Inox Wind Ltd. share price target

IWL, one of the largest integrated wind power solution providers in India, manufactures wind turbine generators and provides ovides complete turnkey solutions such as supply of WTG, land acquisition, infrastructure development, power...

Inox Winds (IWL) 2QFY17 results were below our estimates as the company focused on correcting the supply mismatches to reduce its working capital cycle. While collections have improved (~Rs 8bn vs. ~Rs 4bn QoQ), billings have also gone up leading to flat receivables (Rs 24bn).

Our optimism on wind power in India remains intact given the government push and attractive IRRs for developers (at closer to grid parity tariffs). Hybrid policy (wind solar) and competitive bids provide tailwinds to sector volumes from FY18E onwards. This, coupled with strong FCF generation, (Rs 6bn for FY17E) and high RoE (~25%) makes a strong investment case. Reiterate BUY with a TP of Rs 475/share (10x FY18E EV/EBITDA).

Inox Wind Ltd’s (IWL) 1QFY17 results were below our estimates both in terms of revenue (adverse mix) and extended net working capital (180 days vs. 82 days as on Mar-16). The management clarified that mismatch in supply of individual parts (blades, towers, nacelles & hubs) had led to the buildup of receivables so far. To correct the same, it focused only on manufacturing the balance part of supplies in 1QFY17 leading to lower revenues/ utilisation. With this anomaly getting cleared now, it expects a substantial pick up in volumes and reduction in working capital by end of 1HFY17. Gradual improvement in working capital (over FY17) should enable it to be a net cash company by FY17-end.

Notwithstanding short term ups and downs, long term visibility on WTG volumes remain high given the expected policy on repowering and hybrid model (wind + solar). A bid based tender for 1GW is expected to open in the next 2 months providing further visibility on FY17E WTG volumes. Policy thrust coupled with technical advancements would continue to drive wind sector and IWL would be a key beneficiary of the same. Retain BUY with a TP of Rs 475/sh (10x FY18E EV/ EBITDA).

Top takeaways from Q1FY17 :  Inox Wind’s recurring PAT (Rs 103mn,  ?85% yoy) was materially below our and consensus estimates as lower than expected execution led to a negative operating leverage coupled with high interest costs on account of increased working capital. In 1Q Inox focused on clearing the backlog of production of relatively lower ASP components such as blades and towers while going slow in producing nacelles in order to synchronise component supply going ahead. This led to lower revenues. In addition, due to lack of clarity on tariff in the state of Gujarat clients withheld commissioning, which has subsequently picked up as the state announced its multiyear tariff only in August.

Outlook and Valuation: Based on the weak 1Q performance we cut our FY17/18 earnings estimates by 25% and 19% respectively. We downgrade our rating on the stock to Neutral (from Buy) and cut our price target to Rs 200 (Rs 360 earlier). The company has disappointed investor expectations for the past three quarters on execution, margins and working capital. Consequently, the stock has de?rated and the price has declined 50% in the past 12 months. For the stock to re?rate we believe Inox will have to deliver on reducing its net working capital (53% of TTM sales in 1QFY17) to offset the negatives of slowing industry growth due to a policy cliff in FY18. Since ~50% of FY17 sales will be generated from Gujarat based sites, which now have improved visibility on tariffs, we believe that Inox has a fair chance to reduce its working capital and this refrains us from downgrading the stock to Sell.

Inox Wind Ltd. (IWL) reported below than expected set of revenue and bottom-line numbers. IWL reported top-line of `1,828cr, below our expectations. Inox reported 96.9% yoy top-line increase, reflecting 328MW of Turnkey sale volume. On the back of strong execution IWL reported 83.3% yoy increase in EBITDA to Rs312cr. Reported EBITDA is be..

18.2bn (+97% yoy) were 9% above our estimate driven by strong execution and slippages frompreviousquarter.Increaseinexecutionofturnkeyprojectsin4Qledtoacompression ingrossmargins(670bpsyoy).However,operatingleveragebenefitsonhighersalesvolume...

4QFY16 above estimates driven by strong execution: 4QFY16 sales stood at INR18.3b (up 97% YoY) which was above our estimate of INR15.5b. Supplies during the quarter stood at 328MW which was up 67% YoY. EBITDA was at...

8 Earnings (Rs 1bn; flat yoy) were materially below our (Rs 1.5bn) and consensus' (Rs 1.4bn)estimatesbecauseofsalesslippagetoQ4FY16. 9 Grossmarginsexpanded850bpsyoymainlyonimprovedsalesmixinfavourofhigher...

Government thrust on renewable energy: Development of renewable energy is imperative for the energy security of our import dependant nation. As a result the Government has increased the target of renewable energy to 175 GW (60 GW wind) by 2022. It is also providing various incentives to increase investments in renewable energy like accelerated depreciation, generation based incentives of Re 0.5/unit, allowing wind power as a Corporate Social Responsibility activity, duty exemption on raw materials, etc. RBI has also notified loans of upto Rs 15 cr for installation of wind mills to be classified as priority sector lending. All these measures would result in higher investment...