Inox Wind: How the Wind Power Auction Wins might translate into Revenues.

Inox Wind Ltd had won a 250 MW bid, which was the maximum permissible limit for a single entity, out of the 1000 MW Auction carried out by Central Govt. agency in Q1 of 2017. The price of electricity to be supplied is close to Rs.3.50 per unit (KWh). Inox Wind had also won an order for another 50 MW for supply of WTGs for an IPP (Independent Power Producer), who had also won a bid in that auction. Today Inox Wind has announced that it has again won a 250 MW bid in the second auction carried out by Central Govt agency in this week. The price of electricity to be supplied has been set at Rs.2.65 per unit.

These are surprisingly low bids for Wind Power, considering the fact that until about a year or so ago, the Wind Power tariffs were well above Rs.5 per unit and it was over Rs.8 per unit about 2 or 3 years ago. So the question that arises is that whether it will be profitable for these companies to supply electricity at such low prices and how long will it take to recover their Capital Investments.

Let's consider it from an IPP's point of view, which has won a bid for 250 MW at a price of Rs.2.65 per unit. The Capital Investment required for setting up a WTG is approximately Rs.6 crores per MW. Hence the Capital required for setting up 250 MW capacity will be about Rs.1500 crores. The Capital required for setting up Power evacuation infrastructure will be relatively much smaller and hence I am ignoring it. If all these 250 MW capacity WTGs remain operational 24 x 7 for all 365 days of the year, they will generate about 219 crore units of electricity every year. But the Wind flow is not that consistent everywhere throughout the day or year and hence we can expect about 35 to 40% efficiency overall. Hence the number of units generated will be approximately 80 to 85 crores per year. At the rate of Rs.2.65 per unit, it will translate into revenues of about Rs.220 crores per year. This is close to 15% of the CAPEX involved in this business. Since the electricity is being sold to Power Trading Corporation and not directly to any State Electricity Boards, the payments for the same are expected to be timely. Hence these IPPs should be able to afford Cost of Capital of about 8 to 9% per annum with 20 or 25 years repayment terms.

Inox Wind has already announced that it will be looking to sell majority stakes in the SPVs that will be used to commission the two projects, as it does not intend to remain a Wind Power generator, and focus on it's primary business of being manufacturer and supplier of WTGs. Considering the fact that this business is expected to be profitable even at such low prices, Inox Wind should be able to find buyers for the stakes in these SPVs. Going forward, we may see stabilisation in prices of electricity generated from Wind Turbines around these levels. Any further drop in prices for electricity will need higher efficiency from the WTGs or lower manufacturing costs for them.

Suzlon Energy vs Inox Wind - T-T-M Comparison post Q2-FY17.

I had posted a T-T-M comparison report between Suzlon Energy & Inox Wind a couple of months back based on the numbers available till Q1-FY17 (Click here for that report). The situation was clearly in favour of Inox Wind at that point. Coming to Q2-FY17 numbers announced recently, Inox Wind announced came out with substantially improved performance compared to Q1, but was still short of it's Q2-FY16 numbers. On the other hand, Suzlon Energy came out with numbers that can be termed as 'stupendous', especially the EBITDA & margin numbers, which also helped the company to post healthy Cash & Net Profit numbers for the quarter. While EBITDA margins were expected to be in the 14 to 18% range, Suzlon's Q2 numbers reported an EBITDA margin of almost 23%!! Suzlon's Q2 numbers have had a terrific impact on the company's T-T-M numbers. Hence it's prudent to see how the two companies now fare at the end of Q2-FY17.

At the end of Q1-FY17, Inox Wind's T-T-M Total Income was 49.5% of Suzlon's figure, which is now down to 42.3%, because of Suzlon's much stronger Y-o-Y performance in the latest quarter. On the T-T-M EBITDA front, Inox Wind's number was 74.5% of Suzlon's number last quarter, but now it is just 46%. The huge gap in EBITDA margins of the two companies on T-T-M basis has now been closed substantially. Suzlon's T-T-M EBITDA margin now stands at around 15.5% compared to 16.8% for Inox Wind. Now the big question is whether the 23% EBITDA margin posted by Suzlon Energy for Q2-FY17 is sustainable or was it due to some one-off event. We will come to know about it only after Q3 numbers are posted.

Coming to the Interest Cost of the two companies, this is the only part where Inox Wind's figure has maintained the same percentage over the previous quarter. Inox Wind's Interest Cost continues to be just under one-tenth of Suzlon Energy's Interest Cost. Interest Cost continues to be a pain point for Suzlon Energy. With a stupendous EBITDA performance and strong Cash Profit figure during Q2-FY17, there is a possibility of the company's Interest Cost showing decreasing trend in the coming few quarters. Thanks to the sharp jump in it's EBITDA, Suzlon Energy was able to post a decent positive T-T-M PBDT number this time, bridging the gap to Inox Wind considerably. Inox Wind's PBDT continues to be higher by a good margin, but the gap is now down by more than half of what it was at the end of the previous quarter. Market Caps of the two companies continue to maintain about the same proportions compared to what it was 2 months ago.

Other factors: From the above numbers, it is quite obvious that during Q2-FY17 Suzlon Energy has clawed back a major chunk of the advantage that Inox Wind held over it. But there is one small troubling factor for Suzlon Energy. During Q2-FY17, the company's Order Book dropped by over 100 MW, from levels of 1200+ MW to around 1100 MW. On the other hand, Inox Wind's Order Book expanded from 1100+ MW to over 1300 MW. Suzlon Energy's sales team will have to work harder to keep it's production & execution teams busy in the coming few quarters. On the other hand, Inox Wind's management has continued to exude confidence of achieving a Turnover of between Rs.5000 to 5500 crores for the current fiscal, despite the fact that the company's H1-FY17 turnover is lower than that of H1-FY16 by around 25%. Inox Wind will have to post a growth of 35 to 40% during the second half of this fiscal to achieve it's targeted turnover. They have enough orders in hand and that is probably where the management is getting it's confidence from. Let's wait & watch for Q3 numbers, which should be announced in February'17.

Suzlon Energy vs Inox Wind - Trailing-Twelve-Months comparison!!

Suzlon Energy Ltd.'s sale of Senvion AG got concluded in the last week of April'2015. Hence there was some impact of the German subsidiary on Suzlon's numbers for Q1-FY'16. From Q1-FY'16 onwards, it's now completed 4 full quarters of Suzlon's own performance. Hence now we can start comparing Suzlon's numbers with Inox Wind Ltd., which is a smaller & much younger player in the Wind Energy business in India. Frankly, I had never had a proper look of the numbers from Inox Wind Ltd until the day I was writing a post on Suzlon Energy about 3 months ago. (Click here for that post) After a quick glimpse of Inox Wind's numbers that day, I have studied the numbers better & tried to analyse the company's business performance properly. And I have become a fan of Inox Wind Ltd. I have been closely following the company's share price movement since then and have also included it in my portfolio with reasonably weightage.

Now let me present you the comparison of Trailing-Twelve-Months numbers of Suzlon Energy & Inox Wind:

The Financial Numbers presented here are for the 12-months period from July'15 to June'16. The Market Cap numbers are arrived at by using closing share prices of 20th Sept'16 alongwith the Equity Capital figures for June'16 result. While Inox Wind's Equity Capital is not expected to change any time soon, Suzlon's Equity Base could expand soon from the current level of 502 crore shares to potentially about 599 crore shares, as and when the remaining FCCBs also get converted into shares. Hence the effective fully-diluted Market Cap of Suzlon Energy is potentially nearly 18-20% higher than the number I have mentioned in the table alongside.

As we can see, Inox Wind's Total Income is just under 50% of Suzlon Energy's Total Income. How this percentage number moves in the coming quarters will tell us which one of the two is growing faster. Coming to the EBITDA numbers, Inox Wind's EBITDA is a whopping nearly 75% of Suzlon Energy's EBITDA number. This clearly means Inox Wind is currently enjoying very superior EBITDA margins when compared to Suzlon Energy. We can certainly give some space to Suzlon Energy here as it is still in the midst of a business revival & hence is expected to see a substantial improvement in it's EBITDA margins in the coming quarters. We can certainly expect to see the Inox-to-Suzlon EBITDA comparison percentage coming down to about 65% in the coming 2-3 quarters. I will certainly be disappointed with Suzlon's performance if this does not happen.

Coming to the Interest Cost comparison, it's a no-brainer. Inox Wind's Interest Cost is less than 10% of Suzlon Energy's Interest Cost. On one hand Inox Wind's Net Debt was very low until 2 or 3 quarters ago as the company had enough Equity Capital and Cash Profits to fund it's operations. The Net Debt has now risen to about Rs.1500-1600 crores over the last couple of quarters primarily due to huge capacity expansion undertaken & higher working capital requirements. On the other hand, Suzlon Energy continues to have some bit of Debt hangover from it's past. Even though the 12-months Interest Cost for Suzlon has already dropped by close to half, it still has more work to do in order to bring it down to reasonable levels. The company will need improved Cash Profits to take care of it's expansion requirements on one side as well as paring down it's debt on the other side. Taking the 12-months Interest Cost well below the Rs.1000 crores mark will remain a challenge for Suzlon Energy, atleast in the coming few quarters. Thanks to this Interest Cost factor, Inox Wind will continue to enjoy substantially superior Cash Profit & Net Profit margins in the coming few years.

Suzlon continues to be PBDT Negative currently, but is expected to be in the positive in the next 1 or 2 quarters. But Suzlon might take much longer time to come close to matching Inox Wind's PBDT numbers, maybe even 2 years. Coming to Market Cap comparison, Inox Wind's market value is just about 56% of Suzlon's (non-diluted) figure. This is despite the fact that Inox Wind is already posting healthy profits, while Suzlon continues to be Loss making. Higher Market Value being awarded to Suzlon then suggests that the market expects Suzlon's Financial performance numbers to improve substantially in the coming quarters. It will be interesting to see if this expectation turns out to be true or the market changes it's opinion in the coming months and we see a substantially stronger increase in market value of Inox Wind in comparison to that of Suzlon Energy. Let's wait & watch. My bet is on Inox Wind to get re-rated upwards in the coming months/quarters, while Suzlon continues to linger within a 10-20% range from current levels.

Suzlon's price collapse: Is it time to Panic?

There was panic amongst Suzlon's shareholders on Friday, i.e. 19th Sept.'14, when the company's stock price hit Lower Circuit within minutes of starting to trade at 9:15 am. Hitting the Lower Circuit was nothing new for Suzlon's counter, but the Panic was due to the quantity of shares up for Sale. There were over a crore shares up for sale in the early minutes and the quantity kept piling up through the day with every passing hour. By the end of the trading on Friday, the Quantity had increased to about 10 crore shares. During the day nearly 92 lakh shares were traded on NSE alone and as expected most of them went for delivery. Monday was no different as over 15 crore shares were put up for Sale on NSE and only about 34 lakh shares were purchased.

The reason for this huge Sale quantity since Friday is that part of the FCCB holders converted their Bonds into Equity shares of Suzlon & they are cashing out. About 13% of the total FCCBs were converted into shares this month & the total quantity issued is 27 crore shares of Suzlon & it's pretty obvious that these holders are in a big hurry to cash out. What is foxing me is that why will these Institutions put such large Sell orders in one go, which is bound to scare away genuine buyers too. Any potential buyer of Suzlon shares will certainly postpone his/her purchase decision thinking that such large Sell orders will bring the price further down in a few days & it will be more attractive to buy then. Some buyers will even start questioning whether Suzlon's business recovery is actually true or not as for many shareholders the share price movement reflects the positives or negatives happening in the company's operations.

Now the Question that arises is till when will this slide continue? If we believe that the FCCB holders who converted their bonds into shares are lining up to sell and they seem to be in a tearing hurry to cash out, then will they stop selling at the price that they got their shares, i.e. about Rs.15.50/-. If they are too desperate for Cash, then some of them might continue to Sell even lower than that price. But atleast some of them who are not so desperate will withdraw their Sell orders and at the same time we could see some other large Institutions who believe in Suzlon's recovery to start buying the beaten down stock as it will get very attractive at the price of close to Rs.15/-. Even if we look from the valuation side, Suzlon was fairly valued when at Rs.20-22 range. In my previous post on Suzlon, I had mentioned that I am expecting Suzlon's Market Cap to climb to about Rs.10,000 crores by the end of this fiscal or middle of next calender year. At the end of June'14 quarter, Suzlon's Equity Capital consisted of about 271 crore shares. The company has issued about 34.2 crore shares this quarter including the 7.18 crore shares issued to CDR Lenders & 27.03 crore shares issued to FCCB holders. So the company's Equity Base has already expanded to little over 305 crore shares. At the price of Rs.18/-, Suzlon's Market Cap stands at about Rs.5500 crores, which is not far away from the company's current Fair Valuation.

Now here comes the Real Scary Part: Only about 13% of the FCCBs have been recently converted into shares, which translated into 27.03 crore shares. If the remaining FCCB holders also decide to convert their Bonds into shares, then another 181 crore shares will be issued by Suzlon, further diluting the company's Equity capital. And the scariest part is that all these Bonds will be converted into shares at a price of Rs.15.46/- each and at a Fixed USD rate of Rs.60.225/-. If all these bonds get converted into shares ( and I am sure they will convert at some point if the share price trades at a substantial premium to their conversion price ) then Suzlon's Equity base could be at a touching distance of 500 crore shares. The Equity dilution will be massive and then we can forget the possibility of Suzlon's share price flying away to much higher levels for a considerable amount of time. Every time it goes a bit higher, some of the Bond holders will convert their shares & Sell them to Cash Out.

After considering the possibility of FCCB conversion, I am of the opinion that Suzlon's share price might not go much above Rs.30 level for atleast the next 2 years. Approaching Rs.30/- itself will be very difficult. Other that the FCCB holders, the CDR Lenders are being issued shares at a price of about Rs.18.50/- with a lock-in period of 1 year from the date of issue. Sometime in 2015 even the CDR lenders could think of selling their holding if the share price is trading at a decent premium to their conversion price. One thing is for sure that Suzlon's share is not going to be a Multi-bagger until all these hangovers are eliminated.