Inox results take the wind out of Street

Against the backdrop of the government’s enhanced focus on renewable energy, the solar and wind energy segments have looked promising in the past couple of years. But, Inox Wind’s weak March 2017 quarter performance, increased risk of order cancellations and no clear visibility on earnings for FY18 have shaken the Street’s confidence, especially towards wind energy.

Inox Wind’s stock lost 17.4 per cent on Monday to close at ~166.80.

The transition of the wind power industry from the feedin-tariff (FIT) regime, where contracts are on standard tariffs to promote industry, to the auction route (competitive bidding), both in solar and wind segments, is the key reason for the change in dynamics for the sector. The reverse-bidding mechanism has led to price discovery, which is significantly lower than power tariffs under the FIT regime.

Analysts at Ambit point out that state electricity boards are not ready to sign in power purchase agreements (PPAs) above ~3.46 per unit of electricity, which is the tariff discovered in the February 2017 competitive bidding. This price is 22-38 per cent lower than FY17 FITs in various states.

Lower tariffs are bound to put wind power projects under stress and, consequently, cause decline in orders for wind turbine generators. Inox Wind and Suzlon are among the top wind power equipment makers and turnkey solution providers in India. With the price discovery for tariff during the first auction, Inox Wind has had to curtail deliveries to clients since February 22, which has not only impacted its March quarter performance but also poses risks for FY18, say analysts. Analysts at Motilal Oswal Securities say the company’s order book of 1.3Gw (1,300Mw; as of Q3FY17) has been reduced to 0.3Gw, as the earlier order book was on FIT basis, which is now redundant. One gigawatt (Gw) is equal to 1,000 megawatts (Mw). Further, execution of this 0.3Gw would start only in Q3FY18, adding to more concerns.

There are many reasons for the tariffs coming down through reverse-bidding, and many of them are sustainable or permanent for now. First, competition from solar power is surging. Solar power is seeing significant reduction in cost of production and thereafter competitively bid tariffs too. For solar energy, the major benefit is accruing due to a sharp reduction in raw material costs, primarily of silicon, which are used to manufacture solar panels. The capital expenditure for setting up of solar capacities has, thus, fallen by nearly 80 per cent from about ~18 crore for setting 1 Mw capacity earlier, to now less than ~4 crore, say analysts. This is not the case with wind energy equipment. Among other reasons for the tilt in favour of solar is the significant increase in capital for investments. Sandeep Upadhyay, managing director & CEO, Centrum Infrastructure Advisory, says that there is significant foreign capital available to be deployed looking at the growth opportunity available (in solar). Upadhyay, however, says he remains watchful on sustainability of current tariffs.

Most analysts, thus, remain unsure on how earnings pan out from here for wind power players. With this magnitude of uncertainty, analysts at PhillipCapital say they have put their rating estimates and target price for Inox Wind under review and will revisit their stance in the second half of FY18 after the impact of the auction route stabilises and there is clarity on Inox Wind’s financials. Even analysts at Motilal Oswal say with uncertainty over execution in FY18/FY19, margin pressures as auction-determined tariffs, and potential for writedown on debtors, they put their ratings and estimates under review.

While it is a matter of concern for Inox, the Street is seeing implications for other players as well, including turbine manufacturer Suzlon. Analysts say though the impact on Suzlon’s order book still remains to be seen and will be assessed after the company’s March quarter performance, there could be negative surprises. Suzlon has also forayed into solar power and it may provide some cushion. Suzlon’s stock, nevertheless, also lost 5.53 per cent on Monday to close at ~19.65. Analysts at Ambit add if solar tariffs sustain below ~2.5 per unit, it is a clear negative news for BHEL as the cost of new coal-based power plants is ~4-5 per unit.