There is a buzz in the wind energy sector, with the government aiming to double capacity by 2022. But none of the excitement is visible in the Inox Wind Ltd’s stock. Its shares have fallen more than 20% since listing in April. The S&P BSE 500 index lost 8.6% during the period.
This is despite the company’s strong performance in the first half of the fiscal year, with revenue nearly doubling on the back of strong execution. Operating profit and net profit increased by nearly 80%. What’s more, revenue visibility remains good, with an order book of 1,202 megawatts to be executed in 12-18 months.
Why are investors ignoring this? There are some areas of concern, such as margins. Despite strong volumes, operating profit margins softened from 15% a year ago to 13.6% last quarter.
Secondly, receivables and debt have risen. Though the overall working capital situation improved, the receivables position rose to as high as 188 days in September.
Adverse currency movement (it imports raw materials) impacted margins in the first half of the fiscal year, the company says. Low component prices and greater execution of better-margin large rotor turbines are expected to aid margins, signs of which should emerge from the current quarter. Similarly, the management expects the receivables situation to improve, helped by efficient planning and execution of orders.
The grey area is debt, especially considering that the company raised funds from the primary market only this year. Its total debt since March has increased by 25%, even though the debt-to-equity ratio increased only marginally.
Meanwhile, Inox is investing in wind energy sites. Considering that land is crucial to its product offering, Inox plans to invest further in a land bank. While it may be a prudent strategy, the rise in debt is driving up interest costs.
In the first half of the fiscal year, interest costs jumped 67%. Though still manageable, the company has to demonstrate that its investments and efficiency improvement measures are bearing timely fruit. Until then, the stock may remain under pressure.