Hot growth, hot price
This small company is into high-growth business. But the asking price is also high

Promoted by K.V.Bala and Subuthi Finance, Indowind Energy generates wind power, undertakes turnkey operations for windmill projects and operates and maintains (O&M) wind electric generators (WEGs). The company currently owns 16.825-MW windmill capacities in Karnataka and Tamil Nadu, and operates and maintains 17.915-MW capacity. It currently supplies power to a state utility and a few companies in Karnataka. Tamil Nadu Electricity Board (TNEB) is its major client.

Currently, Indowind Energy sells power to TNEB at Rs 2.70 per unit. It sells power to corporate clients in Karnataka at Rs. 4.05 per unit (however, the company has to pay wheeling charges at 10%).

Strengths

• Is setting up a wind farm of 9-MW capacity in Karnataka at an investment of Rs 49.5 crore. Intends to sell this project for an appropriate price. The project division’s profit before tax (PBT) margin was 23.5% in the year ended March 2007 (FY 2007).

• As per the National Tariff Policy, state commissions have to fix a minimum percentage of energy from non-conventional sources. The Union government has also introduced a package of incentives, some of which include tax concessions such as 80% accelerated depreciation and tax holidays for power income under Section 80IA. Also, the gestation period for the wind power project is just six-nine months as compared with thermal power project’s 36 months. It has low variable cost, too. Thus, in near future, there is likely to be significant capacity additions. The wind power potential, based on data collected from 10 states and only 1% of land availability, has been estimated at around 45,195 MW. Thus, the overall scenario for companies with presence in wind power generation, project and O&M segments are favorable. Indowind Energy normally gets 10-15% of power generated from its O&M projects.

• From the issue proceeds, Rs 18.26 crore will be used for foreclosure of lease with ICICI Bank and Axis Bank. The company had entered into an operating lease with Axis Bank and ICICI Bank for windmills. The banks own the windmills and these have been given on operating lease to Indowind Energy. The company operates 10.75-MW capacity windmills under O&M contract for these two banks. The lease period is ending in 2012 and 2014, respectively, for the two banks. By foreclosing the lease transaction, Indowind Energy will be saving lease payments to these banks (saving of around Rs 4 crore). The impact of the power generated will be reflected in income generated from power.

• Rs 20 crore from the issue proceeds will be used to take over second-hand wind-energy-related assets of defaulting companies put up for sale by banks. This way, Indowind Energy plans to expand its capacity at a cheaper rate using its expertise in this field

• Claims to be the first company in India in the wind energy sector to get carbon credit certification from the United Nations Framework Convention for Climatic Change for its 12.3-MW projects. Indowind Energy expects income from carbon credit of Rs 0.7-0.75 crore from its balance capacity.

• Wind-power generation is seasonal in nature. Thus, there is likely to significantly variation in income from power generation, quarter on quarter. Year on year, the variation will depend on the quantum of wind received by the company’s wind farm.

• Group company Subuthi Finance has received a notice from the Reserve Bank of India (RBI) for irregularities/ violations of certain provisions of the RBI Act. It also had failed to meet certain listing requirement.

• Given a bank guarantee of Rs 5.3 crore to its group company Indonet Global. Other group company SGM Windfarms is in the same business.

Valuation

Between FY 2003-FY 2007, revenue shot up from Rs 5.68 crore to Rs 24.12 crore. However, during the same period, operating profit margin (OPM) declined from 69.7% to 32.9%. This is likely to have happened on account of the fact that the share of the revenue from wind-power generation has declined from 100% to 32%. Wind-power generation has a low operating variable cost and a high fixed cost (depreciation /interest). Thus, net profit during the period has grown at almost half the pace as compared to revenue: from Rs 2.4 crore to Rs 6.58 crore.

FY 2007 EPS on post-issue equity works out to Rs 1.3. At the offer price band of Rs 55-Rs 65, the P/E range is 40.9-48.4, respectively. TTM P/E of Power Generation and General Electric Equipment Medium / Small is 13.6,14.5, respectively. There is no comparable listed entity. Suzlon Energy, one of the global leaders and the most integrated player in this filed, is trading at 43.9 times its consolidated TTM earning.