In an interview with CNBC-TV18, Deepak Asher, director of INOX Wind, which is coming out with an IPO, discussed the company’s investment plans and the business outlook going forward.
Explaining how proceeds from the IPO issue will be spent, Asher said about Rs 200 crore would be spent on helping double capacity from 800 megawatt currently to 1600 MW by in a year.
Below is the transcript of the interview on CNBC-TV18.
Q: At least about 20 percent of your revenues you have indicated will be used for expansion as well as upgradation of your existing manufacturing facilities. Would this be the one which is needed to double your capacity as you have indicated, will you require more funds and what are the company’s capacity expansion plans post FY16?
A: It is not 20 percent of revenues; it is 20 percent of the proceeds of the issue. The issue comprises of two components, there is a primary element and a secondary element. The primary element is roughly about Rs 700 crore which is intended to be used on four different objects. About Rs 300 crore would be used to augment long-term working capital requirements. We expect as we scale up operations, our working capital investments will go up.
About Rs 150 crore will be spent on augmenting manufacturing capacity and expanding that capacity. Our current capacity stands at about 800 megawatts which is expected to be raised to about 1600 megawatts in stages over next 12 months so as to reach 1600 megawatts by March 2016.
About Rs 150 crore would be spent on site infrastructure in terms of the projects that would be executed next year and the balance Rs 100 crore would be spent on what is called general corporate purposes which will include meeting the issue expenses.
Q: Let me come to the capacity expansion. From 800 megawatts you have planned to double it to 1600 megawatts by the end of FY16. What are the capacity expansion plans post that?
A: I can’t talk about that because regulatory constraints. Securities and Exchange Board of India (Sebi) will only let me say what is in the document.
Q: Your working capital requirements for which you are going to be using the Rs 300 crore of the proceeds that will be sufficient for how long for you because it is an working capital intensive business?
A: We expect that that will meet the working capital incremental requirements over the next financial year. As we go forward the cash accruals from operations itself will fund for the working capital requirements.
Q: What are the cash accruals?
A: I can’t make forward looking statements.
Q: As the capacity doubles for the company broadly and qualitatively can you tell us whether the margins of the company will improve?
A: If you look at our track record, over the last four years we have maintained an average EBITDA margin of roughly about 16 percent and average PAT margin of about 10 percent. When the industry was under stress because of the de-growth, we had witnessed because of the policy discontinuity, going forward because of the strengthening of the policies, the significant thrust that the government is placing on the wind energy sector, we expect to be able to perform and at least if nothing else maintain our existing margins.
Q: As the capacity doubles for the company broadly and qualitatively can you tell us whether the margins of the company will improve?
A: If you look at our track record, over the last four years we have maintained an average EBITDA margin of roughly about 16 percent and average PAT margin of about 10 percent.
When the industry was under stress because of the de-growth, we had witnessed because of the policy discontinuity, going forward because of the strengthening of the policies, the significant thrust that the government is placing on the wind energy sector, we expect to be able to perform and at least if nothing else maintain our existing margins.
Q: Your market share as of now stands at close to about 7 percent?
A: Historically that has been true but as I said we have been maintaining a significant momentum of growth. So, that would change going forward.
Q: Would it be in double digits?
A: As I said I can’t make forward looking quantitative statements.
Q: As there is increased contribution of the operations and maintenance (O&M) business we understand the gross margins of the company should improve. Can you throw some colour on that?
A: Typically the turbines that we sell are under a two year warranty period and therefore for the first two years there is no O&M revenues. However, as more and more turbines are installed and more and more of turbines go off the warranty period significant stream of O&M revenues will kick in. Globally this is a high margin business so one would expect a healthy yield out of O&M revenues going forward.
Q: What would be roughly the margins from the O&M business compared to the average EBITDA of say 16 percent?
A: From what I understand globally the sector operates at about 30-40 percent EBITDA margin on O&M revenues.
Q: You spoke about how the cash accruals will start aiding your working capital say in the next one year or something. But at least in the last nine months of this fiscal year the company has experienced negative cash flows.
A: That is true, that is largely because of the significant growth that we have been experiencing. We have grown at about 70 percent per annum over the last three years and hence a large part of the operating cash flow that were thrown up from manufacturing activity were invested in working capital.
As we go forward one would expect the growth would stabilise, one wouldn’t grow at 70 percent per annum perpetuity and secondly because of the larger base the cash flows from operations would more than be able to meet the working capital requirements.
Q: In the various reports that we read, the reason why some people are skeptical is that the pool of customers is very small, the business is heavily dependent on few customers. Would the company be looking at increasing the customer base?
A: If you believe the fact that the government is as well known placing a significant thrust on this sector, a lot of regulatory developments that will happen see the size of the sector expand significantly going forward. One would assume that there would be more customers that will be added to the markets.
Q: While the company has shown a lot of momentum, you spoke about a 70 percent growth that the company themselves have enjoyed, one of the big players Suzlon is also renewed its focus on India as well. Do you foresee increased competitive intensity?
A: I think the market would be large enough for all of us to co-exist.
Q: Any estimates of how large the market will be?
A: It is stated in the document, one expects by FY22 the total cumulative installed capacity would be about 52,000 megawatts. These estimates were made before the regulatory impetus provided by the government.
Q: Now with the regulatory impetus – that is not a company specific thing, it is an industry thing.
A: I can mention a CRISIL report which put the size of the sector to be about 3600 megawatts in FY16 and about 4100 megawatts in FY17; that is available in the public domain and hence I can talk about that.
Q: Would the revenue run rate that the company has so far historically enjoyed continue?
A: We have grown in revenue terms about 100 percent in the nine months in the December 14 so we will have a fairly healthy track record of revenue growth. One more thing I would like to mention, as you might know we closed our anchor book yesterday.
This was completely subscribed, Rs 306 crore. In fact the entire subscription happened at the high end of the price band and we got very marquee names in terms of investors which includes FIIs like Fidelity, Morgan Stanley, Goldman Sachs, Blackrock. Domestic mutual funds like Reliance, SBI Life, Birla, Sundaram, IDFC and Kotak and insurance companies like Birla Sun Life as well as Tata AIA. So, we are extremely gratified with the kind of investor traction we have got on the anchor book.
Q: Your promoters Gujarat Fluorochemicals will also be paring down their stake to about 63 percent and raising some money via the offer for sale (OFS) route. Would they look to further pare down their stake? What would they ideally like their stake to be in another listed entity now?
A: Post this issue the promoter group which is Gujarat Fluorochemicals and the Jain family who owns stake in this company would be around 85-86 percent. Under Sebi regulations we will need to bring this down to about 75 percent within a period of three years so that is all I can say at this point of time.
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