Inox Wind is a leading wind turbine manufacturer and is a part of the larger Inox Group. Inox Wind initially depended on in-house orders from the larger group but has since evolved into a serious player in the industry. However, the price of the stock has halved from the listing price of its IPO in April 2015.
The near halving of its price makes Inox Wind looks quite good when compared to its more influential peer, Suzlon (refer to our recent note – Suzlon: Not for the faint hearted and impatient investor) who has lost around 95% of its market cap when compared to its listing. As of now, Inox Wind seems to have outperformed Suzlon in losing market cap.
So do we buy the stock?
- Inox Wind has a track record of delivering revenue and earnings growth. We believe the trend will continue.
- The company has expanded capacity to 1,600 MW that provides it with significant headroom to grow from the 826MW sold in FY16. We would not be surprised to see Inox Wind selling closer to 1500MW in the next 3-4 years.
- We expect margins to remain stable around the 15% mark.
- From a long-term perspective, we are quite confident that Inox Wind will take a 20-25% share from the new capacity that would be built out given the government plans to have 60GW installed capacity of wind energy by 2022.
- Inox Wind is not saddled with debt like Suzlon that will give it flexibility to be opportunistic with its pricing and go after market share.
The stock price looks reasonable with an EPS of Rs 20 leading to the stock being available at PE of around 11. While we do not go about forecasting future EPS, we can assume the stock to be available at a single digit PE multiple based on future earnings.
Where is the margin of safety?
Do we look for margin of safety in a stock that has halved within a year of its listing? We believe that the price action is more related to the stock finding a level that is in line with industry valuations. We believe that a PE of 15 is a reasonable number for wind energy stock like Inox Wind and Suzlon given the valuations of global wind energy players like Vestas, Goldwin, and Gamesa etc.
We are concerned about Inox Wind debt increasing because of loan to group companies. For a historical context, we would do well to remember inter group transactions between Cairn India and Vedanta. A loan to group companies by Inox Wind makes the management look not so good, raises questions about the credibility of the management, and weakens the margin of safety.
We looking closely at the increasing receivables and debtor days. While it needs to be observed closely, we see it more of an operational issue that will be sorted out over the long term. We do not think it has reached a stage where it will derail the long-term story. However, this parameter needs to be monitored closely.