By Geetanjali Kedia
Inox Wind is entering the primary market on Wednesday 18th March 2015, through a fresh issue of shares worth Rs. 700 crore and an offer for sale of 1 crore equity shares of Rs. 10 each, both in the price band of Rs. 315 to Rs. 325 per share, with retail discount of Rs. 15 per share. The issue will raise Rs. 1,010 crore and Rs. 1,020 crore at the lower and upper price band respectively and represents 14.65% and 14.38% of the post issue paid-up capital, respectively. To be listed on NSE and BSE, the issue closes on Friday 20th March.
75% subsidiary of Gujarat Fluorochemicals, Inox Wind is a wind power solutions provider, manufacturing wind turbine generators (WTGs) and offering turnkey solutions for erection, operation and maintenance of wind power projects, mainly in the states of Gujarat, Rajasthan, Maharashtra, Madhya Pradesh and Andhra Pradesh. It has two manufacturing facilities at Himachal Pradesh and Gujarat each. While the Himachal Pradesh facility has manufacturing capacity of 550 nacelles and hubs per annum, Gujarat unit’s annual manufacturing capacity is 256 rotor blade sets and 150 towers. All these 4 components go into making a WTG.
The IPO is being undertaken to optimize capacity at Himachal plant and expand capacity at Gujarat to 400 rotor blade sets and 300 towers, with project cost of Rs. 196 crore, of which, Rs. 147 crore will be funded through IPO proceeds. Since the business is working capital intensive, close to half the fresh issue, Rs. 290 crore to be precise, from IPO funds will go towards working capital, while Rs. 132 crore is proposed to be invested in wholly-owned subsidiary Inox Wind Infrastructure Services, to develop power evacuation and other infra. Balance close to Rs. 130 crore will be spent on general corporate purposes. Offer for sale proceeds of between Rs. 310-320 crore will go in parent Gujarat Fluorochemicals’ pocket, stake of which will reduce to about 63% post IPO, while overall promoter holding (including other Inox Group companies) will shrink to about 85%, post listing.
Separately, company is undertaking greenfield expansion in Madhya Pradesh (as 20% of its 1,258 MW order book as of 31st December 2014 is from Madhya Pradesh) with capacity to produce 400 nacelles and hubs, 400 rotor blade sets and 300 towers at estimated project cost of Rs. 200 crore, to be funded via internal accruals and debt, and likely to be commissioned in FY16. This project cost is confusing vis-à-vis the Gujarat expansion underway (Rs. 133 crore for 144 rotor blade sets and 150 towers), as proposed capacity is more than double in Madhya Pradesh as also, logically greenfield is more expensive than brownfield expansion. Surely, company needs to throw some more light here!
For FY14, on sale of 330 MW of WTGs, company reported total income of Rs. 1,576 crore and net profit of Rs. 131 crore, resulting in net margin of 8.3%. On equity of 200 crore, this translates into an EPS of Rs. 6.57. For nine months ended 31st December 2014, company sold 380 MW of WTGs and earned total consolidated income of Rs. 1,795 crore and net profit of Rs. 179 crore (10% margin), leading to an EPS of Rs. 8.97. Of this, Q3FY15 alone accounted for sales of 200 MW WTGs, earning revenue of Rs. 932 crore and net profit of Rs. 101 crore (doubling from Q2FY15’s Rs. 55 crore net profit, which was nearly double of Q1FY15’s Rs. 23 crore net profit). Thus, on all parameters – sales quantity, revenue, bottomline and margins, company has posted healthy growth in the current year. Since order book is healthy at 1,258 MW (as of 31-12-14), representing over 2 years sales, the revenue visibility remains very strong.
However, this growth has been achieved with sharp surge in debtors, which shot up, to Rs. 1,251 crore on 31-12-14, in just 9 months, from Rs. 710 crore on 31-03-14, which re-affirms the working capital heavy nature of the business. Also, Himachal Pradesh facility’s income tax break under section 80IC break has declined from 100% to 30% from FY15 onwards. Hence, tax rate in 9mFY15 has shot up to 24%, from negligible tax outgo in FY14. Reduced tax holiday will put some pressure on the bottomline going forward.
As of 31st December 2014, company’s equity was Rs. 200 crore, while consolidated net worth stood at Rs. 598 crore, resulting in BVPS of Rs. 29.88. Company had debt of Rs. 729 crore and liquid investments of Rs. 19 crore, translating to debt-equity ratio of 1.22:1. Post IPO, as equity expands to Rs. 222 crore and net worth increases to Rs. 1,298 crore, the debt-equity ratio will slip below 1, but given the Madhya Pradesh expansion underway (not to be funded via IPO proceeds) coupled with the working capital intensive nature of business, its debt is bound to remain north-bound.
At lower and upper end of end the price band, shares are being issued at historic PE multiple of 27 and 28 times respectively, based on annualized 9mFY15 earnings. Projecting 35% growth for FY16, shares are being offered at a PE multiples of 22 and 23 times respectively. Factoring in the retail discount, the multiple works out to 21 and 22 times respectively, which appears fair, given the strong group sponsorship, steady financial growth and healthy revenue visibility. Regulatory incentives like accelerated depreciation, generation based incentives, preferential tariffs, inclusion of renewal energy projects as qualified CSR activity etc. are giving the sector and the company’s order book a healthy boost. Post-listing, at Rs. 325, company’s market cap will be Rs. 7,212 crore. A comparison with Suzlon is not fruitful, given the latter’s financial working.
Fundamentally the issue is good and is not priced aggressively. However, somber mood in the primary market (going by response to previous 3 IPOs in 2015) can limit listing gains. Company has demonstrated strong financials and remains good over long term horizon, supported by the regulatory impetus and renewed investor sentiment in the sector.
Disclosure: Not applying in the issue.