Indowind Energy : Avoid

Investors can avoid the initial public offer of Indowind Energy, which generates wind power and develops, operates and maintains windmill projects for others. A stiff valuation, absence of a focussed business strategy and governance issues, negate the bright prospects that the wind power business otherwise holds.

At the offer price of Rs 55-65, the price-earnings multiple is at 30-36 times the company’s earnings for the year ended June 2007. Even after considering the company’s 9 MW expansion plan, the valuation is at about 35-40 times on the post-offer equity base. The asking price appears ambitious when compared to the valuations of power generation companies.

The premium enjoyed by Suzlon Energy arises out of its size, more integrated business (manufacturing equipment and developing wind farms) and global presence. We believe that Indowind Energy, with a relatively small turnover (of Rs 24 crore may be unable to deliver earnings commensurate with the valuation it is asking for.
Business and objects of issue

Indowind Wind Energy company has 16.8 MW of installed capacity, the power generated from which is sold to the Tamil Nadu Electricity Board and to some corporates in Karnataka.

The company has also developed 17.9 MW of wind farms for others which it also operates and maintains. Indowind Energy now plans to raise Rs 70-80 crore through this IPO. The proceeds are to be used primarily to set up a 9 MW wind plant in Karnataka, acquire second-hand wind energy generators (WEGs) and foreclose windmill operating leases with Axis Bank and ICICI Bank.
Lacking focus

Indowind Energy appears to lack a focussed business strategy. In the power generation business, it has not had a profitable deal either with the TNEB or with third-parties. While the sale rate with TNEB is lower than that offered by a few other State governments, the sale to corporate clients in Karnataka also appears to be less attractive as the wheeling charges for sale to third parties is higher in the State. Hence, the returns from the power generation segment appear lack-lustre compared to the projects segment.

Despite this experience, the company had again initially planned to set up the new 9 MW plant in Tamil Nadu but later decided to shift the same to Karnataka and sell power to the Bangalore Electricity Supply Company (BESCOM)

This not only resulted in delaying the project but also in the company withdrawing its public offer document on an earlier occasion. That the company is yet to enter into a power purchase agreement with BESCOM (as stated in the offer document) further suggests lack of a planned business approach.

The company has earmarked close to Rs 40 crore for acquiring second-hand WEGs that banks recover from defaulting clients. Windmills, in general, are subject to higher repairs and breakdown. The efficiency of the mills, especially the second-hand ones, remains doubtful, given that they would not have been used after the banks recovered them. This may result in reducing the plant load factor for the company, now at about 23 per cent.

As for foreclosing the operating leases with a couple of banks — neither the company nor the banks have initiated steps for such foreclosure. In this initial stage, it is unclear whether it would be a profitable proposition. The company’s projects division (developing and running wind farms), however, appears to have returned well. If the company is able to focus on this segment, earnings visibility may be higher. However, it may require more skilled manpower than the present 95 (of which 64 are contract labourers).

The company’s corporate promoter, Subuthi Finance (listed in the stock market), has a track record of non-compliance with certain listing requirements. It has also received notices from the RBI for certain irregularities.

Indowind itself has in the past derived a chunk of income from ‘other sources’. While this has gradually declined, the company has stated that it deploys surplus funds for providing loans and earns interest income. This as a poor and risky business practice. The above governance issues do not inspire confidence.

Offer details: The IPO is open from August 21-24. UTI Securities is the book running lead manager. The market capitalisation (on the price band) post listing would be Rs 270-320 crore.