at around ₹170-crore level, and EBITDA margins consistently have been in the range of about 50-60 per cent. However, the company has not been profitable at the net income level due to high-interest costs and depreciation owing to its legacy issues.

Despite the IPO proceeds being used to retire a portion of the company’s debt, and consequently some improvement in debt metrics, debt will still remain at uncomfortable levels. Investors should note that the IPO proceeds are being used for repayment of debt pertaining to certain unrelated businesses. Hence on account of legacy issues, high valuation and inability to get a flavour of a pure-play O&M service business, investors need not invest in the stock of IGESL even after the discounted listing.

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