Wind turbine operations and maintenance (O&M) company Inox Green Energy saw a sharp fall of 5 per cent in its stock price in the last hour of trading on June 5. This was in reaction to the news reported by businessline that wind turbines manufactured by its parent company Inox Wind manufactured may be blacklisted if certain tests are not completed by June 15, following customer complaints against its products.

Blacklisting can have a cascading effect on Inox Green’s growth prospects too. This is due to Inox Green’s O&M business’ significant dependence on Inox Wind as the company derives its entire revenue from the fleet of Inox Wind. The company’s revenue currently depends entirely on Inox Wind Ltd (wind turbine manufacturer) customers as it provides O&M services on a long-term contract basis ranging from 5 to 20 years. Hence, any loss of customers for Inox Wind might also affect the growth prospects of Inox Green.

As per businessline’s sources, there appear to be a number of compliance issues against Inox’s turbines. At a meeting conducted by the Central Electricity Authority (CEA) on May 18, 2023, ‘first time charging’ of newly-set-up wind turbines, Adani Group complained about compliance issues relating to Inox’s turbines. Subsequently, CEA has asked the energy companies putting wind farms to do simulation tests to show the behaviour of turbines during a ‘first time charging process’ followed by submitting a report. If Inox Wind is not able to complete the test and submit a report by June 15, its wind turbines may be blacklisted.

While Inox Wind has come out with a clarification over the news report, where they mentioned that these tests are routinely done, it has not provided clarity on the core points mentioned in the businessline report.

Disappointing show

Inox Green had come out with an IPO of around ₹740 in November 2022. However, the headwinds have been strong for IPO investors since listing. The stock is listed at 7 per cent discount as against its issue price of ₹65. The stock has continued to trade below its issue price and at the closing price on June 5, is down by 23 per cent from its IPO price.

We had recommended investors avoid the issue on account of debt in its balance sheet unrelated to its core business, losses at net level and steep valuation.

Financials and valuation

The core revenue has seen a flattish trend during the last four quarters and have remained around ₹60 crore per quarter with higher reported revenue of around ₹70 crore in Q3 being an exception due to trading income. Further interest costs and depreciation pertaining to unrelated businesses still remain a drag on the company’s profitability, translating into losses at net profit level.

With the help of IPO proceeds the company has reduced its debt from ₹904 crores to ₹595 crores translating into a D/E of about 0.5 times. However, an O&M business ideally shouldn’t have much debt in the first place given a business model that has no major capex and is supposed to generate high cash flows. Further, the stock is trading at a steep valuation at EV/Revenue of 7.89 times. This valuation is unsustainable given poor growth in core operating revenue in recent quarters and the company is yet to break even at the net profit level. Long-term investors can avoid the stock.

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