Why brokerages advise subscribing to Inox Wind IPO?

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The Rs 1025-crore public issue of Inox Wind, the fourth largest wind turbine maker in India, has opened for subscription today. The price band for the issue, which will close on March 20, is fixed at Rs 315-325 apiece.

The wind power solutions provider aims to raise up to Rs 700 crore through fresh issue while founder Gujarat Fluorochemicals (GFL) will dilute its stake worth Rs 325 crore (at higher end of price band) by selling 1 crore equity shares (i.e. offer for sale).

Retail investors will get shares at a discount of 5 percent (Rs 15 per share) to the final issue price.

Brokerages as well as experts believe Inox Wind is a very good IPO. Considering its strong order book, government’s initiative to boost renewable energy sector and healthy response to anchors’ book, investors can subscribe to the issue, said brokerages in its notes.

Vikas Khemani, President and Co-Head, Wholesale Capital Markets at Edelweiss Capital said there is no reason why this company cannot deliver superior returns for shareholders over a medium-term to longer-term.

“Inox wind has done phenomenally well in last three or four years so it is a very good company. It comes from a good family, promoting company which has delivered 20 percent plus compound annual growth rate (CAGR) to the investors over last two decades. Even there is a very enthusiastic support from institutional as well in the non institutional category,” Khemani explained.

He is hopeful of issue doing very well in the markets in the subscription and post listing as well.

According to Ajcon Global, with due consideration to factors like thrust of government on renewable energy sector; ability to provide turnkey solutions for wind farm projects in India; strong order book and project execution capability; recognized and trusted corporate group;  favorable capital structure; and strong return ratios, valuations deserves a premium as its operating and net margins are relatively high and its operating and total cost per MW is relatively low compared to a number of major wind turbine manufacturers inside and outside of India.

Inox has shown a strong growth during FY2014 and 9MFY2015 periods, wherein it sold 330MW and 380MW of wind turbine generators (WTGs) during the period. Plus currently, it has a strong order book of 1,258MW, as against Suzlon’s order book of 1,148MW, and Gamesa India Private Limited’s order inflow of 850MW (as of December 2014).

Angel Broking said Inox Wind has access to wind project sites which have been acquired or are under the acquisition process by its group companies - GFL and Inox Renewables (IRL) - and its subsidiary Inox Wind Infrastructure Services (IWISL).

Thus, according to the brokerage, these provide strong revenue visibility for the company in medium term and in FY16.

Government is set to increase the target of renewable power to 1, 75,000MW and set a target to manufacture wind power electricity to 60,000 MW. This will create the huge opportunity for the Inox Wind for the upcoming period, said GEPL Capital.

Inox Wind, the manufacturer of wind turbine generators, also provides turnkey solutions, and operation and maintenance services for wind power projects. Currently, it has an installed capacity of 550 nacelles and hubs, 256 rotor blade sets and a capacity of 150 towers.

The company is setting up a new integrated capacity which will take the total nacelles and hubs capacity to 950 units, rotor blades capacity to 800 sets and tower capacity to 600 units.

ICICIdirect said with a strong backlog of 1258 MW (around Rs 7,500 crore), margin profile (EBITDA of 16 percent) and return on equities (31 percent in FY14), Inox Wind is expected to clock a healthy financial performance over FY15-17E.

In addition to that, Motilal Oswal said in the WTG business, gross margins are likely to sustain at around 26 percent and EBITDA margins at 16-17 percent.

The operations and maintenance (O&M) business provides interesting opportunities, given that the supplier retains O&M on nearly 100 percent of the projects, and gross margins are remunerative at around 50 percent. Going forward, the contribution will increase meaningfully, as the installed base increases, Motilal added.

The brokerage expects Inox Wind’s WTG sales to increase from 330MW in FY14 to around 600MW in FY15 and 1-1.2GW in FY16.

Inox Wind has relationships with several large utilities, including Tata Power, Continuum Wind, Clean Wind Power (Hero Group), and ReNew Power; and bagged several large sized orders in FY15.

According Mehta Equities, technology suits low windy sites. “Inox’s WTG is equipped with DFIG technology (based on AMSC technology) which is one of the most advanced technologies being used globally. The swept area per MW is also one of the highest which we believe makes the IWL WTG suitable for low windy sites and climatic conditions such as Indian sites,” it explained.

Inox 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. Issue proceeds will also be used for long term working capital requirements; and investment in subsidiary, IWISL, for the purpose of development of power evacuation infrastructure and other infrastructure development.

However, key risks according to the brokerages are: Increase in competition might put pressure on margin; limited wind energy potential; orderbook may not turn in revenues; negative cash flow; investment in subsidiary; high concentration of revenues to few clients; high dependence on government policies and benefits; lack of in-house technology; high working capital intensity etc.

More about the issue

Its anchor investors' portion, which was opened for one day before the issue opening date, received good response. The company has decided to allocate 94.25 lakh shares worth Rs 306 crore at a price of Rs 325 apiece to anchor investors.

Anchor investors were Sundaram Mutual Fund, IDFC Fund, FIL Investments Mauritius, SBI Infrastructure Fund, Grandeur Peak Global Reach Fund, Blackrock India Equities Fund, Reliance Capital Trustee, Morgan Stanley, Tata AIA Life Insurance Company, Birla Sun Life Insurance Company, Kotak Fund, Goldman Sachs India Fund, Swiss Finance Corporation (Mauritius) and Indus India Fund (Mauritius).

The minimum bid lot is 45 equity shares and in multiples of 45 equity shares thereafter.

The equity shares are proposed to be listed on the BSE and the NSE.

Axis Capital Limited, DSP Merrill Lynch Limited, Edelweiss Financial Services Limited and YES Bank are the global co-ordinators and book running lead managers to the issue. Link Intime India Private Limited is a registrar to the offer.