Groupexperience signals plenty of air, but no energy!

Frequent restructuring of group companies to pop-up promoter’s interest, listing for raising easy funds and delisting once purpose is served, posting unusual losses before making cash offer to minority shareholders reflect badly on promoters.

OFFER AT A GLANCE
Public Offer	Offer for Sale of 1 crore shares from the promoter and fresh issue of 2.15 to 2.22 crore shares from the company
Offer % on Post-IPO Capital	14.24% to 14.5% on Rs 222 cr Equity Capital
Offer Price	Between Rs 315 and Rs 325
Offer Amount	Between Rs 1015 cr and Rs 1025 cr
Application Quantity	45 & Multiples of 45
Bid/Offer Opens	March 18, 2015
Bid/Offer Closes	March 20, 2015
Listing	BSE and NSE
Issue Grading	Nil
Global Co-ordinators & Book Running Lead Managers	Axis Capital, BofA Merrill Lynch & Edelweiss Financial
Book Running Lead Manager	Yes Bank
Issue Registrar	Link Intime

The IPO

The present offer, valued between Rs 1015 cr and Rs 1025 cr, comprises a fresh issue of 2.15 to 2.22 crore equity shares from the company and an `offer for sale’ of 1 crore shares from the promoter-company, Gujarat Fluorochemicals Ltd – a well known listed entity who currently holds 15 crore shares (75%). The IPO constitutes 14.2 to 14.5% of the post-issue capital (between Rs 221.54 cr and Rs 222.22 cr). The offer is being made through the book-building route with a price band of Rs 315-325. There is a discount of Rs.15 on the issue price to retail individual bidders and eligible employees. Investors have to bid for a minimum 45 shares (Rs 14,175) and multiples thereof.

 

IPO Object

Besides deriving the benefits of listing of the shares on the stock exchanges, the company proposes to utilize the fresh issue proceeds net of issue expenses on the following: Expansion and upgradation of the existing manufacturing facilities (Rs 147 cr); Long term working capital requirements (Rs 290 cr); Investment in Subsidiary, IWISL, for the purpose of development of power evacuation infrastructure and other infrastructure development (Rs 132 cr) and General Corporate Purposes (balance amount). Nevertheless, the Rs 560 cr-plus proposed funding has not been appraised by any external agency.

 

Grading

The company has not sought grading of its IPO from any rating agency.

 

Lineage

The 2009-registered Inox Wind Ltd (IWL) belongs to the Inox (Industrial Oxygen) group controlled by the Jains. The 9-decade-old group is currently steered by the brothers-duo Pavan Kumar Jain (62), chemical engineer from IIT New Delhi, and Vivek Kumar Jain (59), economics graduate from St. Stephens New Delhi and post-graduate from IIM Ahmedabad. Inox group is not new to the investing public. In fact, IWL will be the sixth public venture floated by the group in last 27 years.  Whereas a little known public company of the group, Inox Leasing & Finance Ltd, which has been de-listed and converted into the ultimate holding company of the Jains, the group’s cash cow and more popular face in the listed domain, Gujarat Fluorochemicals (GFL), has become the `venture capitalist’ of all the new ventures of the group. GFL holds 75% of the pre-issue capital of IWL.

As regards GFL’s track, incorporated in 1987 the company made its initial public offer in the year 1988. GFL was established primarily to manufacture refrigerants but, over the years, as regulatory pressures restricted the growth prospects of refrigerants, the company diversified into other businesses like Polytetrafluoroethylene resin (PFTE, an engineering plastic) and chemicals. The company has been a consistent dividend-payer for the past one and a half decades, the last dividend being 350% – unchanged for the last six years. GFL has not rewarded any bonus share in its 26 years of listing though it has made two splits, 5:1 in 2005 and 2:1 in 2008. Currently, its Re 1 paid-up share is quoting at more than Rs 750 resulting in a market capitalization of Rs 8300 cr-plus against its equity base of less than Rs 11 cr! The steep valuation is attributed more to its consolidated financials than its core business.

GFL holds 75% in Inox Wind whose valuation is sought to be Rs 7000 cr-plus. It has 48% stake in another listed company of the group, Inox Leisure, which is currently valued about Rs 1700 cr by the market. Further, GFL has 100% interest each in Inox Renewables Ltd and Inox Infrastructure Ltd whose valuations may be unlocked sometime later.

 

Business profile

Incorporated in April 2009, Inox Wind is engaged in the manufacture key components of wind turbine generators (WTGs) namely nacelles, hubs, rotor blade sets and towers. IWL reportedly produces nacelles and hubs at Una, Himachal Pradesh. Rotor blade and tower manufacturing are housed at Rohika in the Ahmedabad district of Gujarat. As per the offer document, the company is now setting up a new integrated manufacturing facility at Barwani, Madhya Pradesh, to produce nacelles and hubs, rotor blade sets and towers. IWL is said to have secured a perpetual license from AMSC Austria GmbH to manufacture 2 MW WTGs in India based on AMSC’s proprietary technology. The company also has non-exclusive license from WINDnovation Engineering Solutions GmbH, Germany for custom-made rotor blade sets.

Through two wholly owned subsidiaries, Inox Wind Infrastructure Services Ltd and Marut-Shakti India Ltd, 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. The company has acquired or in the process of acquiring access to certain project sites in Rajasthan, Gujarat, Andhra Pradesh and Madhya Pradesh which according to the company are suitable for the installation of an aggregate of 4,052 MW of capacity. They intend to develop these project sites and wind sites under acquisition for customers as part of their turnkey model for wind farm development.

 

Financial Performance

IWL reportedly commenced operations in March 2010. For the nine months ended December 2014 and the years ended March 2014, 2013 and 2012, respectively, the company produced and sold 190, 165, 99 and 60 WTGs of 2 MW each which yielded a revenue of Rs 1795 cr, Rs 1576 cr, Rs 1064 cr and Rs 622 cr respectively on which it netted a profit of Rs 179 cr, Rs 131 cr, Rs 150 cr and Rs 100 cr respectively. Though IWL’s profitability is appealing, the company’s consolidated operations have resulted in negative cash flow in recent years.

At the end of December 2014, IWL reportedly had 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 Inox Renewables, a group company, in addition to orders for only the supply of WTGs with aggregate capacity of 564 MW.

The company’s 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. 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.

 

Prospects

There are about a dozen established players already operating in the WTG segment in the country making the field very competitive. The stiff competition and the sagging wind energy market in certain parts of the country have already taken heavy toll on the industry leader, Suzlon. While IWL (capacity 1100 MW) does not want to compare itself with Suzlon (capacity 3700 MW) it boasts of having many competitive strengths like high quality WTGs based on sophisticated technology and design, strong order book and ready pipeline of project sites, efficient cost structure, strong management team, recognized and trusted corporate group, etc., etc.

IWL’s management claims that while others are selling largely to small customers, they cater to IPPs (Independent Power Producers) who bring bulk business. However, according to industry insiders, IWL is not the only company in the country supplying to IPPs. If the industry sources are to be believed, there is already a `capacity glut’ for WTGs in the country. They also point out the capital cost difference between solar and wind energy is fast narrowing. Also, as Indian climate is more suited for solar energy, of late, Government’s policies are more favourable to solar projects. Knowledgeable sources also opine that due to the ‘product cycle’ the players in the wind energy attain their best performance in the initial 4 to 5 years. If the above points are any indication, long term prospects of wind energy players are not all that promising.    

HOW INOX WIND COMPARES WITH SUZLON
CONSOLIDATED RESULTS	INOX WIND		SUZLON
(Amount in Crore)	31-Dec-14	31-Mar-14	31-Dec-14	31-Mar-14
Operating Revenue	1779	1567	15028	20403
Operating Profit	298	185	517	-70
Operating Margin %	15.9	11.2	3.2	-0.7
Finance Cost	46	46	1510	2070
Depreciation/Amortization	15	12	623	777
Net Profit	179	131	-1616	-2916
Equity Cap	200	200	643	498
Net Worth	598	420	-1960	-544
Goodwill	2	2	8674	9148
Net Block	211	198	13279	13948
Borrowings	729	480	17323	15164
Market Cap	7000	7000	8681	8681
Share Price	315	315	27	27
Price/Earnings	26.0	53.2	–	–
Price/Book Value	11.7	16.7	–	–
Price/Revenue	2.2	4.4	0.4	0.4
Price/Net Block	33.1	35.4	0.7	0.6

 

Valuation & Perception

Whereas the promoter’s average cost of holding is just Rs 2, IWL is expecting the public investor to shell out 157 times more. With the price band of Rs 315-325, IWL is asking for a market cap of Rs 7000 cr upward. At this valuation, the company’s consolidated earnings for the last full year is discounted more than 50x, net worth is discounted more than 11x, revenue is priced more than 4x and net block of asset is discounted as high as 33x.  How does IWL’s valuation compare with the group companies? GFL, 75% parent company of IWL, despite having more sound fundamentals, is currently priced only 2.3x of its net block, 2.4x its revenue, 2.6x of net worth and 37x of last full year’s earnings. Though P/E is high at 72x, Inox Leisure’s Price/Revenue and Price/Net Block multiples are less than 3 and its Price/Book Value is only 4.4x. Compared to its group companies, IWL’s pricing thus looks very steep.   

HOW INOX WIND COMPARES WITH GROUP LISTED STOCKS
(Rs Cr)	Gujarat Fluo	Inox Leisure	Inox Wind
FACE VALUE (Rs)	1	10	10	10
PRICE/BAND (Rs)	757.80	180.55	325	315
MARKET-CAP	8,328	1,736	7,200	7,000
EQUITY CAPITAL	11	96	200	200
RESERVES	3,230	295	398	398
NET BLOCK	3,583	635	211	211
OPER. REVENUE	3,452	799	1,576	1,576
OPER. PROFIT	598	112	185	185
NET PROFIT	227	24	131	131
PRICE/EARNING (X)	36.8	72.0	54.8	53.2
PRICE/BOOK VALUE	2.6	4.4	12.0	11.7
PRICE/REVENUE	2.4	2.2	4.6	4.4
PRICE/NET BLOCK	2.3	2.7	34.1	33.1
OPM (%)	17.3	14.0	11.7	11.7
DIVIDEND (%)	350.0	0.0	0.0	0.0
YIELD (%)	0.5	0.0	0.0	0.0

 

In a boom market, investment bankers may suggest exciting prices to their clients to get business. But, will the price sustain for long?  Take the case of Inox Leisure. This company priced its IPO at Rs 120 in January 2006. Immediately after listing, the price started moving up and more than doubled (Rs 252) in April 2006. But, by July 2006 the price fell below the IPO price! The stock hit a rock bottom of just Rs 21 in 2009. After languishing way below the offer price till 2013, this non-dividend-paying stock has resurfaced above the IPO price in 2014 that is on the eve of the group’s next public issue! Currently Inox Leisure is trading around Rs 180 yielding an annual return less than 6% on the IPO price. Perhaps, Savings Bank account might have given better return!   

In the case of the group’s flagship, Industrial Oxygen which was subsequently renamed as Inox Air Products, the public offer was made at a price of Rs 140 in May 1994. This stock hit a bottom of Rs 59 in 1996! The promoters finally made an open offer in 1999 to mop up the public shares and eventually sold at a hefty premium to the US-based Prodair Corporation.

Niryat Sam Apparels promoted by SMS Udyog – a group company of Inox was offered at par in March 1996. This stock went down to as low Rs 1.05 in 2002! Eventually the promoters bought back the shares in February 2009 at par value. In other words, after 13 years of waiting, the investors got just the investment cost. Intriguingly, Niryat Sam does not get a mention in IWL’s offer document. The management representative now says that Niryat was promoted by Inox Jains’ cousin. If this is true, how Niryat was allowed to claim itself as a group company of Industrial Oxygen in 1996 when it went public?

Inox promoters’ indifferent attitude towards public investors can be fully seen in the case of Inox Leasing and Finance (ILFL). When GFL was floated, Industrial Oxygen Company Ltd and Gujarat Industrial Investment Corporation Ltd (GIIC) were presented as promoters. ILFL was formed in 1995 and the promoters transferred the real estate assets of Industrial Oxygen to ILFL in 1996. In lieu of the assets transfer, Industrial oxygen shareholders were offered ILFL shares in ratio of 1:1.

Meanwhile, pursuant to a scheme of amalgamation of SMS Udyog (wholly-owned subsidiary of Industrial Oxygen) with the parent company and a scheme of reconstruction between Industrial Oxygen and ILFL in September 1997, the equity shares of GFL held by Industrial Oxygen were transferred to ILFL and the latter became the promoter of GFL. Subsequently, pursuant to the terms of the Shareholders’ Agreement, ILFL acquired GIIC’s entire shareholding in April 2000. Thus ILFL became the single largest shareholder of GFL (52.54%).

Even while ILFL was having a significant stake in the group’s valuable assets, the company posted a loss of Rs 11.34 cr in 2002 which was more than its equity! This loss was attributed to the company’s “equity trading transactions and depreciation in shares held by ILFL. As a result, the share price hit a bottom of Rs 5 in 2002. While the stock was languishing below par, the promoters made ‘cash offer’ at par in mid-2002 and increased their stake to the brim. The public experience with the group companies thus comprehensively proves that the hype created around the Inox group benefits solely the promoters!