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Inox Wind (INXW) Summary

Core Content

Inox Wind (INXW) has reported its first quarterly profit in 1QFY19 after 4 consecutive quarters of losses. This marks the resumption of profitability and is attributed to the execution of its firm order book and improved EBITDA margins. The company's order book of 950MW provides earnings visibility for the next 15-18 months, and it has already secured open access for transmission, which is a positive sign for timely execution of projects.

Main Points

• Profitability Recovery: INXW reported an adjusted profit of INR80m in 1QFY19, surpassing the estimated loss of INR59m / INR250m.
• Order Book and Execution: The company has a firm order book of 950MW and plans to execute 600MW in FY19 and 700MW in FY20. This is a significant increase from the 172MW executed in FY18.
• Transmission Infrastructure: Unlike its peer Suzlon, INXW has no transmission constraints and has already secured open access for its full order book.
• Valuation and Target: The current EV/EBITDA multiple is at 5x for FY19, which is considered undervalued compared to the sector average of 6x. The target price is INR165, implying an 8x EV/EBITDA multiple for FY19E.
• ROE Expectations: The company expects its ROE to recover to 14% in FY19 and 16.5% in FY20, reflecting improved financial performance.
• Earnings Growth: Core EPS is expected to grow from INR13 in FY19E to INR18 in FY20E and INR22 in FY21E.
• Sector Outlook: The wind power sector in India is improving with the new policy, leading to a revival in order flow and commissioning. Wind power is now cheaper than conventional sources, enhancing its attractiveness.

Key Financial Information

Key Takeaways from Investor Call

• Order Book: INXW has a strong order book of 950MW and is selective in upcoming auctions.
• Execution Plan: It aims to execute 600MW in FY19 and 700MW in FY20.
• Auctions: The FY19 auctions are expected to total 7,000MW, including 4,000MW under SECI, 2,000MW for NTPC, and 1,000MW for Gujarat.
• EBITDA Margins: The company expects double-digit EBITDA margins in the future.
• Receivables: Receivables have improved, with a reduction to 90 days, indicating better cash flow management.

Wind Power Sector Outlook

• Policy Change: The shift from FIT to auctioning in Feb-17 caused a sharp decline in wind power commissioning, from 5.4GW in FY17 to 1.8GW in FY18.
• Cost Efficiency: Wind power is now cheaper than conventional sources, increasing its appeal.
• Tariff Stability: Wind power tariffs are stable for 25 years, offering long-term value.

Valuation Discount Justification

• Earnings Recovery: The stock is valued at 5x FY19 EV/EBITDA, which is considered undervalued given the expected earnings recovery.
• ROE Recovery: The company's ROE is expected to recover to 14% in FY19 and 16.5% in FY20.
• Stock Performance: The stock has underperformed over the last 12 months, but the outlook is positive with a price target of INR165.

Price Drivers and Swing Factors

• Upside: Strong order wins, improved EBITDA margins, and faster receivables recovery.
• Downside: Increased competition in auctions, potential delays in central government auctions, and transmission infrastructure build-up.

Financial Metrics and Ratios

Conclusion

Inox Wind is on a positive trajectory with improved profitability and a strong order book. Despite past challenges, the company is well-positioned for future growth with favorable policy changes and transmission infrastructure. The current valuation is considered undervalued, and the stock is recommended to maintain a "BUY" rating with a 12-month price target of INR165.