News Update

Top five reasons why Inox Wind IPO looks attractive at current valuations

EW DELHI: Inox Wind Ltd (IWL) is coming out with an initial public offering (IPO) of about 2.15 crore (assuming subscription at Rs325) equity shares of the face value of Rs10 each. Also, the promoter of the company, Gujarat Fluorochemicals, will offer 1 crore additional shares for sale.

The fresh issue size is targeted to raise Rs700 crore, which would be used by the company, while the proceeds (expected to be around Rs320 crore) from the offer for sale would go to the promoter company.

The objects of the issue mainly involves expansion and upgradation of the existing manufacturing facilities; meeting long-term working capital requirements; investment in its subsidiary, IWISL, and other infrastructure development.
After the issue, the promoter’s holding in IWL will reduce from 100% to 90%.

Brokerage firm Sharekhan has outlined five reasons why the current offer price leaves scope for a decent appreciation in the long term:

Conducive macro environment; promising growth opportunities: 

Renewable energy is one of the key focus areas of the new government, whose vision is to multiply the capacity of the renewable energy sector. Under the National Action Plan on Climate Change (NAPCC), the Government of India has set a target of having 15% renewable energy in the electricity generation mix by 2020, implying a total installed base of approximately 100GW of renewable energy generation capacity.

Sharekhan believes that the government aims to double the wind power capacity expansion target in the next Five Year Plan to around 20,000MW during FY2017-22, that is a run rate of around 4,000MW per annum vs the current run rate of 2,000MW per annum.

Access to superior technology and project execution capability: 

IWL has a perpetual and exclusive licence from AMSC to manufacture 2-MW WTGs in India and a nonexclusive licence to manufacture outside India. This gives huge technological competitiveness to IWL and in future the company could look out for business opportunities outside India too.

Moreover, it stands out on the basis of the execution capability of its management demonstrated in the past. The company which commenced its business in FY2010 managed to scale up the business to 380MW sales in M9FY2015.

 

Strong order book and adding substantial capacity: 
Currently IWL has an order book of around 1,258MW (694MW for engineering, procurement and construction orders and 564MW for only supply of WTGs). Out of the 1,258MW, capacity of around 122MW has already been erected and commissioned.

Given the strong wind power capacity addition target set by the new government and the fact that supportive incentives are in place, there could be a strong demand for WTGs in future. Going forward, the company plans to add significant capacity at the Rohika unit. Further, IWL intends to use part of the IPO proceeds to invest in new equipment at the Una unit to optimise the capacity of the nacelle and hub manufacturing facility.

Strong earnings growth potential with high return ratios:

Given the strong order book position and expanding opportunity pie domestically, the company is expected to deliver a healthy revenue growth ahead. Going by its historical profitability track record, Sharekhan believes that it could achieve a healthy operating profit margin (OPM) of around 16% and a net profit margin of 10%.

Consequently, its earnings could grow at a healthy rate. During M9FY2015, the company’s earnings grew by 110% year on year. Moreover, as achieved in the past, the return on equity stands a very healthy 30%.

IWL would attract scarcity premium:

Given the strong order book of the company and the thrust of the government on renewable energy projects, IWL is well positioned to grow at a very healthy rate over the next few years. Moreover, the company has a sound track record, a proven management team and has managed to achieve industry-leading OPM and return on equity (30% plus).

At the offer price, IWL is valued at 19-20x its historic earnings on enterprise value/earnings before interest, tax, depreciation and amortisation basis.
On a rough and conservative basis, the valuation works out to around 10x FY2017 estimate, which is much below the prevailing average valuation of 15-16x of the listed players globally.

Moreover, with its listed domestic peer Suzlon Energy, struggling with debt and profitability issues, IWL would emerge as one of the few quality companies listed in the renewable energy space and thus attract the scarcity premium.