Product crack: Inox Wind IPO

The issue is being offered to retail investors at a `15 discount

Inox Wind Ltd is hitting the market with its initial public offering (IPO) of around 1,015 crore. It consists of a fresh issue of shares of up to 700 crore and an offer for sale by its promoters of 10 million shares. The price band has been fixed at 315-325 per share.

WHAT’S GOOD…

The company manufactures wind turbine generators (WTG) and provides turnkey solutions to wind power generators. It has licences from at least two international wind energy technology companies to manufacture WTGs. Renewable energy is a focus industry for the government. In the recent budget, the renewable energy sector got a boost with doubling of coal cess and emphasis on achieving the 175,000 megawatt (MW) target for clean energy installations by 2022.

For the nine months ended December 2014, the company produced and sold 190 WTGs compared with 60 in the year ended March 2012. Revenue for the same period was 1,795 crore as compared with 100 crore for the year ended March 2012. As of December 2014, its order book comprised of orders for WTG with an aggregate capacity of 1,258 MW.

It also manufactures most of the components in-house, which is likely to give it a long-term cost advantage and keep quality intact. Earnings before interest, tax, depreciation and amortization margin of 15-17% is healthy. The company does not have high levels of debt on its books.

...WHAT’S NOT

The company saw negative operational cash flow in the past two years. While profitable, the cash generated is being used towards growth as this is a capital-intensive business. Moreover, there are limited locations in India where wind energy can be generated. But the industry is still in early stages of development. While renewable energy projects account for 12% of installed capacity in India, its share of energy output is only 6% due to low capacity utilization. India’s wind energy installations in 2012 reached 3.2 gigawatt (GW), but came down to 1.7 GW in 2013 due to adverse regulations. Competition, too, is going up with more than 15 WTG manufacturers setting up facilities.

VALUATIONS

The issue is being offered to retail investors at a 15 discount. The business is in initial stages of growth, but most analyst estimates suggest a forward price-to-earnings ratio of 20-21 times (after factoring in the retail discount). The government’s aggressive renewable energy installation target by 2022 will help order books of companies like Inox Wind. Reintroduction of accelerated depreciation for windmills and raising generation-based incentives will also help. These factors make this a fundamentally sound investment. But remember that IPO investments are only for those who can stomach high risk. Investors in this IPO will have to remain invested for at least 3-5 years. Recent uncertainty in secondary markets can also result in tepid listing gains. Do keep in mind that with 35% of the IPO reserved for retail investors, oversubscription will mean that you may not get the number of shares you had applied for.

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