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The reason I got interested in the INOX wind stock was because I read the news that the promoters sold their own stake in Gujarat Fluoro and infused Rs 623 Cr equity in Inox Wind. This sounded interesting. Why are the promoters selling stake in a fast growing, well-performing business in a sunrise industry (speciality chemicals for electric vehicles) and infusing equity money in a loss-making company?
I decided to investigate more.

Inox wind, a wind turbine and generator (WTG) manufacturer, was doing quite well till 2017. Wind sector was booming, and an accident happened – the government changed policies.
Wind projects used to be awarded on a cost-plus basis till 2017. This meant in order to support development of the renewable sector, the government ensured that all renewable (solar + wind) project developers will make profits irrespective of their manufacturing cost.
In 2017, the government decided that the renewable energy sector no longer required “development assistance” and was now ready for competition from the market forces. There was massive disturbance in the wind sector. Capacity addition fell by more than 80%. Several other issues like land acquisition, non-availability of transmission network etc. troubled the sector. Then Corona came and again construction stalled.

This is the financial performance of Inox Wind (Standalone financials)

Rs Cr	FY15	FY16	FY17	FY18	FY19	FY20	FY21	FY22
Revenue	2483	3874	2853	198	1345	528	504	518
Profit after Tax	332	476	256	-157	1	-227	-196	-274
Installations (MW)	274	786	656	8	264	262	80	112

The decline in financial performance is clearly visible FY18 onwards. In fact, the last 5 years have been very tough for Inox Wind.

If we now analyze the recent policy decisions of the government, we observe that the government is trying to remove roadblocks plaguing the wind energy sector
Eg. One of the pain points of the wind sector was reverse e-auction. This auction methodology is similar to the one used in telecom spectrum auctions. This is how reverse e-auction works

• All the eligible bidders submit their financial bids.
• Financial bids are opened and everyone gets to know each other’s bid.
• Every bidder is now given an option to change his bid in public.
• What this means is that there is a race to the bottom. 

In order to win the auction, bidders aggressively compete with each other and lower the prices at which they are willing to sell electricity
Reverse e-auction used between 2017 and 2022 in the wind sector meant that the discovered prices were very low. Many of the developers later realized that it was not feasible to construct these wind power plants and profitably sell electricity at such low rates. Thus, many of the auctions did not convert into wind power projects executed on the ground.

Government in Jan-23 has come out with a policy document which talks about changes in the way auctions will be conducted for wind power plants. Reverse auction has been changed to closed envelope single bid auction. This means there will not be a race to the bottom and the tariffs discovered in such auctions will be more sane at the same time being competitive enough that the electricity consumers don’t have to pay too high a price.

One promising sign has been the recently concluded wind energy tender – SECI Tranche XIII, reasonable tariffs have been discovered. At these tariffs, wind power project developers should be able to install wind projects and also make a reasonable profit

The same policy document also talks about awarding 8,000 MW of wind power projects every year till 2030. The last peak performance on installation of wind power projects was in 2017 at 5,500 MW

Another problem troubling the wind sector was that a wind power project gets constructed in about 2 years. However, the transmission infrastructure required to transmit the electricity to the consumer needs anywhere between 3 to 5 years to get constructed. Between 2018-21 there were several cases where the wind power project was ready, but the transmission infrastructure was not ready. This meant massive losses and interest burden to wind power developers.

Government has acknowledged this problem and is working to try and avoid this situation. An indication towards this is the report published by the Central Electricity Authority (CEA) Transmission System for integration of 5,00,000 MW of renewable energy by 2030. This report talks about the preparedness of transmission infrastructure keeping capacity addition by 2030 in mind. The government agencies are also taking concrete steps to get the transmission projects implemented ahead of schedule.

The fact that the ministry of power has done this comprehensive exercise of identifying and detailing the transmission network that needs to be constructed till 2030 gives great confidence that a good deal of these projects will get implemented on the ground. Availability of adequate transmission infrastructure will pave the way for faster construction of both solar and wind power projects

The next aspect we need to investigate is the growth in demand for electricity.
Historical consumption of electricity.

Barring the Corona years of FY20 and FY21, the electricity consumption in India has grown at an average rate of about 6% per year since FY2007.
It is safe to assume that electricity demand will continue to increase at a similar rate on average for the next 7 years till FY2030.

In such a scenario, electricity consumption may reach 1517*(1.06)^7 = 2281 BUs in FY30
This would mean additional electricity consumption of (2281 – 1514) = 766 BUs

In the next 7 years, where will this additional generation come from? – coal or renewable?
Let us look at the capacity additions in the last several years

We clearly observe from the above data that coal capacity additions have significantly reduced in the last 5 years since FY18. As a representative sample, let us look at capacity addition plans of the largest power producer in the company – NTPC

If we exclude the current capacity under construction, and look at future planned capacity, only 6000 MW out of a total 40,000 MW being planned in from coal-based sources.

Given that not many new coal power plants are coming up, it is safe to assume that 75% of the above additional electricity consumption will have to come from renewable sources. Again, let’s assume that solar installations will be double of wind power installations. Thus, electricity generation from new wind power plants will have to be
⅓ * 75% * 766 BUs = 191 BU

Assuming a 33% capacity utilization factor (CUF) for wind power projects, new wind power projects required = 191 * 10^6 / 33% / 365 / 24 = 65,400 MW

Let us assume that only half of this capacity will get installed in the next 7 years till Mar-30, which will mean approximately 5000 MW wind installations are needed every year.
This is an average number, actual installations will be lumpy – some years better than others.

Supply Analysis – Wind turbines
Getting data about the supply-side of wind turbine manufacturers is not very easy.
The main suppliers include Suzlon, Envision (Chinese), Siemens Gamesa, Inox Wind, GE Power. The total installed WTG (wind turbine generator) manufacturing capacity in India is estimated at 10,000 MW per year (source – 2022 Inox Wind annual report). Global manufacturing capacity is much larger.
However, because the wind sector has gone through so much pain in the last 5 years, most of the Indian suppliers have closed down or are in very poor financial condition.

What are the competitors doing?
Envision has got multiple orders from wind generating companies and is expanding its India manufacturing capacity according to this media report.

Envision India country head also expects the wind installations to accelerate soon to a run-rate of 3,000 – 5,000 MW per year

JSW Energy has given a 810 MW order to GE Energy for supply of wind turbines in Oct-21.

Clearly, competitors are seeing traction in new orders and higher pipeline of wind projects under construction, all indications are that demand for wind turbines is increasing.
However, we must also bear in mind that supply of WTG in India is very high and it is clearly a case of WTG supply > demand

Has Inox Wind won any new orders in the last 2 years?
Given that the wind turbine supply capacity is 10,000 MW per year, Inox Wind does not get any significant new orders and does not benefit from the likely uptick in the wind capacity installations.
However, there are indications that things are looking up for Inox Wind as well
150 MW NTPC order win in Nov-21
200 MW NTPC order win in Aug-22

Also, in an attempt to have a cleaner, less levered balance sheet, thereby improve its capacity to deliver on projects, Inox Wind has raised significant amount of capital in the last 18 months

Capital raised by Inox Wind in recent months
Total consolidated debt as on 31.03.2022 = Rs 3,300 Cr
Above number includes advances from customers, loans from related parties, external (bank) debt etc, but excludes trade payables.
Inox Wind group has raised substantial amounts of equity capital since Mar-22
Dec-22: Rs 740 Cr through Inox Green IPO
Dec-22: Rs 623 Cr equity infused in Inox Wind by promoter by selling stake in Gujarat Fluoro
Oct-22: Rs 750 Cr (approx) by selling 3 SPVs of 50 MW each to Adani Green
Basically, since SPVs were transferred to Adani Green, Rs 600 Cr (approx) debt owed by those SPVs was also transferred to Adani Green

Aug-22: Rs 250 Cr (approx)
May-22: Rs 400 Cr through preference shares convertible at Rs 126 Rs / equity share

Total capital raised since Mar-22 = Rs 2800 Cr
This would mean the consolidated Inox Wind entity is left with only Rs 500 Cr (approx) debt.
Interest Cost in trailing 12 months (consolidated) = Rs 354 Cr
Interest Cost in trailing 12 months (standalone) = Rs 223 Cr

Q4FY23 onwards, the interest outgo will substantially reduce.

Inox Wind has actually taken steps to completely deleverage its balance sheet and get ready to increase its financial and technical capability to take on new additional projects for construction of wind power projects.

Inox Wind financial projections
Assuming that sometime in the next 2 / 3 years, Inox Wind gets to install 700 MW of wind projects out of the 5000 MW wind installations likely to happen per year in India.

In such a scenario,
Revenue ~ Rs 4000 Cr
Operating Profit ~ Rs 500 Cr (estimated at Rs 75 lac / MW)
Current m-cap = Rs 3500 Cr (Stock price = Rs 107, fully diluted basis)

(Inox Wind’s stake in its subsidiary Inox Green is valued at approx Rs 500 Cr)\
If Inox Wind actually installs 700 MW wind capacity and India is installing 5000 MW wind capacity year on year, the market will easily value Inox Wind at 10 EV / Operating Profit multiple

Potential m-cap in 2025 ~ Rs 5500 Cr
(assuming Inox Green stake is still being valued at Rs 500 Cr)

Risks to the investment thesis
Risk 1 – Bad debts, sticky receivables
(Standalone Financials)

	FY16	FY17	FY18	FY19	FY20	FY21	FY22	FY23
Bad debt written off	3	35	8	59	167	75	179	137
Receivables	2409	2382	1339	1630	1322	1048	1073	1057
Total Revenue	4445	3405	465	1436	760	711	625	681

Ageing of receivables

Inox Wind has already written-off Rs 367 Cr of receivables from the above

Risk 2 – Non completion of projects awarded by SECI under tranche III & IV
Analysis of Inox Wind Order Book
As of Dec-22 the Inox Wind order book stood as below

NTPC orders are firm orders for which execution is progressing well. We observe that the 3.3 MW turbine only has a LOI and not a firm order.
Also, on careful analysis we realize that the 350 MW SECI orders are all auction based orders won by Inox related parties in Tranche III & Tranche IV sometime in 2019. Project progress for these wind projects is not very encouraging.
My channel checks suggest that the company does not have any intention of completing these projects primarily because the tariffs discovered were very low – Rs 2.44 / kwh for SECI III and Rs 2.51 / kwh for SECI IV projects.
This would mean that Inox Wind does not have too many orders to execute beyond NTPC orders and will have to win several new orders from new customers in the next 12/18 months.

Risk 3 – India is not able to install 5000 MW wind projects per year
Infrastructure projects are complex and have many moving parts. Power generation projects face several moving parts and multi-faceted challenges some of which are enumerated below

• Land availability
• Forest clearance
• Timely execution of transmission projects
• Adequate / reasonable tariff for sale of electricity
• Timely payment by customer (DISCOMs)

Risk 4 – DISCOMs do not sign agreements to buy
We may think India needs a lot of electricity to grow and satiate it’s tremendous need for energy
Look at the intra-day demand-supply curve from the energy exchange.

Above graph clearly indicates that power prices in the time period when wind & solar plants do not generate electricity are already touching Rs 12 / kwh. However, during those times of the day, when wind and solar power projects actually generate electricity, the power prices are much lower, sometimes as low as Rs 4 / kwh (still high enough for wind / solar power projects to be economically viable)

What the above graph is actually telling us is that the consumer does not need electricity when wind / solar power projects are generating it. All the aggressive capacity addition we are estimating has ignored this exact problem.
We will have to build battery storage in large capacities to be able to supply the electricity to the consumer when he / she actually needs it. Battery storage substantially increases the cost of electricity.

Key monitorable for our investment thesis on Inox Wind
New order wins over the next 12 / 18/ 24 months

What will make me sell the company?

• Less than 500 MW new order wins in next 12 months
• Order wins less than 1000 MW in the next 18 months

Disclaimer: This post is written as an educative endeavour.
No part should be considered as investment advice.
Please consult your investment advisor before taking any investment decisions