Indosolar Ltd

Indosolar Limited is entering the capital market on 13^th September 2010 to raise Rs. 357 crore, via a fresh issue of 11.2 to 12.3 crore equity shares of Rs.10 each (depending on the price discovered). The issue, constituting 35%-37% of post-issue paid-up capital of the company, is priced in the band of Rs.29 to 32 per equity share and closes on 15^th September 2010.

The company manufactures poly-crystalline solar photo-voltaic (SPV) cells from silicon wafers. These SPV cells, used in converting sunlight directly into electricity, are sold by the company to primary module manufacturers. Its present manufacturing capacity stands at 160 MW (2 units of 80 MW each, operational since July 2009 and March 2010 respectively).

The company has a very limited operating history. For 13 months from July 2009 to July 2010 i.e. since start of commercial operations till latest available data, it has sold only 44 MW of SPV cells, which works out to an average capacity utilization of just 39%. Even during the 4 months of FY11, from April to July 2010, the capacity utilization has improved only to an average of 46%. Its order book, as of 31^st July 2010, stood at Rs. 1,012 crore or 170 MW, of which, Rs. 171 crore or 31 MW, has been executed upto 31^st July 2010.

The company plans to expand its SPV cell manufacturing capacity by 100 MW, with an investment of Rs. 337 crore, which is expected to be operational by mid-FY12. This expansion will be entirely funded by the issue proceeds, while the balance funds raised in the IPO, will be utilized for general corporate purposes. A pre-IPO placement of Rs. 19.6 crore was closed by the company recently.

For FY10, the company reported total income of Rs. 131 crore and net loss of Rs. 66 crore. A closer look at financials shows employee cost for the year stood at Rs. 8.5 crore, of which, Rs. 5.1 crore was paid just to the Chairman, Managing Director and Executive Director. This sort of remuneration seems unjustified for a loss-making company. Also, the auditor has qualified the audit report, stating that managerial remuneration of Rs. 2.4 crore, paid during 26^th September 2009 to 31^st March 2010, is in violation of the limits prescribed by the Companies Act, 1956.

The company's equity, as at end of FY10, stood at Rs. 208 crore, which will rise to Rs. 320 to Rs. 332 crore post-issue, on the upper and lower end of the price band, respectively. Its networth, as of 31^st March 2010, was Rs. 144 crore and the book value per share, as on that date, was lower than the face value, at Rs. 6.90 per share, due to the debit balance of Rs. 81 crore in the P&L account. The company had debt of Rs. 544 crore at the end of FY10, resulting in a pre-issue debt equity ratio of 3.8:1 which will get reduced to 1.1:1 post-issue.

On expansion of manufacturing capacity to 260 MW, the company's investment will exceed Rs. 1,000 crore. Hence, it will be eligible for financial incentives of 25% of the total cost, under the Government of India's 'Special Incentive Package Scheme' of 2007. Thus, at the end for FY11, the company is expected to receive a one-time capital subsidy of Rs. 250 crore from the Government.

Since the additional capacity of 100 MW is to be funded entirely by the IPO proceeds, we have valued the company's existing 160 MW capacity on a pre-issue and post-issue basis:

* Assumed at lower end of price band of Rs. 29

** Proportionate for 160 MW taken, considering Rs. 250 crore for 260 MW

The above analysis shows that the company's existing capacity of 160 MW, operational only since the past 14 months, is being valued at a significant premium, to the extent of Rs. 395 crore, in the IPO. This gain will solely benefit the promoters, who presently, hold 97.6% in the company.

At the lower end of the price band, the company is being valued on PBV of 4.2 times on pre-money basis and on 1.9 times, on post-money basis. Moreover, the solar industry has not fared too well on the bourses. Listed companies, having interest in this space, including Websol Energy, Moser Baer and XL Telecom, have shown poor performance, to say the least.

Considering the past and present state of affairs of the company, the issue appears to be expensively priced. Investors can give this one a miss as better listed peers such as Moser Baer are available, as such stocks need to have long term investment horizon of atleast 2 years to reap rewards and returns.