HDFC sec IPO note: Inox Wind

HDFC Sec | Jan. 27, 2015, midnight

Inox Wind Ltd (IWL) is one of India’s leading wind power solutions providers. It manufactures wind turbine generators (WTGs) and provides turnkey solutions by supplying WTGs and offering services including wind resource assessment, site acquisition, infrastructure development, erection and commissioning, and also long term operations and maintenance of wind power projects.


Incorporated in April 2009, IWL commenced its operations in March 2010. The company manufactures the key components of WTGs in-house such as nacelles, hubs, rotor blade sets and towers. It has established relationships with leading suppliers for raw materials, such as steel and epoxy, and those components that it does not manufacture in-house, such as gearboxes, electric control systems (ECS) and generators.


IWL has a perpetual license from AMSC Austria GmbH (formerly Windtec GmbH), or AMSC, a leading wind energy technology company based in Austria, to manufacture 2 MW WTGs in India based on AMSC’s proprietary technology. Its license in India is exclusive, subject to three existing licenses that AMSC had previously granted for the production and sale of 2 MW WTGs worldwide, including in India. In addition to its license in India, it also has a non-exclusive license to manufacture 2 MW WTGs outside India based on AMSC’s proprietary technology. IWL has non-exclusive licenses from WINDnovation Engineering Solutions GmbH (based in Germany), or WINDnovation, for custom-made rotor blade sets.


Through Its wholly owned subsidiaries, Inox Wind Infrastructure Services Limited (“IWISL”) and Marut-Shakti India Limited (“MSEIL”) IWL provides turnkey solutions for wind farm projects. These services include wind resource assessment, site acquisition, project development, erection and commissioning, and also long term operations and maintenance of wind power projects. It has acquired or expects to acquire access to certain Project Sites in Rajasthan, Gujarat, Andhra Pradesh and Madhya Pradesh and it expect to have access to Wind Sites Under Acquisition in Rajasthan, Gujarat, Andhra Pradesh, and Madhya Pradesh, which it estimate are suitable for the installation of an aggregate of 4,052 MW of capacity. IWL intends to develop these Project Sites and Wind Sites under Acquisition for customers as part of its turnkey model for wind farm development.


Objects of Issue:The objects of the Issue are The Issue comprises of the Fresh Issue by the Company and an Offer for Sale by the Selling Shareholder. The Company will not receive any proceeds from the Offer for Sale by the Selling Shareholder and the proceeds received from the Offer for Sale will not form part of the Net Proceeds. IWL proposes to utilise the funds which are being raised through the Fresh Issue, after deducting the Issue related expenses to the extent payable by it towards funding the following objects:-


1) Expansion and upgradation of existing manufacturing facilities


2) Long term working capital requirements


3) Investment in its Subsidiary, IWISL, for the purpose of development of power evacuation Infrastructure and other infrastructure development; and


4) General Corporate Purposes In addition, the Company expects to receive the benefits of listing of the Equity Shares on the Stock Exchanges


Competitive Strengths:


Ability to provide turnkey solutions for wind farm projects in India:Based on IWL’s experience of working with customers in India, many customers prefer not to engage in Wind Site acquisition and other processes associated with the development of wind farm projects. Together with its wholly-owned subsidiaries, IWISL and MSEIL, provides turnkey solutions for wind farm projects. These services include wind resource assessment, site acquisition, infrastructure development, erection and commissioning and long term operations and maintenance of wind power projects.


High quality WTGs based on sophisticated technology and design:IWL manufactures the major components of its WTGs, including nacelles, hubs, rotor blade sets and towers, at its in-house facilities. It has a perpetual license from AMSC, a leading wind energy technology company based in Austria, to manufacture 2 MW WTGs in India based on AMSC’s proprietary technology. It also has a non-exclusive license from WINDnovation for custom-made rotor blade sets. IWL’s Type Class III-B 2 MW WTGs have been designed and developed after due assessment of wind site qualities and conditions across low wind resource locations, such as those in India. Its WTGs are designed and developed with a view to achieving efficient power curves, improved up-times and reducing operations and maintenance costs.


Strong order book and ready pipeline of Project Sites:As of December 31, 2014, IWL’s order book included orders for WTGs with aggregate capacity of 1,258 MW, comprising orders for supply and erection of WTGs with aggregate capacity of 694 MW, including 50 MW ordered by IRL, a Group Company, in addition to orders for only the supply of WTGs with aggregate capacity of 564 MW. Out of the above order book, WTGs of aggregate capacity of 122MW have already been erected and commissioned as of December 31, 2014, and hence, a significant part of revenues in respect these WTGs has been recognized and payment thereof realized by December 31, 2014. In September 2013 IWL acquired Marut-Shakti Energy India Limited, or MSEIL, a company that is engaged in the development of wind power projects and has been allotted Project Sites with aggregate capacity of 85 MW in Madhya Pradesh, which are included in its inventory of Project Sites, and has also applied for the registration of Wind Sites Under Acquisition with aggregate capacity of 80 MW in Madhya Pradesh.


Efficient cost structure: IWL manufacture the key components of its WTGs in-house this helps ensure cost competitiveness, cost-effective logistics and attractive margins. Its license to use AMSC technology reduces its research and development expenses and it operates with a strong focus on controlling operating and financing costs. It has split up its existing manufacturing activities with a view to ensure costefficiency. In addition, based on operating and financial performance, IWL’s cost structure is among the most competitive in the wind turbine manufacturing industry.


Strong management team: IWL’s senior management has extensive experience in the quality, engineering, supply chain management, manufacturing, marketing, project development and maintenance of WTGs. Each of its senior managers in charge of these functions has an average of more than ten years of experience in their respective fields and considerable experience in the wind energy industry.


Recognized and trusted corporate group: IWL is a member of the Inox Group, which commenced operations in 1923 and currently operates in the industrial gases, engineering plastics, refrigerants, chemicals, cryogenic engineering, renewable energy and entertainment sectors. The Inox Group, which includes two publicly-listed companies, namely Gujarat Fluorochemicals Limited, or GFL, and Inox Leisure Limited, is a market leader in various industries in India. The Inox Group’s long history, business relationships and financial stability instill confidence in its customers who prefer dependable and established suppliers for long-term projects such as wind farms.

 

Key Concerns:


Projects included in order book may not ultimately be confirmed:
As of December 31, 2014, IWL’s order book included orders for WTGs with aggregate capacity of 1,258 MW, comprising orders for supply and erection of WTGs with aggregate capacity of 694 MW, including 50 MW ordered by IRL, a Group Company, in addition to orders for only the supply of WTGs with aggregate capacity of 564 MW. Its order book includes executed binding contracts for WTGs with aggregate capacity of 826 MW and signed term sheets or letters of intent, which are subject to the execution of binding contracts, for WTGs with aggregate capacity of 432 MW. As such, it cannot be assured that the orders will be confirmed, that binding contracts will be executed, and that binding contracts or other orders will not be cancelled or reduced or result in revenues that itwill receive payment as per the indicative terms of any such orders.


In addition, it may also encounter certain problems while executing a project as ordered, or executing it on a timely basis. If it is unable to commission the WTGs on schedule, it has to pay liquidated damages to its customers and it may also suffer damage to its reputation, which could result in further terminations of orders. Any delay, cancellation or payment default could adversely affect its cash flow position, revenues or profits, and adversely affect the trading price of the Equity Shares.


Acquisition of Project Sites and/ or Wind Sites Under Acquisition may be subject to legal uncertainties and defects:
Through its whollyowned subsidiaries, IWISL and MSEIL, IWL provide turnkey services for wind farm projects. As part of its turnkey solutions model for wind farm projects, it acquires and develops Wind Sites and facilitates of the transfer of rights to such Wind Sites in favor of its customers pursuant to its project agreements with its customers. Some or all of the land comprising its Wind Sites may not be acquired by it for a variety of reasons, including that allotments of government land may be cancelled and that private land may not be available at competitive prices or at all. Its inability to acquire such Wind Sites may hinder its ability to successfully execute wind power projects for its customers in time or at all, which may in turn result in a material adverse effect to its business, prospects and results of operations.


Demand for products and services depends on the activity and new capital expenditure levels in the wind power sector
: All of its historical income has been, and its expected future income will for the foreseeable future be, derived from products and services sold in connection with wind power projects. Demand for its products and services are particularly sensitive to the commercial viability of wind power relative to the commercial viability of other sources of power. With respect to governmental policies, certain fiscal incentives including the ability to use accelerated depreciation for tax purposes, have spurred demand for WTGs by individuals and certain companies. While the stated policy objective of the Government of India, which is reflected in recently announced regulations, is to increase generation of power from renewable sources, a reduction of capital investment in the wind power industry due to changes to any of the above factors or for any other reason could have a material adverse effect on its results of operations and financial condition.


IWL does not have an agreement to share revenues derived from wind farms that it develops for Group Companies or its Promoter: IRL and Inox Renewables (Jaisalmer) Limited, which are Group Companies, and GFL, its Promoter, together accounted for 15%, 34%, 100%, 100% and 100% of its revenue from operations in the years ended March 31, 2014, 2013, 2012, 2011 and 2010, respectively. While IWL Group Companies and Promoter did not account for any of its revenue in the nine months ended December 31, 2014, as of December 31,  2014, 50 MW, or 4% of its order book, comprised orders from IRL. Its business may be adversely affected if IRL experiences reduced demand for WTGs or purchases WTGs from other suppliers. While its Framework Agreement with IRL and GFL provides that IRL shall not engage in acquiring additional Wind Sites except for the benefit of IWL and IWISL and for its own purposes (i.e. other than third parties), there can be no assurance that IRL will not procure Wind Sites and compete with it, particularly with respect to the provision of services to Group Companies



Intends to apply approximately 18.79% of the proceeds of the Fresh Issue to make an unsecured loan to its subsidiary, IWISL: IWL intends to apply a portion of the proceeds of this Issue to make an unsecured loan to its subsidiary, IWISL, for the purpose of developing power evacuation infrastructure and other infrastructure for Project Sites that IWISL has acquired in Rajasthan, Gujarat, Andhra Pradesh and Madhya Pradesh and Wind Sites Under Acquisition that IWISL expects to acquire in Rajasthan, Gujarat, Madhya Pradesh and Andhra Pradesh. IWL shall grant an unsecured loan to its Subsidiary of an amount of Rs 2,100.00 million, of which Rs1,315.37 million shall be financed out of the proceeds of the Fresh Issue, which is approximately 18.79% of the proceeds of the Fresh Issue, and the balance out of the internal accruals of the Company. There can be no assurance that IWISL will repay this loan to IWL.



Operations are dependent on the timely supply of quality raw materials and components at commercially acceptable prices:
IWL’s products have significant raw materials requirements, including steel, epoxy and glass fabrics, and it outsources a variety of components for the manufacture of its wind turbines, including gearboxes, generators and electronic controls systems. IWL is dependent on external suppliers. The prices and supply of such raw materials and components depend on factors beyond its control, including general economic conditions, competition, production levels, transportation costs and import duties. It may not be able to pass on unanticipated increases in the cost of equipment, materials or components to its customers, which may adversely affect results of operations. Furthermore, it does not have direct control over the quality of the materials and components that are sourced from its suppliers



AMSC, which is technology licensor and the subsidiary company of exclusive supplier of ECS, has experienced financial difficulties: IWL has produced, and expect to produce for the foreseeable future, 100% of its WTGs using technology that it has licensed from AMSC. AMSC has experienced certain well-publicized adverse developments, including financial difficulties, the potential loss of a key customer andchanges to its senior management. Based on recent developments with respect to AMSC’s business, there can be no assurance that AMSC will continue to update and upgrade the technology that it license from AMSC for its WTGs. Furthermore, if AMSC is unable or unwilling to supply ECS to it, there can be no assurance that it will be able source ECS of comparable quality, and at comparable or lower cost, from another supplier in a timely manner or at all, or that it would not suffer liabilities for delays to customers or from other risks relating to its new supplier of ECS


Revenues depend on the prices at which IWL is able to sell products and services:IWL sell its products and services in a competitive market place and, as a result, the prices it is able to charge are affected by both the demand for the products it sells and services it offers and the supply of competing products and services. If IWL is forced to reduce the prices that it charge from IPPs or any other customers for its products and services,its business, financial condition and results of operations would be adversely affected.


Delays in announcing or changes in tariffs payable by power off takers may cause customers to reduce or delay their investments in WTGs.
The power generated by IWL’s customers from their wind power projects is generally sold to state-owned utilities. States have traditionally specified fixed feed-in tariffs for wind power, which vary from period to period. Revisions to fixed feed-in tariffs could increase or decrease the tariff. Any material reduction in the feed-in tariffs could materially adversely affect the level of investment in wind power infrastructure, including WTGs in a particular state or in India as a whole. In particular, if the finalization of a tariff is delayed beyond the date that it is expected to be set, its customers may postpone their investment decisions. Any of the foregoing could adversely affect itsbusiness, financial condition and results of operations.



Delays in and/ or non-uniform implementation of various incentive schemes by the regulatory authorities may cause IWL’s customers to reduce or delay their investments in WTGs
. Any delays in, non-uniform implementation of and/or withdrawal of various incentives to wind power producers including in the implementation of the RPO scheme, GBI Scheme, or accelerated depreciation has in the past resulted, and may in the future result, in IWL’s customers reducing or delaying their investment decisions in its WTGs which could adversely affect IWL’s business, financial condition and results of operations.



Dependent on the continuing operation of its manufacturing plants: Manufacturing plants of IWL are located in India.
These plants are subject to the normal risks of industrial production, including equipment breakdowns, sub-standard performance of equipment, labourstoppages, natural disasters, directives from government agencies, power interruptions and transportation problems. While all of its plants have some back-up power generation capacity, it is only sufficient to maintain limited operations. As a result, any extended power supply interruption will result in reduced production at the affected plant. Any interruption to production at any of these plants could reduce its  production, sales revenue and profit. This in turn could have an adverse effect on its business, results of operations, financial condition and
prospects.



Limited operating history:IWL was incorporated in April 2009, and commenced operations in March 2010 and, prior to the year ended March 31, 2013, all of its revenues were derived from sales to related parties. Given its limited operating history in the wind power business, it may not succeed in addressing certain risks pertaining to companies in an early stage of growth, including its ability to acquire and retain customers or maintain adequate control of its costs and expenses



Operate in a very competitive industry: IWL’s ability to compete depends on various factors including performance of WTGs, costcompetitiveness price, site selection (including wind resource and energy production assessments), reliability, product quality, technology, price, and the scope and quality of services, including operation and maintenance services, and training offered to customers. IWL faces competition from companies that may have greater financial resources and more favorable cost structures or strategic goals than it does. If IWL is unable to compete successfully for new customers and projects, its business financial condition and results of operations would be adversely affected.



Ability to pass higher costs on to customers is limited by market prices and other factors: IWL’s ability to pass on any increased costs to its customers is limited by market prices of WTGs and services and the pricing offered by its competitors. If the cost of manufacturing a product, or providing a service, exceeds its estimated costs it is possible that its revenues from the relevant contract may not cover its costs, which would adversely affect financial condition and results of operations.



Delays or defaults in customer payments could adversely affect profits and liquidity:IWL regularly commit resources to orders prior to receiving advances or other payments from customers in amounts sufficient to cover expenditures on orders as they are incurred. IWL also undertake significant expenditure in connection with the manufacture of WTGs and the provision of shared services and infrastructure related to the Wind Sites. There can be no assurance that IWL will not experience significant delays or defaults in customer payments. Any delays associated with its collection of receivables from customers could result in lower than expected cash flows from operating activities.

 

It cannot be assured that its new products will be commercially successful:Growth depends on designing, developing and marketing new and more cost-efficient WTGs. Its arrangement with AMSC is limited to 2 MW WTGs and it would be required to enter into a separate license with AMSC or another WTG technology provider, or develop the technology in-house, if IWL were to seek to offer other turbines. There can be no guarantee that it will succeed in introducing new products into the market in a timely manner, that the newly introduced products will be accepted in the market, or that such acceptance will continue for any period of time. Any of these factors could have a material adverse effect on its business, financial condition and results of operations.



Rely on third party contractors for a substantial portion of activities:
IWL engage independent third party contractors to provide a substantial portion of its activities, including (a) fabrication and painting of towers at its Rohika Unit and (b) infrastructure development at wind farm sites, which includes building group and unit sub-stations, transmission lines, roads, foundations of turbines, electrical work at site, erection including crane services etc. There can be no assurance that the work performed by such contractors will be of satisfactory quality, completed in a timely manner, or at all. If the work is not completed and/or is not of acceptable quality, it may incur substantial additional costs to remedy any defects and its reputation could be significantly harmed.



Business is dependent on economic growth in India:
Performance of IWL is dependent on the health of the overall Indian economy In the past, economic slowdowns have harmed industries including the power generation and power generation equipment manufacturing sector. Any future slowdown in the Indian economy could harm its business, financial condition and results of operations.


IWL could become liable to customers, suffer adverse publicity and incur substantial costs, including pursuant to any obligations to pay liquidated damages, as a result of defects or failure in its WTGs.


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