Inox Wind's Q3 - Getting back on Growth track.

Inox Wind Ltd had disappointed investors during the first Half of this fiscal with a near 25% Y-o-Y drop in Total Income, about 35% drop in EBITDA and a much bigger fall in Net Profit numbers. In this backdrop, the company management's conservative guidance for a Total Income of between Rs.5000 to 5500 crores for FY'17, given at the start of the year, clearly looked under serious threat. To achieve even the lower end of the targeted number, Inox Wind would have needed to post a Y-o-Y growth of about 33% in Total Income during the second half of the fiscal. One thing that was riding in the company's favour was the good Order Book position as well as a healthy flow of fresh orders. The Q3 numbers announced by Inox Wind Ltd on 3rd February'17 have kept the hopes alive for the company being able to hit a Total Income figure of about Rs.5000 crores for FY'17.

Inox Wind Ltd. reported a healthy 22% Y-o-Y Growth in Total Income for Q3-FY'17. What is even more commendable is the fact that this growth came in despite the logistical & administrative impact of Demonetisation during the month of November'16 and also a few weeks of

Trailing-Twelve-Months Progress

December'16. The Q3 result certainly gives a boost to the confidence of the company's performance & growth prospects. Another positive factor being the healthy flow of orders during the quarter, amounting to about 330 MW. Inox Wind was able to report a sale of about 266 MW of WTGs during the quarter, despite delays due to Demonetisation. The company's management is fairly confident of achieving a sale of 500 to 600 MW during the Q4 of this fiscal, which should help take the company's Total Income figure to within the guided number for the fiscal. In all likelihood, Inox Wind's Q4 Total Income figure could be in excess of it's Q1+Q2+Q3 number this fiscal. The healthy Order Book of over 1300 MWs gives further confidence to this possibility. The question is whether Inox Wind will be able to manufacture & supply the requisite number of WTGs and other components. I am quite optimistic that the actual number shouldn't be far from my expectations.

Even on the EBITDA margin front, the jump in turnover has helped Inox Wind's EBITDA margin jump by over 200 bps during Q3 as compared to what it had managed during Q1 & Q2 of this fiscal. The EBITDA margin number is still about 100-125 bps lower than what Inox Wind had managed

during Q3 & Q4 of last fiscal, but that can be attributed to the higher fixed costs for the company this fiscal due to larger manufacturing capacity operational. The EBITDA margin can be expected to be higher in Q4 this fiscal than in Q3, on the back of big expected jump in turnover. Inox Wind's EBITDA for the first three quarters of this fiscal stands at about Rs.382 crores, nearly 16% lower than corresponding period of last fiscal. But I am expecting Inox Wind to finish the fiscal with an EBITDA number of between Rs.820 to 840 crores, which should be about 5% to 8% higher than that of last fiscal.

The higher EBITDA for this fiscal still may not help Inox Wind post a higher Net Profit figure as the increased Interest Outgo and higher Depreciation Provisioning will eat away all the gains & more. In the current fiscal so far, Inox Wind's Net Profit is about 32.5% lower than that during the same period last fiscal. Even though I am expecting Inox Wind's Q4-FY'17 Net Profit to be atleast 15% higher than it's Q4-FY'16 figure, the company will most likely fall about 5 to 7% short of it's FY'16 Net Profit number this fiscal. Inox Wind's expanded manufacturing capacity became operational just before the end of FY'16, which pushed it's Fixed Costs, Interest Payments and Depreciation Provisioning figures higher from the start of this fiscal. Inox Wind's T-T-M Interest Cost number has climbed to about 19% of it's EBITDA over the last 3 quarters. But I am expecting it to peak out at 20% or lower and not be any further threat to the company's Net Profit margins.

Valuation: At the current share price of about Rs.185/-, Inox Wind's Market Cap is just about 10 times it's T-T-M Net Profit and about 5 to 6 times it's T-T-M EBITDA. It is trading about 40% lower than it's IPO price, even though it has grown in size by over 60% in the last nearly 2 years. Inox Wind continues to be amongst the largest players in the business of providing Wind Power solutions with amongst the strongest Order Book positions in the Industry in India. After expanding it's manufacturing capacities for key components before the start of this fiscal, it is now in a position to focus on scaling up of capacity utilisation over the next 2 years or more, before needing any more Capital Expenditure towards expanding manufacturing capacities. Hence Inox Wind can utilise the Cash Profits from it's operations to bring down it's Net Debt levels during this period, which should help bring down it's Interest Cost in the next fiscal and improve it's Net Profit margins. With healthy Cash Profit margins & negligible CAPEX requirement for the next couple of years, Inox Wind could start paying some dividend to it's shareholders from this fiscal or the next. Finally, to summarise, Inox Wind continues to be one of the best Investment Options in the Renewable Energy space with a medium to long term view, on the back of low existing Valuations and healthy Growth Opportunities.

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.