India’s wind energy market and budget 2016 outlook:
As on December 31,2015, cumulative capacity of about 38,820 MW off grid-interactive renewable energy capacity has been installed in the country which includes 25,088 MW from wind power, 4,878 MW from solar power, 4,177 MW from small hydro power and 4,677 MW from bio-power.
As proposed in 2016 Budget, Govt. has set a very aggressive target of 60,000 MW capacity by 2022.
While renewable energy sources together account for only 12.6 percent of total capacity, wind accounts for 8.7 percent. Among the Indian states, Tamil Nadu led with a total installed capacity of 7,251 MW, followed by Maharashtra with 3,472 MW, Gujarat with 3,384 MW, Rajasthan with 2,734 MW, and Karnataka with 2,312 MW in FY15 In terms of additional annual capacity coming online, Maharashtra led in FY14 with 847 MW, thanks to favorable wind policies and strong Renewable Purchase Obligation (RPO) compliance and enforcement. As of January 2014, India’s wind energy installed capacity was majorly spread across 8 states: Rajasthan, Gujarat, Madhya Pradesh, Maharashtra, Andhra Pradesh, Karnataka, Tamil Nadu and Kerala.
As of January 2016, states like Maharashtra, Rajasthan and Tamil Nadu had utilized their overall wind energy potential by more than 50%. Madhya Pradesh, Gujarat and other states on the other hand have been able to utilize below 25% only. This is a huge opportunity for wind energy manufacturers, plant developers and Government to expand this sector.
Inox land bank stands at 5000MW distributed in major wind energy potential areas like Rajasthan, Gujarat, Madhya Pradesh, Maharashtra and Andhra Pradesh and the company is going to start its venture in Tamilnadu which keeps Inox in a very strong position to capitalize upon existing opportunities.
Inox Wind The company:
Inox Wind Ltd (IWL) belongs to Inox group companies and is a fully integrated player in wind energy market with the state-of-art manufacturing plants near Ahmedabad (Gujarat) for blades and tabular towers; at Una (Himachal Pradesh) for Hubs and nacelles. The company in mode of expansion is setting up a new plant at Barwani (Madhya Pradesh) for manufacturing of rotors and towers. Inox is one of the largest manufacturers of Wind Turbine Generator (WTG) in India. IWL supplies the key components of WTG along with associated and auxiliary components and offer wind farm projects on a turnkey basis across India through their wholly owned subsidiaries – Inox Wind Infrastructure Services Ltd (IWISL) and Maruti Shakti Energy India Ltd (MSEIL). IWL has the projects across different states like Rajasthan, Maharashtra and Andhra Pradesh and have an aggregate power project capacity of 5000MW.
Inox Winds has got very diversified and reputed clients with high repeat orders. The clients would include big names like Continuum Wind, Mytrah Energy, Tata Power, Bhilwara Energy, CESC, Renew Wind Energy, Ostro Energy and PSUs like NHPC, RITES, GACL, GMDC amongst others.
While Govt. focuses on the renewable power it makes sense to look at the backbone who will help generate that.
Inox Winds: Strong Fundamentals and Business Growth
The business has grown in a phenomenal pace . Last 3 Years Sales growth CAGR at a whopping 58.7% while profit has grown at a CAGR 49.1%. TTM profit growth stands at 78.6%. This improvement in margin is due to a strategic shift towards taller towers and bigger turbines ( 113W in place of 100W) which increases efficiency and thus margin.
With big order book, operational efficiency and cash flow visibility the growth and margins looks sustainable if not bettered.
In last five years sales has grown from a mere 8 Cr to 3200 Cr. A 5 year CAGR of 216%!!
Great return Ratios: ROCE3yr avg: 29.44% and Average return on equity 3Years: 40.51%
Great Business Stability: Altman Z Score: 4.36 and Interest Coverage Ratio: 7.93. Signifying a rock solid business.
High Operating Margin: Maintaining a very high operating margin close to 18-19%. TTM OPM is at 19% +
Very High promoter, DII and FII holding: Promoters hold 85.62%, DIIs 4.48 % and FII 3.08%. Only 6.8% shares are widely held by public
Very manageable Debt: Debt to Equity ratio at only 0.6 levels
Huge Net cash flow of 700 Cr in last FY
The future looks even brighter: Growth Triggers
Growth Trigger 1: Governmental and regulatory impetus will add to growth:
The pic below will give you a better understanding of all the aids that Govt. is providing this sector.
Growth Trigger 2: Mega capacity expansion drive:
Inox Winds is in the process of increasing their capacity at a rapid pace in their Barwani, Madhya Pradesh plant and most of it should complete by FY16 itself. So, Q4 16 and Q1 17 is going to be big.
Growth Trigger 3: Technology Moat:
The company has signed two strategic long term technology agreement with AMSC
a) Securing exclusive and perpetual license and know-how for manufacturing of 2MW ECS in India which will help them to one is to reduces dependence on AMSC and would have long term security. Second would be to improve supply chain control and cost savings due to indigenization. And lastly it would help Inox wind to reduced foreign exchange exposure.
B) Collaboration for development of 3MW WTG for India which will help to improve efficiency and lower cost of generation.
Growth Trigger 4: On the way to become market leader:
In FY15, Inox emerged as one of the India’s leading WTG manufacturers, with a market share of 12%. With the geographical mix in the project sites of Inox which are majorly in high potential wind energy generation states, I assume Inox to have a 25% market share and become a leader in WTG market.
Growth Trigger 5: Off-Shore wind: An idea of the future
Off-shore wind energy is a new technology wherein the wind turbines are set up in the midst of the water bodies to generate electricity. Off-shore winds are more efficient in terms of generation when compared to on-shore wind farms. However, off-shore wind industry is still in infant stage as the cost of setting up off-shore plant is 2 times more than setting a on-shore wind farm. Indian offshore wind is at very small stage which has a potential of 350GW. A national off-shore wind energy authority is being proposed to provide a conducive environment for harnessing off-shore wind energy including setting up a demonstration off-shore wind power to show case technology. Inox is ready for it.
Growth Trigger 6: Robust order book and revenue visibility
Currently Inox Wind’s order book stands at around 1256 Mega Watts which would take around 12-15 months to implement with the increased capacity. This gives a great revenue visibility of around a year to 15 months. Regular order are flowing in. Recently Inox bagged a 100 MW order from Tata Power. Sufficient Land Bank as of December 2015 for installation of an aggregate capacity of more than 4,500 MW gives confirmation of order execution.
Outlook and valuation:
So, just to summarize things for Inox Wind
- Great parentage
- Exponential growth
- Ultra strong Fundamentals
- A industry which is of Govt. focus
- Next Gen power products and technology moat
- Great short term triggers and revenue visibility
- Best land banks
At today’s closing price of 231.4 the stock PE comes to little above 11. Which I feel is very reasonable given the growth prospects of the company. Till yesterday the stock was trading at its lowest ever closing price of 217. However 231 too looks reasonable to me given the budget impact yesterday.
Debt ridden, loss making Suzlon at this price (Rs 13.5) too trades at 1.5times Inox Wind’s valuation, leaving a lot of space for valuations to grow for Inox Wind going forward.
Try to buy around 40% of your total allocation to this stock ( Shouldn’t be more than 6-8% of total portfolio at 220 levels.
Keep buying 20% ( 1.2% – 1.6% of Total portfolio) more at each 5% drop from there.