Inox Wind's Q1FY20 results (Downgrade to Underperformer) - Another miss in execution

Q1FY20 result highlights

• Delay of grid infrastructure and land policy in Gujarat had continued to impact execution under SECI 1 and SECI 2 orders, resulting in disappointment in revenues for the wind OEM’s. However, we understand that grid infrastructure is ready and should result in improved execution but the volumes for FY20 are likely to be below expectation (4-5GW).
• The expected recovery in the industry at the beginning of the year has not materialised. Note that the transition from feed in tariff has adversely impacted FY18, FY19 and continues to adversely impact the FY20E.
• As a result, INOX reported sale of Rs2.5bn in Q1FY20, decline of 40% yoy. EBITDA was Rs383m (vs est of Rs870m).  Consequently, INOX reported a loss of Rs141m in Q1FY20 (est of profit of Rs272m)
• Total order book at end of Q1FY20     stands at 1231MW (order value of Rs70bn). Out of 1231MW, 500MW is in form of letter of intent from Adani Green. Management expects increase in execution in coming quarters on commissioning of  common power evacuation facilities in the State of Gujarat

Key positives: None

Key negatives: Continued disappointment in execution led by grid iissues; Momentum slowing down for wind auction in last six months

Impact on financials: Downgrade our earnings estimates for FY20E and FY21E by 65% and 57% to account for delayed execution

Valuations & view

INOX Wind (INOX) had a disappointing execution in last 30 months as industry wind power installations fell 40% yoy to 1.8GW in FY18 and 1.5GW in FY19. We believe the transition from Feed in Tariff (FiT) to auction regime will help turn the tide in the wind power industry in FY20E. However, continued delay in execution on the order book of 1.2GW and consequently, the risk of cancellation of existing order book is rising for the company. Given the uncertainty, we have reduced our volumes estimates for FY20E/FY21E from 550/600MW to 450MW/500MW and expect company to report a EPS of Rs2.6/Rs4.2. We down grade the stock to Underperformer rating on the stock with a revised target price of Rs39/share (15x FY20E P/E) on delay in execution of existing order book and uncertainty on the future auctions.