INOX WIND LTD: FLY HIGH WITH GUST !!!

Scrip Code: 539083 / INOXWIND

CMP:  Rs. 451.95; Market Cap: Rs. 10,029.59 Cr; 52 Week High/Low: Rs. 494.40 / Rs. 325.00.

Total Shares: 22,19,18,226 shares; Promoters : 19,00,00,000 shares –85.62 %; Total Public holding : 3,19,18,226 shares –14.38 %; Book Value: Rs. 21.85; Face Value: Rs. 10.00; EPS: Rs. 7.21; Dividend: 0.00 %; P/E: 62.68 times; Ind. P/E: 69.22; EV/EBITDA: 51.67.

Total Debt: Rs. 480.40 Cr; Enterprise Value: Rs. 10,509.00 Cr.

INOX WIND LIMITED: Incorporated on April 9, 2009 and is based in Noida, India. Inox Wind Ltd is a subsidiary of Gujarat Fluoro chemicals Limited. Inox Wind Limited manufactures and sells wind turbine generators and components in India. The company came out with an IPO on March 18 2015 offering 3,19,18,226 equity shares of Rs. 10 each for Rs. 325 per share raising Rs. 1,037.34 Cr, retail investor were given a discount of Rs. 15 per share. It got listed on April 9, 2015 at Rs. 400 making a high of Rs. 427.40 on listing day. The object of offer for sale was to invest in new equipment at the Una (Himachal Pradesh) unit to optimise the capacity of the nacelle and hub manufacturing facility, for expansion and up-gradation of existing manufacturing facilities, for long term working capital requirements, for investment in their subsidiary Inox Wind Infrastructure Services Ltd for the purpose of development of power evacuation infrastructure and other infrastructure developments and for other general corporate purposes. Inox Wind Ltd provides turnkey solutions for wind farm projects & offers services including wind resource assessment, site acquisition, infrastructure development, erections and commissioning, and also long term operations and maintenance of wind power projects. Company manufacture the components of wind turbine generators in-house with a view to ensuring high quality, advanced technology and reliability and maintaining cost competitiveness. Company has facilities dedicated to manufacturing nacelles, hubs, rotor blade sets and towers. Inox Wind have a perpetual license from AMSC Austria GmbH (formerly Windtec GmbH), or AMSC, a leading wind energy technology company based in Austria, to manufacture 2 MW WTGs in India based on AMSC’s proprietary technology. Inox Wind has a fully integrated state-of-the-art manufacturing plants at Una (Himachal Pradesh) for Hubs and Nacelles and Rohika, near Ahmedabad (Gujarat) for Blades and Tubular Towers. Inox Wind manufactures the key components of the Wind Turbine Generator (WTG) to ensure high quality based on the most advanced technology, reliability of performance, and cost competitiveness. Inox WTGs are designed for low wind speed sites such as those in India. Inox Wind is an ISO 9001:2008 certified company. In addition, IWL’s manufacturing units are awarded with ISO 14001:2004, OHSAS 18001:2007 and ISO 3834-2 (tower manufacturing facility). Inox Wind turbines are type certified by TUV SUD according to “The Guidelines for the Certification of Wind Turbines issued by Germanischer Lloyd” and are duly enlisted in RLMM by C-WET. Inox Wind manufacturers two different WTG models 2 MW rating: Rotor diameter of 93 meters with hub height of 80 meters Rotor Diameter of 100 meters with hub height of 80 to 92 meters. Inox Wind owns a 100 % subsidiary, Inox Wind Infrastructure Services, which does the project development in respect of wind power projects, including wind studies, energy assessments, land acquisition, site infrastructure development, power evacuation, statutory approvals, erection and commissioning and long term operation and maintenance of the wind farms. Company produced and sold 60 turbine generators and in FY 2013; 60 turbine generators of 2 MW each. INOX WIND Limited is locally compared with Suzlon Energy Ltd, Honda Siel Power Products Ltd, Triveni Turbine Ltd, TD Power System Ltd, BHEL, Siemens Ltd, Crompton Greaves Ltd, Thermax Ltd, ABB India Ltd, Alstom India Ltd, KEC International Ltd, Gamesa Wind Turbines Pvt Ltd, GE India Industrial Pvt Ltd, Vestas Wind Technology India Private ltd, Sinovel DB India Pvt Ltd and globally compared with  AZZ Inc of USA, Ametek Inc of USA, Babcock & Wilcox Enterpr of USA, Broadwind Energy Inc of USA, Enersys of USA, Franklin Electric Co Inc of USA, Areva of France, Alstom of France,  Gamesa Corp Technologica S.A. of Spain, Vestas Wind Systems A/s of Germany, Schneider Electric S.E.of France, PNE WIND AG of Germany.

Investment Rationale:

Inox Wind Ltd, an Inox Group company, is India’s fourth-largest wind turbine generator (WTG) manufacturer and commands market share of 7 % in FY14. The Inox Group is operational from 1923 in India and currently operates in industrial gases, engineering plastics, refrigerants, chemicals, cryogenic engineering, renewable energy and entertainment sectors. The Group has two publicly-listed companies – Gujarat Fluorochemicals and Inox Leisure. Inox Wind Ltd is the subsidiary of Gujarat Fluorochemicals. Inox Wind Ltd commenced its operations in March 2010, and is into manufacturing of key components of Wind Turbine Generators and other parts like nacelles, hubs, rotor blade sets, and towers used to generate electricity from wind power. It provides turnkey solutions for wind farm projects through its wholly-owned subsidiaries, and has a project site pipeline of 4GW. Inox Wind Limited has two 2 business models: Turnkey Solution provider: In this model, Inox takes care of all the aspects related to development of wind power project from concept to commissioning including operation and maintenance. This includes wind studies, energy assessment, land acquisition, site infrastructure development, power evacuation, statutory approvals, and supplies of WTG, erection and commissioning and long term operation and maintenance of the wind farms and its Second model is of Equipment Supply: In this model, Inox Wind supplies the WTG and other associated equipment’s to customers for erection on sites owned by them. The rest of the project development work, which includes wind studies, energy assessment, land acquisition, site infrastructure development, power evacuation, statutory approvals, etc., is onto the customers’ while erection of tower and commissioning and long term operation and maintenance of the wind farms is onto Inox. Civil works could either be on Inox or on customer, on a case to case basis. India has significant untapped wind potential. According to the Centre for Wind Energy Technology, India has the potential to install over 100,000 MW of wind turbines at 80 meters hub height, implying an untapped wind power potential of 78GW. Based on C-WET estimates, India has explored only 22 % of its wind power potential. This indicates strong long term business opportunity for domestic WTG manufacturers. India has set a target of achieving overall wind energy installed capacity of 27,300 MW by 2017 and 38,500 MW by 2022. As per NOVONOUS estimates, this creates an US$ 31.25 billion opportunity in the wind energy market in India till 2022. The wind energy market in India has been growing since the last many years. The total installed capacity of the Indian Wind Energy market is 21,136.20 MW. India stands at the 5th Rank in terms of the total installed wind power capacity just behind China, USA, Germany and Spain. But the potential is far from being utilized. The wind energy sector in India had witnessed a sharp fall in capacity addition from 3.2GW in FY12 to 1.2GW in FY13, led by withdrawal of accelerated depreciation (AD) and generation-based incentives (GBI) in March 2012. However, renewable energy is now a key focus area for the new government, which has ambitious plans to set up an installed capacity base of 60GW in the wind energy segment by 2022 vs 23GW as at end FY15. There are multiple tailwinds that will help drive the size of the Indian wind energy market from 2.3GW in FY15 to 4-5GW in medium term. Inox Wind’s order book as at December 2014 stood at 1,258MW, and cumulative installations or supplies stood at 1,044MW including 312MW yet to be erected INXW has a 100 % subsidiary, Inox Wind Infrastructure Services, which does project development and operation and maintenance (O&M) of wind farms. Currently, IWL has an installed capacity of 550 nacelles and hubs at Una, Himachal Pradesh, 400 rotor blade sets, and a capacity of 300 towers at Rohika, Ahmedabad, Gujarat. The company is setting up a new integrated capacity of 400 nacelles and hubs, 400 rotor blade sets, and 300 towers at Barwani, Madhya Pradesh. This would take the total nacelles and hubs capacity to 950 units, rotor blades capacity to 800 sets, and tower capacity to 600 units. The projected cost of construction of the proposed unit is around Rs. 200 crore. The facility is expected to commence production during FY16. Post the expansion, the total production capacity is expected at reach 950 nacelles and hubs, 800 rotor blade sets and 600 towers. Hence, the production capacity will effectively double from 800 MW to 1600 MW by FY16. IWL has acquired access to certain project sites in Rajasthan, Gujarat, Andhra Pradesh and Madhya Pradesh. The company expects to gain access to wind sites under acquisition in Rajasthan, Gujarat, Andhra Pradesh and Madhya Pradesh, which is estimated for the installation of an aggregate 4,052 MW capacity. There are many initiatives taken by the new government like several states such as Rajasthan, Madhya Pradesh, Gujarat, Andhra Pradesh, Telangana, Maharashtra and Karnataka have provided preferential tariff over and above MNRE’s GBI of Rs. 0.5 per kilowatt-hour to attract investment. Some have also increased wind power tariffs by 2-15 % to attract investments. These states are expected to witness traction and will play a critical role to achieve the aggregate target of 4-5 GW per annum. Several states including Tamil Nadu, Karnataka, Maharashtra and Gujarat have policies that eliminate or reduce value-added tax (VAT) for wind turbine components. The Maharashtra Energy Development Agency (MEDA) has created a green cess (tax) fund. A part of this fund is used to create infrastructure for grid connectivity with proposed wind farms. Strong evacuation infrastructure promotes investments in wind power. State governments like Rajasthan, Madhya Pradesh and Gujarat have formalized land facilitation policies to expedite wind energy projects. Major projects get delayed mainly on account of delays in land acquisition.

Outlook and Valuation: 

Inox Wind Ltd provides turnkey solutions for wind farm projects & offers services including wind resource assessment, site acquisition, infrastructure development, erections and commissioning, and also long term operations and maintenance of wind power projects. Company manufacture the components of wind turbine generators in-house with a view to ensuring high quality, advanced technology and reliability and maintaining cost competitiveness. Company has facilities dedicated to manufacturing nacelles, hubs, rotor blade sets and towers. Inox Wind have a perpetual license from AMSC Austria GmbH (formerly Windtec GmbH), or AMSC, a leading wind energy technology company based in Austria, to manufacture 2 MW WTGs in India based on AMSC’s proprietary technology. In August 2014, Inox Wind and AMSC amended the agreement to cover all 2 MW WTGs with rotor diameters between 85 meters and 120 meters. In addition, Inox Wind has a non-exclusive license to manufacture 2 MW WTGs worldwide based on AMSC’s proprietary technology. Globally, over 15 GW of aggregate production capacity operates on AMSC technology. As per the terms of license from AMSC, Inox Wind is required to purchase Electronic Control System manufactured by AMSC or its affiliates. Inox Wind has a non-exclusive perpetual license from WINDnovation Engineering Solutions GmbH, Germany for the technology on manufacturing Rotor blade sets. Inox Wind procures gearboxes from DHHI (China) and Wikov Industry a.s. (Czech Republic), and generators from Emerson Industrial Automation and ABB India for its gearboxes and generators. In the equipment supply business, Inox Wind's is among the top-2 players in India; while the size of this segment is 15 % for the WTG industry, it is targeted to contribute 30 % to Inox Wind’s revenue in FY16. The major Wind Turbine Manufactures in India are Chiranjjeevi Wind Energy, Elecon Engineering, Garuda Vaayu Shakti, Ghodawat Energy, Inox Wind, NEPC India, Pioneer Wincon,PowerWind, Regen Power Tech, RRB Energy, Siva Windturbine, Southern Wind Farm, SRC Green Power, SUZLON. 

Inox Wind manufactures the key components for WTGs in-house, which ensures cost competitiveness, cost-effective logistics, and attractive margins. It has split its manufacturing activities to ensure cost-efficiency. The existing rotor blade and tower manufacturing facilities are located at Rohika in Gujarat, adjacent to a highway to facilitate easier handling during transportation to wind sites and sea ports. This location is also close to states like Rajasthan, Gujarat, Maharashtra and Madhya Pradesh, where there is good potential for wind energy production. The more easily transportable nacelles and hubs are manufactured in Himachal Pradesh, which gives Inox Wind certain tax incentives. Inox Wind has entered into technology tie-ups with global players to source key components of the WTG equipment. Technology tie-ups ensure that Inox Wind has access to latest technology and also saves on R&D cost, which helps to keep its cost structure lean. Inox Wind outsources raw material and components that it does not manufacture inhouse. It sources a portion of the towers required for WTGs from Fedders Lloyd Corporation. Inox Wind gets warranties from component and raw material suppliers against deficient performance and resultant liabilities, this arrangement eliminates provisioning for this raw materials procured. The average wind installation size in India has been increasing with the shift in customer base from individuals (AD market) to IPPs (GBI market). The average project size has increased from 2 MW in 2009 to 7 MW in 2013. Project size of 50 MW and above is becoming the norm for IPPs in India. This customer profile shift augurs well for Inox Wind, as its business model is focused on the IPP segment rather than the accelerated depreciation (AD) market. It is the preferred partner for 8 of the top-10 IPPs in India. Focus on IPPs and timely project execution has helped Inox Wind to develop strong relationships with the IPPs. Encouraged by enabling government policies, several IPPs have firmed-up strong capacity addition plans. Given Inox Wind’s relationships with the IPPs, provides Inox Wind with a sweet spot. In India, 80 % of the wind energy projects are executed on turnkey basis, as wind power developers do not have in-house capabilities to undertake project development on a large scale. Inox Wind’s business model, however, is equally focused on turnkey solutions and WTG supplies. While turnkey solutions contribute 48 % of its order book, WTG supplies constitute 52 %. Its balanced business model helps Inox Wind to optimally utilize its organizational resources. Inox Wind provides turnkey solutions together with its wholly-owned subsidiaries, Inox Wind Infrastructure Services Limited (IWISL) and Maruti-Shakti India Limited (MSEIL). Its services include wind resource assessment, site acquisition, infrastructure development, erection and commissioning, and long-term operation and maintenance of wind power projects. As of March 2015, Inox Wind’s order book stood at 1,178 MW, comprising 614 MW for the supply and erection of WTGs and 564 MW for the supply of WTGs. The order book includes executed binding contracts for 825 MW and term sheets or letters of intent for 432 MW. Robust order book and ready pipeline of project sites provides comfort on the revenue visibility front. INXW can to deliver 825 MW in FY16 and 950 MW in FY17. Given its cumulative supplies of 1,044 MW, operation and maintenance (O&M) provides interesting opportunities. It is expected that the contribution of O&M to increase meaningfully post the two-year warranty. The equipment supplier retains O&M on 100 % of the projects and the business has gross margins of 50 % to 55 %. The typical cost for O&M stands at Rs. 10 lakh per MW per annum. Backed by strong revenue and earnings growth and robust return ratios with RoE of 28 % and RoCE of 32 % in FY17. At the CMP of Rs. 451.90, the stock is trading at its all-time high P/E of 16.98x FY16E, 14.30x FY17E. The company can post EPS of Rs. 26.60 for FY16E and Rs. 31.60 for FY17E.

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	1,567.00	2,710.00	4,980.00	5,943.00
NET PROFIT (₹ Cr)	132.00	296.00	590.00	701.00
EPS (₹)	6.60	13.40	26.60	31.60
PE (x)	66.50	32.90	16.50	13.90
P/BV (x)	20.20	6.90	4.80	3.60
EV/EBITDA (x)	51.60	21.30	12.20	9.60
ROE (%)	36.60	32.60	35.00	30.00
ROCE (%)	20.80	27.60	32.00	31.50

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*As the author of this blog I disclose that I do not hold INOX WIND India Ltd in my any of the portfolios.

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