Inox Green Energy Services Limited

A Business Analysis

About Inox Green Energy

INOX GREEN ENERGY SERVICES Limited (INOX Green) is a major wind power operation and maintenance (“O&M”) service provider within India. INOX Green is engaged in the business of providing long-term O&M services for wind farm projects, specifically the provision of O&M services for wind turbine generators (“WTGs”) and the common infrastructure facilities on the wind farm which support the evacuation of power from such WTGs.

Industry Analysis

Domestic economic growth hinges on the revival in private consumption, lowering of banks’ non-performing assets (“NPAs”), improvement in the investment climate and many more factors. The Central Government has taken the following steps in this regard: 

• Post-pandemic policies to revive the economy: The Indian Government has initiated several measures to revive the economy from the pandemic stress including Small Industries Development Bank of India schemes for special liquidity support to micro, small and medium enterprises (“MSMEs”), state compensation schemes, increase in the threshold of default under Section 4 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), among others. These are short-term measures, but likely to support long-term growth of the country as the economy recovers from the pandemic.
• Union Budget 2022-23: The growth-centric and expansionary budget of 2022-23 focuses on improving India’s mid-term growth trajectory. Some of the key announcements include: 
  • PM Gatishakti: Completion of 25,000 km national highways in the current fiscal, adoption of modern, world class infrastructure, introduction of single platform to allow data exchange among all mode operators, multimodal connectivity between mass urban transport and railway stations. 
  • Greater financial assistance for States: Outlay for “Scheme for Financial Assistance to States for Capital Investment” was increased to ₹15,000 crore in Revised Estimates from ₹10,000 crore in Budget Estimates, with States being allowed a fiscal deficit of 4% of GSDP, of which 0.5% would be tied to reforms in power sector. 
  • Boost for MSMEs: Under Credit Guarantee Trust for MSEs, an additional credit of ₹2 lakh crore to be facilitated. Outlay of ₹6,000 crore to be rolled out via the RAMP (Raising and Accelerating MSME Performance) program. 
  • Public Capital Investment: Outlay for capital expenditure increased to ₹7.5 lakh crore (by approximately 35%) in fiscal 2023, 2.9% of GDP. Effective Capital Expenditure for Central Government at ₹19.68 lakh crore, approximately 4% of GDP. Introduction of digital Rupee by RBI and Green Bonds to mobile resources for green infrastructure.
  • Improve the investment climate through the ease of doing business: The Central Government has initiated a number of measures to ease the business environment, such as Goods and Services Tax (GST) and the insolvency law, and a number of other steps such as introducing an online single-window model for providing clearances and filing compliances, establishing the Central Registration Center, removing the Foreign Investment Promotion Board for fast-track foreign investments, and setting up a National Investment and Infrastructure Fund. The country has adopted a carefully designed approach to reform, with an aim to improve the business regulatory environment over the course of several years and is now among the top 10 improvers. India’s position in the World Bank’s Ease of Doing Business (“EODB”) rankings improved from 142 in 2015 to 63 in 2020; thus, it has maintained its position in the top 100 for the third straight year. However, it is still far behind large Asian economies such as China and other BRICS (Brazil-Russia-India-China-South Africa) countries. The EODB rankings of Russia and China have also improved impressively – from 62 and 90 in 2015 to 28 and 31 in 2020, respectively.

Demand and Supply Review of the Indian power sector 

The total installed generation capacity at the end of July 2022 was 404 GW, of which approximately 97 GW of capacity was added from fiscals 2016 onwards. Coal and lignite-based installed power generation capacity has maintained its dominant position over the years and accounts for approximately 52% as of July 2022. However, renewable energy installations (including large hydroelectric projects) have reached approximately 161 GW capacity as on July 2022, compared with 25 GW as on March 2012 (Source: MNRE), constituting approximately 40% of total installed generation capacity as of date. In particular, this growth has been led by solar power, which grew at breakneck speed to approximately 58 GW from 0.9 GW over the same period. 

The Electricity Act, 2003 coupled with competitive bidding for power procurement, implemented in 2006, encouraged the participation of private players who had announced large capacity additions. Moreover, the strong government thrust on renewable energy coupled with reducing tariffs (with falling capital costs and improving efficiency) also supported renewable energy capacity additions. Tepid rise in demand growth coupled with rising supply led to a drop in power deficit. 

The growth stood at 4.3% during fiscal 2016 and 2.6% in fiscal 2017 owing to slowdown in manufacturing activity. It improved to 6.1% in fiscal 2018, mainly driven by rising electrical connections under the rural electrification and SAUBHAGYA schemes. Power demand growth was subdued at 1.3% on-year in fiscal 2020 owing to a slowing economy, with an extended monsoon till October 2019 further dampening demand. The extended monsoon resulted in lower cooling demand from domestic consumers as well as reducing irrigation demand from agricultural consumers. Demand recovered slightly in January-February 2020 with the onset of summer, but the pandemic downed the shutters on economic activity in March 2020, thereby pulling power demand growth into negative territory. Power demand posted a decline of (1.0-2.0) % in fiscal 2021. Economic growth made a healthy comeback in fiscal 2022 coupled with a low base effect as well as Government spending on infrastructure. Consequently, power demand returned to positive territory during fiscal 2022, growing at 8.2%. Power demand surged in Q1 of fiscal 2023 due to severe heatwave and continued momentum in economic activity, thus registering a 18.6% on-year growth in the quarter. Subsequently, demand is expected to gradually pick up on the back of healthy recovery in economic growth, expansion in reach via strengthening of T&D infrastructure, and improved power quality, thereby registering a 5.0-6.0% CAGR over fiscals 2023 to 2027. 

India’s electricity requirement is estimated to have grown at a CAGR of approximately 3.6% between fiscals 2016 and 2022, while power availability rose quicker at approximately 3.9% CAGR on the back of strong capacity additions, both in the generation and transmission segments. As a result, the energy deficit declined to 0.4% in fiscal 2022 from 2.1% in fiscal 2016. The decline was sharp, particularly in fiscal 2017, on account of muted demand growth of 2.6%. The low demand was the result of a decline in consumption across categories owing to energy efficiency measures, T&D loss reduction in key states driven by adoption of the Ujwal Discom Assurance Yojana (“UDAY”) scheme.  

In fiscals 2018 and 2019, power demand grew at 6.1% and 5.0% on-year, respectively, led by a low base and gradual pickup in consumption across categories with impetus from electrification of un-electrified households, transmission and distribution network expansions, healthy economic activity, etc. Strengthening of inter-regional power transmission capacity over the past five years has supported the rapid fall in deficit levels as it reduced supply constraints on account of congestion and lower transmission corridor availability, thereby lowering the deficit to 0.6% in fiscal 2019. However, in fiscal 2020, power demand grew at a slower 1.3% due to weakening economic activity and extended monsoon, where by the end of fiscal 2020, economic activity and capacity additions (both generation and transmission) slowed down due to the ongoing pandemic. Gradual recovery was experienced post fiscal 2021, as construction activity and demand recovered post the pandemic and lifting of COVID-19 restrictions.  

After a minor (1.2)% decline in fiscal 2021, power demand has seen a strong rebound in fiscal 2022, registering approximately 8.0% y-o-y growth on the back of healthy revival in economic activity.  

For fiscal 2022, the average energy deficit across states and union territories currently stands at 0.4%. Between five regions, two regions have a deficit higher than all India average; the northern and eastern region with a deficit of 0.8% and 0.6%, respectively. The top states with the highest deficit are Jammu & Kashmir (UT) and Ladakh (UT), Jharkhand, Bihar, Punjab and Uttarakhand.  

However, this does not imply that the power deficit is negligible since off-grid untapped latent demand persists and intensive rural electrification as well as ‘24X7 power supply to all’ is yet to be achieved. Further, many towns and villages in the country are deprived of the 24 x 7 electricity supply on account of multiple technical (such as highly loaded power line frequently tripping) and commercial (theft and pilferage, subsidized consumers, etc.) issues. Thus, the lower power demand is on account of lagging rural electrification as well as sub-optimal distribution infrastructure, and absence of last mile connectivity in some cases. 

Demand and Supply Outlook 

CRISIL Research expects energy requirement to grow at 5-6% CAGR over fiscals 2022 to 2027, due to healthy economic growth and expansion of the power footprint. Power demand which was expected to bounce back in Q1 of fiscal 2022, was impacted by the second wave of COVID-19 infections which resulted in partial lockdowns in major states over April-May 2021. Infection rates began subsiding in June-July 2021 due to which industrial and economic activities went back to normal in various regions of the country. Later, a less severe third wave was caused by the Omicron variant, which translated to a power demand growth of 3.8% on-year in Q4 of fiscal 2022. Overall power demand during fiscal 2022 grew at 8.2%.

Q1 of fiscal 2023 saw a surge in power demand resulting from the severe heatwave in the country. This along with the continued momentum in economic activity resulted in an on-year power demand growth of 18.6% in Q1 of fiscal 2023, despite high base of Q1 of fiscal 2022. Going forward, demand is to be driven by industries due to improving utilisation levels and kick-start of the capex cycle in key sectors owing to buoyant customer sentiment. Commercial power demand is also projected to improve as offices and educational institutes resume operations, albeit in a hybrid scenario. Therefore, power demand growth is estimated to rise 6-6.5% on-year in fiscal 2023, over a high base. 

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Business Overview of Inox Green

The company is one of the major wind power operation and maintenance (“O&M”) service providers within India. Company is engaged in the business of providing long-term O&M services for wind farm projects, specifically the provision of O&M services for wind turbine generators (“WTGs”) and the common infrastructure facilities on the wind farm which support the evacuation of power from such WTGs. The company have stable annual income owing to the long-term O&M contracts that they enter into with their customers. The company is a subsidiary of Inox Wind Limited (“IWL”), a company which is listed on the National Stock Exchange of India Limited and BSE Limited, and part of the Inox GFL group of companies (“Inox GFL Group”). The company subsidiaries are engaged in the business of power generation through renewable sources of energy with Nani Virani Wind Energy Private Limited being the only subsidiary which has commenced power generation.  The company enjoy synergistic benefits as a subsidiary of IWL, which is principally engaged in the business of manufacturing WTGs and providing turnkey solutions by supplying WTGs and offering a variety of services including wind resource assessment, site acquisition, infrastructure development, EPC of WTGs, and, through our Company, providing long-term O&M services for wind power projects. Pursuant to an exclusivity agreement between IWL and our Company, we provide exclusive O&M services for all WTGs sold by IWL through the entry of long-term O&M contracts between the WTG purchaser and ourselves for terms which typically range between five to 20 years. Due to this exclusivity agreement, IWL’s order book is an important indicator of future revenue and growth for our Company. As of June 30, 2022, IWL had entered into binding contracts for the supply of 2 MW capacity WTGs with an aggregate capacity of 964 MW. Further, IWL had also received letters of intent, which are non-binding and which therefore may not lead to execution of any form of binding contract, for its new 3.3 MW capacity WTGs with an aggregate capacity of 524.7 MW. 

As of June 30, 2022, O&M services portfolio consisted of an aggregate 2,792 MW of wind farm capacity and 1,396 WTGs. This included a total capacity of 1,220 MW for various customers in Mahidad, Rojmal, Sadla, Savarkundla, Rajkot and Dayapar in Gujarat; a total capacity of 632 MW for various customers in Kukru, Nipaniya, Jaora and Lahori in Madhya Pradesh; a total capacity of 560 MW for various customers in Dangri, Rajasthan; and a total capacity of 196 MW for various customers in Vaspet, Bhendewade and South Budh in Maharashtra. Of the 2,792 MW capacity, 1,964 MW was attributable to their contracts for comprehensive O&M services and 828 MW was attributable to their common infrastructure O&M contracts. In general, their comprehensive O&M contracts cover the provision of O&M services to both WTGs installed on a wind farm and the common infrastructure facilities, such as electrical substations and transmission lines, which support the wind farm; our common infrastructure O&M contracts relate only to the provision of O&M services on the common infrastructure facilities.  

The company;s presence in the wind-resource rich states in India as of June 30, 2022, as well as a breakdown of their wind power capacity portfolio, is indicated on the following map:

Part of strong Inox GFL group

Renewable Energy Business

Inox Key Highlights

The company's competitive strength

Strong and diverse existing portfolio base.

As of June 30, 2022, theur portfolio of O&M contracts (consisting of both comprehensive O&M contracts and common infrastructure O&M contracts) covered an aggregate of 2,792 MW of wind projects spread across eight wind-resource rich states in India with an average remaining project life of more than 20 years. The counterparties to their O&M contracts feature a mix of independent power producers (“IPP”) (approximately 72%), public sector undertakings (“PSU”) (approximately 14%) and corporates (approximately 14%), as on June 30, 2022. Further, certain individual wind project sites which we have developed in collaboration with IWL have significant capacity to support the installation of additional WTGs which will further grow our portfolio base. Such capacity exists due to the nature of wind project site development which requires the construction and installation of supporting infrastructure such as pooling substations and transmission lines in advance of the installation of WTGs (which are thereafter installed on a plug-and-play basis). In addition, with the transition from the feed-in tariff regime to the auction based regime having had a few years to bed in, the compny believe that there will be an increase in the number of WTG installations in the coming years as compared to the suboptimal number of WTG installations for the past few years which will further expand our portfolio base.

Established track record, favourable national policy support and visibility for future growth.

The company have an established track record in the wind energy O&M industry of more than nine years due in large part to the synergistic relationshi their share with their parent company, IWL, which commenced operations in the wind energy space in the financial year ended March 31, 2010.  

As set out on in the graph below, their operating portfolio of O&M contracts (both comprehensive O&M contracts and common infrastructure O&M contracts) has grown at a compound annual growth rate of approximately 40.16% in the past nine years since our commencement of operations. 

Reliable cash flow supported by long-term O&M contracts with high credit quality counterparties.

The company enter into long-term O&M contracts with their customers which range from five to 20 years (in which the first two to three years of O&M services are generally provided for free for IWL supplied WTGs) with a renewal option provided in most cases. Such contracts provide them with full revenue visibility as the price for their O&M services is pre-determined for each year of the contract. Furthermore, such contracts feature a built-in fixed price escalation formula of approximately 5% per annum (compounded on the previous year’s charges for a contractually specified number of years) which provides both their customers and them with price certainty and guarantees them a level of steady growth and inflation protection. Moreover, as O&M services are critical for the functioning of WTGs, there exists a low risk of non-payment from their customers who in any event are large IPPs, PSUs and corporates. As of June 30, 2022, the company have not encountered any payment defaults from our customers. Our ability to maintain and renew our O&M contracts throughout the useful lifecycle of each WTG is further secured given their experience and expertise in servicing the proprietary components which make up the WTGs manufactured by IWL as well as the common infrastructure facilities developed by IWL. With confidence that our O&M contracts will be maintained or renewed throughout the useful lifecycle of a WTG which is approximately between 20 to 25 years, we believe that the weighted average remaining term of the O&M contracts in our existing portfolio is more than 20 years. 

Established supply chain in place.

The company have an established relationship with their suppliers for the parts, components and tools they require in their provision of O&M services. As part of their synergistic relationship with IWL, the company believe that they are able to obtain proprietary components and spare parts for the IWL manufactured WTGs directly from IWL and as for the other tools and parts they employ, the company have an established network of external suppliers.  

The company's business strategy

• Exploring opportunities to expand our portfolio and scale our operations.
• Transitioning to an asset-light model with minimal capital expenditure which we believe will result in higher EBITDA and profit margins.
• Continuing and enhancing our focus on predictive maintenance over reactive maintenance.
• Provide analytics and asset performance forecast services. 

Business Services

Operation Services

The company have a dedicated onsite O&M team to provide 24/7 operation services for their customers’ wind farms to help ensure that their WTGs are generating the highest yield possible under prevailing weather conditions as well as a dedicated Client Relationship Management team which provides their customers with a direct point-of-contact with their Company. In addition, to provide their customers with peace of mind in relation to the security of their WTG assets as well as to maintain the security of the common infrastructure facilities, the company provide round the clock watch and ward security services which include conducting surveillance through CCTVs which are centrally monitored.  The company's team operates the wind power plant’s infrastructure (which includes the WTGs) and the power evacuation facilities. In particular, the company are able to monitor and control the WTGs in real time through the use of wtSCADA. wtSCADA is a system of software and hardware elements that enable us to: (i) control WTG processes either locally or at remote locations; (ii) monitor, gather, and process real-time data from the WTGs; (iii) directly interact with devices such as sensors and motors on the WTGs through human-machine interface (HMI) software; and (iv) record notable events into a log file.

Maintenance Services 

The maintenance of WTGs (i.e., WTG O&M) is generally categorised into predictive and reactive maintenance. In reactive maintenance, repairs are undertaken once a component fails and often results in long downtimes for the affected WTG. In predictive maintenance, efforts are taken to detect potential component failures in advance so as to be able to resolve any issues early and minimize such downtime. Company focuses on predictive maintenance through the scheduling of regular inspections and maintenance (which are enhanced during peak wind seasons) as well as employing advanced tools such as wtSCADA to monitor the conditions of the WTGs and common infrastructure facilities in portfolio to allow for early detection and resolution of issues.  

A typical WTG consists of various components such as blades, nacelles, gearboxes, sensors, generators, drivetrains, hydraulics, unit substations and other electrical components. In the course of conducting our maintenance, our technicians thoroughly work through extensive checklists which include:

• conducting visual inspections of the nacelles, gearbox, generators, yaw system and brakes;
• inspecting and assessing the turbine blades and pitching mechanism;
• examining and tightening bolts;
• surveying the tower foundation; 
• measuring oil and lubrication levels;
• checking the alignment of the drivetrain;
• checking ventilation, air filters and shock absorbers;
• repairing any cracks and corrosion; and 
• inspecting bearing and connections. 

IGSEL Portfolio Growth

Management of the company

Manoj Shambhu Dixit is a Whole-time Director of their Company. He has passed the final year of the graduate program in mechanical engineering and the final year of master’s in mechanical engineering from Indian Institute of Management Research and Technology, Ahmedabad, Gujarat. He has been associated with our Company since October 8, 2013, and is currently responsible for, inter alia, project development, people management, and power sale. In the past, he has been associated with Perfect Refractories Limited, and Gujarat Fluorochemicals Limited.  

Mukesh Manglik is a Whole-time Director of the Company. He holds a bachelor’s degree in electrical engineering from Veermata Jijabai Technological Institute, Mumbai, Maharashtra. He has been associated with our Company since October 21, 2014, and is currently responsible for, inter alia, engineering, machine automation, new product development and technical support. In the past, he has been associated with Suzlon Infrastructure Services Limited.  

Financial Performance

Profit and Loss

Balance Sheet

Cash Flow Statement

Shareholding Pattern

Risk of the business:

• High inflationary environment
• Global economic slowdown due to higher crude and energy prices.
• High interest rate which can hamper the companies operating leverage to get an better margin.

Valuation

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