Inox well placed to ride the rally in wind sector; we see 20% upside in 1 year: BofA-ML

NEW DELHI: BofA-ML, in its latest report, has initiated coverage on Inox Wind (IWL) with a buy rating and a target price of Rs 562, which translates into an upside of 20 per cent from Friday’s closing price of Rs 468.20 on the BSE.

The global investment bank sees growth in India’s wind power sector at an inflection point, and forecasts 25% wind capacity CAGR in FY15-18. IWL will be a key beneficiary given its ability to provide turnkey services, access to over 4GW of wind sites, sophisticated technology & healthy balance sheet.

The company also has a robust 46 per cent EPS CAGR for FY15-18E and over 30 per cent RoE. IWL also trades at attractive valuations as compared to its global peers.

Wind capacity in India declined at a compounded 10% during FY12-15 due to a withdrawal of policy benefits like generation-based incentives (GBI) and accelerated depreciation (AD) tax.

However, the government has now restored both these schemes, which could drive a 25% wind capacity CAGR for the sector in FY15-18, and an order flow CAGR of 18% for IWL in FY15-18, said the BofA-ML report.
Consequently, the global investment bank expects an 18 per cent order flow CAGR for IWL. They also see its execution cycle improving materially, led by its plans to double capacity to 1.6GW.

BofA-ML expects IWL to derive 75 per cent of sales from 100/113-meter machines by FY18 compared to 15 per cent now.

Attractive valuations vs global peers:

Weak state electricity boards’ (SEB) finances are the key risk IWL trades at 14.5x FY17E earnings versus 20.2x (on average) for its global peers. The street seems cautious about the growth potential for the wind sector given the weak performance during FY12-15, but a return of growth should help rerate the stock, in our view, said the report.

The key risk which BofA-ML perceives is the weak finances of state electricity boards, which is impacting their ability to buy wind power (relatively expensive compared to conventional energy sources).

Other risks include regulatory changes, IWL's exposure to multiple currencies for imports, and financial stress at AMSC Austria GmbH - the proprietary licensor of electric control systems (ECS).