Inox Green Energy Services Limited IPO

About the Company:

Inox Green Energy Services Ltd (IGESL) was incorporated on May 11, 2012. IGESL, a subsidiary of Inox Wind Limited (IWL), a listed 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.

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.

Pursuant to an exclusivity agreement between IWL and our Company, we provide 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.

Issue Details:

Key Strengths:

Strong and diverse existing portfolio base:

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 the 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.

Established track record:

IGESL has an established track record in the wind energy O&M industry of more than nine years due to the synergistic relationship it shares with its parent company, IWL, which commenced operations in the wind energy space in the financial year ended March 31, 2010. The operating portfolio of O&M contracts (both comprehensive O&M contracts and common infrastructure O&M contracts) has grown at a compound annual growth rate of approximately 40.16% in the past nine years since the company’s commencement of operations.

Favourable national policy support and visibility for future growth:

According to the International Energy Agency (IEA), India is the third largest energy consuming country in the world and has become one of the largest sources of energy demand growth globally. In its recent India Energy Outlook 2021 report published in February 2021, the IEA predicts that by 2040, India could add 900 GW of wind and solar capacity. IWL’s wind energy extraction technology and access to wind sites coupled with strong industry growth prospects enables the company, through its exclusive arrangement with IWL, to provide O&M services for the WTGs they manufacture and to forecast a steady growth in its O&M business over the coming years.

Reliable cash flow supported by long-term O&M contracts with high credit quality counterparties:

The company enters into long-term O&M contracts with its customers ranging from 5 to 20 years with a renewal option. These contracts feature a built-in fixed price escalation formula of approximately 5% p.a. and provide the company full revenue visibility. The customers of IGESL include Gujarat Fluorochemicals Limited, Continuum Power Trading (TN) Private Limited, Gujarat Industries Power Company Limited, Torrent Power Limited, Shree Cement Ltd., Integrum Energy, Sri KPR Infra & Projects Limited to name a few.

Established supply chain in place:

IGESL has an established relationship with the suppliers for the parts, components and tools in the provision of O&M services. As part of its synergistic relationship with IWL, the company is able to obtain proprietary components and spare parts for the IWL manufactured WTGs directly from IWL and for the other tools and parts, the company has an established network of external suppliers. 

Key Risks:

Dependency on IWL:

The company is entirely dependent on IWL for its business and if IWL chooses another service provider for operation and maintenance services of their wind turbine generators, IGESL’s business, financial condition and prospects may be adversely affected. Furthermore, the deterioration of the financial condition or business prospects of Inox Wind Limited could reduce the requirement of O&M services and result in a significant decrease in the company’s revenues.

Highly Competitive Industry:

The wind energy industry is intensely competitive. Important competitive factors in the industry affecting the company include performance of WTGs, reliability, product quality, technology, price, scope and quality of services, and training offered to customers. According to CRISIL, since equipment providers offering bundled O&M services charge a service cost which increases the overall operating cost of the generation plant resulting in higher levelized cost of electricity, renewable energy developers may shift to third party O&M service providers post warranty to save costs or reduce the dependency on equipment providers. 

Decrease in Comprehensive O&M contracts in future:

IGESL provides O&M services primarily through two types of contracts namely, comprehensive O&M contracts and common infrastructure O&M contracts.

The former entails the provision of O&M services to both the WTGs on a particular wind farm as well as the common infrastructure facilities which support the wind farm such as electrical substations and transmission lines. The latter only relates to O&M services in respect of the common infrastructure facilities.

In the past few years, there have been certain large independent power producers (“IPPs”) who have opted to bring the O&M of their WTGs in-house and have thus either not renewed or terminated their comprehensive O&M contracts with the company. If more of the customers internalize the O&M of their WTGs, the business and results of operations may be materially and adversely impacted.

 Key Financials:

Conclusion:

The government’s initiative to achieve 50% of India’s power generated by renewable energy by 2030 bodes well for IGESL. The wind sector currently contributes 25% of India’s renewable energy space and is expected to grow at a healthy rate over the next decade aiding IGESL.

However, as reported by the company in its RHP, the non-renewal of certain large independent power producers (IPPs) for comprehensive O&M contracts and deciding to do such O&M in-house have dented its revenue. On the financials front, the revenue has been more or less stable. The company has turned loss making in the last two fiscals, while EBITDA and PAT margins have also drastically fallen. Given a very heavy debt-laden company, we advise the investors to AVOID the IPO.