INOX Green Energy Services
INOX Green Energy Services is coming out with a 100% book building; initial public offering (IPO) of 12,13,11,474 shares in a price band Rs 61-65 per equity share.
Not more than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
The issue will open for subscription on November 11, 2022 and will close on November 15, 2022.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 6.10 times of its face value on the lower side and 6.50 times on the higher side.
Book running lead managers to the issue are Edelweiss Financial Services, DAM Capital Advisors, Equirus Capital, IDBI Capital Markets & Securities and Systematix Corporate Services.
Compliance Officer for the issue is Pooja Paul.
Profile of the company
The company is one of the major wind power operation and maintenance (O&M) service providers within India. The company is engaged in the business of providing long-term O&M services for wind farm projects, specifically the provision of O&M services for wind turbine generators (WTGs) and the common infrastructure facilities on the wind farm which support the evacuation of power from such WTGs. It has stable annual income owing to the long-term O&M contracts that it enters into with its customers. It is a subsidiary of Inox Wind Limited (IWL), a company which is listed on the National Stock Exchange of India Limited and BSE Limited, and part of the Inox GFL group of companies (Inox GFL Group).
The company enjoys synergistic benefits as a subsidiary of IWL, which is principally engaged in the business of manufacturing WTGs and providing turnkey solutions by supplying WTGs and offering a variety of services including wind resource assessment, site acquisition, infrastructure development, EPC of WTGs, and, through the company, providing long-term O&M services for wind power projects. Pursuant to an exclusivity agreement between IWL and the company, it provides exclusive O&M services for all WTGs sold by IWL through the entry of long-term O&M contracts between the WTG purchaser and ourselves for terms which typically range between five to 20 years. Due to this exclusivity agreement, IWL’s order book is an important indicator of future revenue and growth for the company.
Proceed is being used for:
Repayment and/ or pre-payment, in full or part, of certain borrowings availed by the company including redemption of Secured NCDs in full.
General corporate purposes.
Industry Overview
The O&M service offered by the Original Equipment Manufacturers (OEMs) dominated the market with up to 70.0% of market share. Independent Service Providers (ISPs) and renewable energy developers contributed to 20.0-25.0% and 5.0-10.0% respectively in fiscal 2021. OEMs hold the largest share of wind O&M services in India. Most of the operators or turbine owners prefer OEMs pre and post warranty. This is because OEMs have the advantage of better spare part availability which is crucial to maintain high generator availability. In addition to this some of the OEMs offer upgrades along with equipment acquisition or O&M service contracts. These bundled offerings are what separates the OEMs from ISPs. The bundles offerings are beneficial in case of equipment failure resulting in timely rectification of the faults and easy availability of spares. On the other hand, the service costs from OEMs sometimes increases the overall operating cost of the generation plant and thereby resulting in higher LCOE. Therefore, RE developers / equipment owners might shift to third party service post warranty to save O&M costs or reduce the dependency on OEMs. However, this shift can result in increasing the cost of O&M due to lack of long-term supply tie ups.
Third-party service providers offer independent service contracts to wind asset owners and can result in a reduction in the fixed O&M services cost. India has seen an increase in the independent service providers with multiple instances of OEMs filing for bankruptcy. This has resulted in revisions in the O&M strategies of wind asset owners and shifting the focus towards the ISPs or in-house maintenance by the owners themselves. Some of the ISPs associate themselves with multiple OEMs to leverage the confidence that the operator/asset owner has built with the OEMs. Traditionally, OEMs have been a key stakeholder in the O&M strategies of asset owners, however, for asset owners who use equipment from multiple OEMs, ISPs are able to offer a single point of contact for all their O&M needs thereby eliminating the need to contact various OEMs for each equipment. This will eventually lead to reducing turnaround time and downtime.
Pros and strengths
Strong and diverse existing portfolio base: As of June 30, 2022, the company’s portfolio of O&M contracts (consisting of both comprehensive O&M contracts and common infrastructure O&M contracts) covered an aggregate of 2,792 MW of wind projects spread across eight wind-resource rich states in India with an average remaining project life of more than 20 years. The counterparties to its O&M contracts feature a mix of independent power producers (IPP) (approximately 72%), public sector undertakings (PSU) (approximately 14%) and corporates (approximately 14%), as on June 30, 2022. Further, certain individual wind project sites which it has developed in collaboration with IWL have significant capacity to support the installation of additional WTGs which will further grow its portfolio base.
Reliable cash flow supported by long-term O&M contracts: The company enters into long-term O&M contracts with its customers which range from five to 20 years (in which the first two to three years of O&M services are generally provided for free for IWL supplied WTGs) with a renewal option provided in most cases. Such contracts provide it with full revenue visibility as the price for its O&M services is pre-determined for each year of the contract. Furthermore, such contracts feature a built-in fixed price escalation formula of approximately 5% per annum (compounded on the previous year’s charges for a contractually specified number of years) which provides both its customers and the company with price certainty and guarantees it a level of steady growth and inflation protection.
Supported and promoted by parent company -- IWL: The company’s parent company, IWL, together with its group companies, is one of India’s notable WTGs manufacturers which provides wind energy turnkey solutions across India. Its service offerings include wind resource assessment, wind site acquisition, infrastructure development, EPC and it has an installed capacity of approximately 2,792 MW as of June 30, 2022. IWL has manufacturing facilities in Gujarat, Himachal Pradesh and Madhya Pradesh and clientele which includes various IPPs, PSUs and corporates. The company benefits from a synergistic relationship with its parent pursuant to an exclusivity agreement which enables it to provide O&M services to all customers who purchase WTGs from its parent company during the relevant warranty period as part of a “one-stop shop” / turnkey solution and who, after such period, often retain it to continue providing O&M services due to its expertise in operating and maintaining IWL’s proprietary WTGs and the common infrastructure facilities. This enables the company to build its portfolio alongside its parent.
Established supply chain in place: The company has an established relationship with its suppliers for the parts, components and tools it requires in its provision of O&M services. As part of its synergistic relationship with IWL, the company will able to obtain proprietary components and spare parts for the IWL manufactured WTGs directly from IWL and as for the other tools and parts it employs, it has an established network of external suppliers.
Risks and concerns
Completely dependent on Inox Wind: Pursuant to an exclusivity agreement dated December 17, 2021, between the company and Inox Wind Limited, its Promoter and largest shareholder, the company provides exclusive O&M services for all WTGs sold by Inox Wind Limited through the entry of long-term O&M contracts between the WTG customer and ourselves which range between five to 20 years in term. Thus, the company derives its revenues from O&M services offered to WTGs supplied by Inox Wind Limited. Any adverse developments in its relationship with Inox Wind Limited may have a material adverse impact on the company’s business, financial condition and prospects.
Dependent on external suppliers for spares and components: The success of the company’s existing and planned operations will depend on, among other things, its ability to source sufficient amounts of spares and components at competitive prices for carrying out its O&M services. The company sources materials such as steel, glass fibre and epoxy resin for wind turbines, as well as several key WTG components (such as gearboxes, yaw bearing, pitch bearings, gear rim, slewing rings, brake calipers and castings, as well as nacelle cover, tower and generator) from third party suppliers in India and overseas. The company’s O&M and common infrastructure maintenance costs from its top five suppliers for the three months ended June 30, 2022 and Fiscals 2022, 2021 and 2020 was Rs 135.62 million, Rs 189.79 million, Rs 104.76 million and Rs 110.53 million, respectively, representing 35.04%, 29.35%, 18.37%, and 19.15% of its total O&M and common infrastructure facility maintenance expenses, respectively. The company relies on equipment and machinery that are built by third parties and may be faulty or susceptible to malfunction. Although, in certain cases, it is entitled to be compensated by manufacturers for certain equipment failures and defects, and while no such instance has occurred in the past, such arrangements may not fully compensate it for the damage and loss suffered as a result thereof.
Reported a restated loss in past fiscals: The company reported a restated loss after tax of Rs 115.84 million in the three months ended June 30, 2022 which was primarily on account of O&M and common infrastructure facility expenses and finance costs incurred during this period. Further, the company also reported a restated loss after tax of Rs 931.98 million, Rs 1,535.22 million and Rs 522.64 million in Fiscals 2022, 2021 and 2020. This was primarily due to the losses incurred by its EPC Business, which has been subsequently transferred to Resco, one of Inox Wind Limited’s subsidiary by way of a BTA on December 31, 2021. The company may incur losses after tax in the future. Further, its failure to generate profits may adversely affect the market price of its Equity Shares, restrict its ability to pay dividends and impair its ability to raise capital and expand its business.
Stiff competition: The wind energy industry is intensely competitive. Important competitive factors in the industry affecting it include performance of WTGs, reliability, product quality, technology, price, scope and quality of services, and training offered to customers. Although the company has expended considerable resources on the design, development and delivery of its services, some of its competitors have longer industry experience and greater financial, technical and other resources, as well as larger customer bases and greater brand recognition. Some competitors may also be able to react faster to technological developments, trends and changes in customer demand. The company’s competitors may be willing and able to spend more resources to develop O&M services and may be able to provide comparable services faster or at a price lower than the company.
Outlook
Inox Green Energy Services is one of the major wind power O&M service providers within India. The company is a subsidiary of Inox Wind. Inox Green provides exclusive O&M services for all WTGs sold by IWL through the entry of long-term O&M contracts between the WTG purchaser and ourselves for terms which typically range between five to 20 years. The company is engaged in the business of providing long-term O&M services for wind farm projects, specifically the provision of O&M services for wind turbine generators. On the concern side, the company is currently entirely dependent on its promoter company for its business and if they to choose another service provider for operation and maintenance services of their wind turbine generators, its business, financial condition and prospects may be adversely affected.
The issue has been offered in a price band of Rs 61-65 per equity share. The aggregate size of the offer is around Rs 740.00 crore to Rs 788.52 crore based on lower and upper price band respectively. On the performance front, the company’s revenue from operations decreased by 0.05% to Rs 1,721.66 million for the year ended March 31, 2022 from Rs 1,722.48 million for the year ended March 31, 2021, primarily due to a marginal reduction in per MW revenue on account of the shifting of certain comprehensive O&M contracts to common infrastructure. Moreover, the company has reported a loss of Rs 47.07 million for the year ended March 31, 2022 as compared to RS 323.42 million for the year ended March 31, 2021. Going forward, the company is planning to expand its portfolio to also provide O&M services for WTGs which are not manufactured by IWL. Further, the company intends to continue looking for opportunities to strategically acquire the O&M portfolios of other wind OEMs, especially smaller scale wind OEMs or third party and independent service providers which is currently unable to compete effectively, to further grow its portfolio base.
