MANAGEMENT DISCUSSION & ANALYSIS A. ECONOMIC OVERVIEW 1. Global Economy The global economy grew at 3.4% in 2014 reflecting a pickup in growth in advanced economies. Global growth remained at the same level as growth in 2013 and is forecast at 3.5% in 2015 and 3.8% 2016. The combined gross domestic output of advanced economies expanded by 1.8% in 2014 up from 1.4% in 2013. Global growth is forecast to rise moderately to 3.5% in 2015 and 3.8% in 2016, the net positive being a sharp decline in oil prices. International Monetary Fund (IMF) projects growth in emerging markets and developing economies to remain broadly stable at 4.3% in 2015 and increase to 4.7% in 2016. Moving ahead, across nations, the mandate of Governments is to control inflation, improve fiscal prudence and achieve sustainable growth. 2. India Macro-economic Environment India continues to be one of the fastest growing economies in the world. The country is expected to grow at more than 8% in FY2016. A year after formation of the new Government, the positive impact of Government policies and decisions has started reflecting at the ground level. The Government seems to be moving in the right direction - balancing the act of reforms, capital spending to boost economic recovery and fiscal prudence. During FY2015, the Indian economy stood up to the challenges of consumer inflation, weakening of Indian rupee, widening current account and fiscal deficits and an unstable global environment. It is now on a firm path of a revival with a wave of optimism. The strong uptick in GDP growth was accompanied by a receding inflation at 5.1% in January 2015, considerably lower than double-digit figures seen in FY2013. Current account deficit and fiscal deficit, the prime causes of concern in FY2013, are now within manageable levels. B. INDUSTRY OVERVIEW India is the 4th largest energy consumer in the world trailing only the United States, China and Russia. Despite overall increases in electricity consumption in the past few decades, India's per capita electricity consumption remains fairly low. As of March 2015, the per capita consumption was estimated to be 1,010 (Provisional) kWh which is lower than that of the developed countries and the other BRICS (Brazil, Russia, India, China and South Africa) countries. India's generation capacity has grown from 85.80 GW as of March 1997 to 271.72 GW as of March 2015. As of March 2015, coal based projects account for approximately 61% of the total installed power generation capacity in India and renewable energy based projects account for approximately 13% of installed capacity. Although there has been an increase in installed capacity, actual installations have been well below targets. Conventional fuel based capacity additions have faced challenges such as fuel supply shortfalls, land acquisition challenges, delays in state and environment clearances, equipment shortages in the market and difficulties with passing on higher costs of fuel to off-takers. At the same time, renewable energy capacity additions have exceeded planned targets mainly because of the following reasons : 1. Renewable Energy in India Over the past few years, conventional energy costs have been increasing, whereas renewable energy cost have been decreasing. They have been further supported by a number of fiscal policy initiatives taken by the Central and various State Governments. Prime Minister Narendra Modi has made renewable energy a priority for his Government as he looks to address India's chronic power shortages and provide round-the-clock power to all Indians by FY2022 and also balance the need for environmental responsibility. from 9.8% in the year ended March, 2009 to 12.4% in the year ended March, 2014. Under the National Action Plan on Climate Change (NAPCC), the Government of India has set a target of 175 GW of renewable energy by 2022. During the 11th Five Year Plan, 14.70 GW of renewal energy capacity was added against a target of 14 GW. Despite an increase in generation capacity, a major power supply deficit continues to exist in India. The average energy deficit and peak demand deficit for India over the past six years from FY2008 to FY2014 was around 8.70% and 10.50% respectively, as per a report by a leading brokerage firm on the power scenario. Despite the recent growth in expansion of renewable energy capacity, a large part of the country's renewable energy potential remains untapped. During the 12th Five Year Plan, the Government of India aims to add 30 GW of renewable energy capacity whereas for the 13th Five Year Plan, the Government of India aims to increase 175 GW of renewable energy. 2. Wind Power Market - Global and India During FY2014, global installed capacity for wind power increased by 16% to approximately 370 GW. Global wind power installations increased by 35,467 MW and 51,473 MW in FY2013 and FY2014, respectively. The chart shows cumulative market share (by calendar year 2014) and annual wind power installations (during calendar year 2014) for the top 10 countries by wind power installations. India ranked at the 5th position for cumulative installations with a 6.1% share of cumulative installations and fifth position with a 4.5% share of annual installations at the end of calendar year 2014. During the last 21 years, wind power capacity addition in India has taken place at a Compounded Annual Growth Rate (CAGR) of 32.87% from a modest installed capacity base of 54 MW in the year ended March 1993 to 21.10 GW as at March 2014. Annual installation in India reached 3.2 GW during the year ended March 2012. However, during March 2013, wind installations came down to 1.7 GW mainly due to the withdrawal of accelerated debrciation. However, after the introduction of Generation Based Incentive (GBI) the annual installation reached 2 GW for the year ended March 2014. Introduction of Accelerated Debrciation during FY2014-15 has further increased annual installations for the year ended March 2015 to 2,298 MW. Among Indian states, Tamil Nadu ranks highest in wind power, both in terms of capacity installations and in terms of energy generation, with shares of 35% and 49%, respectively. Other states like Gujarat, Maharashtra and Rajasthan have seen significant growth in wind capacity addition during the last four to five years, mainly due to stable policy and regulatory regimes. Key Drivers for Renewable Energy in India ¦ Demand Supply Gap: At the end of March 2015, the annual energy shortfall for India was 3.6% and that for peak power demand was 4.7%, which augments renewable energy capacity ¦ Increase in Conventional Fuel Cost: Crude oil and coal prices have been relatively high in the recent past, which, if sustained for a long period, is expected to result in increase in wind power projects. ¦ Energy Security: The development of renewable energy resources is imperative for the energy security of the nation. According to the government's estimates, by 2035 India's energy demand is expected to more than double, from less than 700 million tonnes of oil equivalent (mtoe) today, to around 1,500 mtoe. India is highly dependent on imports to meet its energy demand and has an energy import bill of 150 billion dollars. This is expected to reach 300 billion dollars by 2030. A stable, cost-effective energy supply is critical for the long term development of the country. Sustainable development of renewable resources of energy is a viable solution to tackling the energy deficit and providing national and economic security. Low Gestation Period: Wind Power Projects can be set up modularly with in a short period of 6 to 9 months. They have virtually no adverse social impact. Regulatory and Policies Support: The Ministry of New and Renewable Energy (MNRE) aims to increase the share of energy generation from renewable increases significantly in comparison to growth in power generation from conventional sources. MNRE is targeting renewable energy capacity of 175,000 MW by FY2022, including 60,000 MW of wind power capacity. MNRE has also introduced the National Renewable Energy Act, 2015 to promote renewable energy. Policy Drivers for Wind Projects a. Reintroduction of Accelerated Debrciation: Initially, wind power units were being sold to high networth Individuals and Corporates as a tax-saving financial product. After being withdrawn in FY2012, the Government has re-introduced accelerated debrciation for tax saving purposes to incentivise investment in wind power and to attract small Corporate and HNIs to invest in such projects. b. Reintroduction of Generation-based Incentives: To broaden the investor base and facilitate entry of large IPPs and FDI in the wind power sector, regulators declared various incentives to wind power producers, including a return to the Generation Based Incentive (GBI) Scheme for wind power projects. Under the GBI Scheme, a GBI is provided to wind electricity producers at the rate of Rs. 0.50/unit of electricity fed in to the grid for a period not less than 4 years and a maximum period of 10 years in parallel with accelerated debrciation on a mutually exclusive manner, with a cap of Rs. 10,000,000 per MW. c. CSR policy: A recent policy decision qualifies investments in wind power as a CSR activity. Under the Companies Act, 2013, certain companies have to spend 2% of their average net profits for the past three years on CSR activities. Renewable energy projects have been included as qualified under CSR activity under Companies Act, 2013, and hence, investments in this will help companies fulfill their CSR obligations. This is attracting a lot of PSUs to make investments in wind power. d. Green Corridor: Fast tracking of the Green Energy Corridor will enable more renewable energy to be added to the grid. Doubling of the National Clean Energy Cess will lead to more funds being available for renewable energy projects. e. Renewable Energy Law: Introduction of Renewable Energy Law for India is aimed at creating additional demand for renewable energy. f. Priority Sector Lending: As per RBI's notification released on April 23, 2015, bank loans up to Rs. 150 million per borrower for installation of wind mills will be classified under Priority Sector Lending. This will lead to more HNIs and Small Corporates to invest in Renewable Energy. Additional Incentives: ¦ Attractive brferential feed-in tariff in multiple states for wind power. This provides significant boost to demand from IPPs, PSUs, Corporate and Retail Customers. ¦ Amendments to regulations for RPO, RGO compliance, brferential grid access and inter-state open access. ¦ Favourable provisions for wheeling, banking and third-party sale in many states. Electricity duty exemptions and concessional levy of cross-subsidy surcharge in the case of third-party sales. ¦ Special Additional Duty (SAD) exemption on raw materials imported for manufacturing WTGs. C. COMPANY OVERVIEW 1. About the Company Inox Wind Limited (IWL), is an integrated wind energy solutions provider and a pure-play renewable energy Company. It is the one of largest wind power solution providers in India. Incorporated in April 2009, it manufactures wind turbine generators and provides complete turnkey services such as supply of WTGs, offering wind resource assessment services such as site acquisition, infrastructure development and operation & maintenance services. The Company has two manufacturing facilities: one at Rohika in Ahmedabad, where it manufactures rotor blade sets and towers; and another at Una in Himachal Pradesh, where it manufactures nacelles and hubs. The facility in Rohika has a capacity to manufacture 400 rotor blade sets and 150 towers per annum, while its facility in Una can manufacture 550 nacelles and hubs. The Company is also setting up another manufacturing facility in Barwani, Madhya Pradesh to produce nacelles and hub, rotor blade sets and towers. The facility in Barwani unit shall have, when commissioned, the capacity to manufacture 400 nacelles and hubs, 400 rotor blade sets and 300 towers. After the expansion at our manufacturing facility at Barwani (MP), total capacity of the Company is expected to be 950 nacelles and hubs, 800 rotor blade sets and 600 towers. Inox Wind Limited has obtained ISO 9001:2008, ISO 14001:2004, OHSAS 18001 and ISO 3834 certification for its management systems pertaining to manufacturing, installation, commissioning and O&M of wind turbines 2. Key Market Differentiators a. Strong Management The Company is a part of the Inox Group, a multi-billion dollar professionally managed business group. The Group has a brsence across diverse businesses including Industrial Gases, Refrigerants, Chemicals, Engineering Plastics, Cyrogenic Engineering, Renewable Energy and Entertainment. The Group employs more than 8,000 people at more than 100 business units across the country, and has a distribution network that is sbrad across more than 50 countries around the globe. b. Advanced Technology With the emergence of wind independent power producers (IPPs), the focus has shifted towards utilising higher efficiency technologies to maximise project returns. The historical trends show that megawatt scale turbines are becoming more popular as compared to smaller capacity turbines. The average WTG size for annual installations has increased gradually touching 805 kW during the year ended March, 2014. At the same time, with focus on developing low wind speed sites, WTGs suited to such conditions are being brferred. The technology in India is moving towards bigger rotor diameters with better aerodynamic design, lighter blades and higher hub heights, which would result in lower cost of energy generation. The Company has state-of-the-art technology licensed from AMSC, a leading wind energy technology Company. Our rotor blade manufacturing design is licensed from WINDnovation, a leading rotor blade designer based in Germany. c. Inhouse Manufacturing Facilities of Key Components The Company has dedicated in-house manufacturing facilities for manufacturing components of WTGs such as nacelles, hubs, rotor blade sets and towers. This ensures high quality, advanced technology and reliability and maintaining cost competitiveness. d. Robust Order Book The Company has a robust order book of 1,178 MW as at the end of FY2015 from major corporates, independent power producers and Navratna PSUs. Third party sales have increased to 100% in FY2015 as compared to Nil in FY2012. e. Competitive Pricing Structure The Company manufactures key components of WTGs in-house, which ensures cost competitiveness, cost-effective logistics, and attractive margins. The Company has split up its manufacturing activities to ensure cost-efficiency. Its existing rotor blade and tower manufacturing facilities are located at Rohika, Gujarat, which is adjacent to a highway to facilitate easier handling during transportation to wind sites and sea ports, and in relatively close proximity to states offering good potential in wind energy production, such as Rajasthan, Gujarat, Maharashtra and Madhya Pradesh. Nacelles and hubs are more easily transported than rotor blades sets and towers. The Company currently manufactures nacalles and hubs at Una unit in Himachal Pradesh, in order to benefit from certain tax incentives. f. O&M Credibility and Capabilities With the emergence of larger customers, the reliance on O&M has increased. Wind independent power producers seek operational efficiencies to improve profitability and typically rely on the OEMs to manage wind farms including regular brventive maintenance, replacement of worn out parts and spares management. IWL provides long term, reliable and combrhensive O&M services. Our strong financial position provides confidence of our long term capabilities. g. Turnkey Solutions The Company's capability to provide turnkey solutions to its customers makes it a brferred partner to wind farm developers and independent power producers. 4. Our Future Growth Drivers a. Gain from Regulatory Impetus: The Government is aiming 10 GW of wind energy addition every year by giving various regulatory benefits such as: ¦ Reintroduction of accelerated debrciation for windmills ¦ Generation based incentives ¦ Investment in wind power to qualify as corporate social responsibility activity ¦ Attractive brferential tariffs ¦ Fast track of Green Energy Corridor ¦ Priority sector landing The above regulatory impetus is conducive to rapid growth of the Company. b. Enhanced Capacity to leverage Market Opportunities The strong order book shows the medium term revenue visibility for the Company. To cater to increasing demand, the Company has increased rotor blade production capacity from 256 to 400 rotor blade sets and is increasing tower production from 150 to 300 towers per annum at its Rohika unit, Gujarat. The Company is also constructing new integrated manufacturing unit at Barwani, Madhya Pradesh with Nacelles and Hubs capacity of 400 units, rotor blades capacity of 400 sets and tower capacity of 300 units. This new plant is expected to commence operations during FY2016. The Madhya Pradesh expansion, coupled with capacity augmentation at Gujarat, will lead to a near-doubling of its capacity to 1.6 GW by end FY2016. On completion, total production capacity is expected to be 950 nacelles and hubs, 800 rotor blade sets, and tower capacity to 600 units. c. Increasing our inventory of Project Sites We have acquired access to certain Project Sites in Rajasthan, Gujarat, Maharashtra, Andhra Pradesh and Madhya Pradesh and for customers as part of our turnkey model for wind farm development and continue to pursue further Wind Site acquisition and development opportunities to replenish and expand our inventory of project sites. d. Improving the cost-efficiency of generating power from wind energy We aim to continue to improve the cost-efficiency of power generation from wind energy by reducing the cost of generating electricity per kWh from our WTGs. We plan to achieve this goal by offering our customers more advanced WTGs with improved power curves, such as our newly introduced WTGs of 100 meter rotor diameter and our proposed WTGs of 113 meter rotor diameter, higher machine availability times, reducing the costs of manufacturing, infrastructure, operations and maintenance through economies of scale. e. Entry into new States The Company enjoys a strong brsence in Rajasthan, Gujarat, Maharastra and Madhya Pradesh. Going forward, it is well equipped to enter into new States that provide favorable policies for wind based power generation. f. Hybrid Wind Solar Opportunities We aim to leverage our inventory of project sites, our execution and O&M capabilities to exploit wind solar hybrid opportunities. We are ideally positioned to leverage the opportunity given our massive inventory of project sites, execution teams and turnkey capabilities. g. Annuity from O&M revenues The Company has long term O&M Contracts which provides annuity revenues. Increase in installed capacity base is adding to our revenues and profitability. 5. Key Risks & Concerns 1. Competitive Landscaping The WTG manufacturing capacity in India is estimated to be 12,000 MW per annum. IWL competes with players such as Suzlon Energy, Gamesa Wind Turbine Private Limited, Vestas and Wind World (India) Limited, Regen Powertech amongst others. Moreover, some more international players are eyeing the Indian market. Therefore, competition is likely to remain high. 2. Regulatory changes The rollback or reduction in policy incentives, such as accelerated debrciation and generation-based incentives or hike in duties and taxes, can have a negative repercussion on WTG manufacturers as well as have an impact on wind installations. 3. Ability to pass higher costs on to customers Our ability to pass on increased costs to customers is limited by market prices of WTGs and services and pricing offered by our competitors. If the cost of manufacturing a product or providing a service exceeds estimated costs, our profitability can be impacted. 4. Forex Fluctuation Fluctuation in the value of the Rupee against foreign currencies may have an adverse effect on the Company's results of operations. 6. Financial Highlights Despite the sector facing challenging times in recent years, our Company has rapidly scaled up in the last 4 years, with our annual WTG sales increasing more than four-fold from 120 MW in FY2012 to 578 MW in FY2015. This was possible because of our unflinching commitment and passion to succeed even while the rest of the industry was facing a downtrend. Our Consolidated Revenues, EBITDA and PAT for the year ending March 2015 stood at Rs. 27,099.3 million, Rs. 4,574.4 million and Rs. 2,964.2 million respectively, resulting in a corresponding YOY growth of 73%, 159.5% and 124.1%, and a CAGR growth of 106.6%, 105.5% and 113.3% over the last five years. 7. Operational Highlights ¦ Produced and sold 289 WTGs in FY2015, compared with 165 in FY2014 ¦ Strong order book for WTGs with an aggregate capacity of 1,178 MW ¦ Third-party sales increased by 300 MW and stood at 578 MW ¦ 100% of our sales in FY2015 have been to third parties, compared to zero in FY2012 ¦ Multiple orders from brstigious names such as Tata Power, Continuum Wind and Green Infra. We have received repeat orders from almost all customers. 8. Financial Overview 1. Revenue from Operations Revenue from Operations increased from Rs. 15,668.1 Million in FY2014 to Rs. 27,099.3 Million in FY2015, a growth of 73% due to increase in sales volume from 330 MW in FY2014 to 578 MW in FY2015. Regulatory and Policy support aided this massive growth in revenues. 2. Earnings before interest tax debrciation and amortisation (EBITDA) EBITDA grew from Rs. 1,762.7 Million in FY2014 to Rs. 4,574.4 Million in FY2015, a strong growth of 159.5% due to improved efficiency and optimum utilisation of manufacturing units. EBITDA margin grew from 11.3% in FY2014 to 16.9% in FY2015 as a result of an extremely efficient cost structure. 3. Profit after Tax Profit after tax increased from Rs. 1,322.8 Million in FY2014 to Rs. 2,964.2 Million in FY2015, a growth of 124.1% in profit after tax. Profit after tax margins grew from 8.4% in FY2014 to 10.9% in FY2015 driven by improved EBITDA margins. 4. Interest and Debrciation Interest expenses grew from Rs. 460 Million in FY2014 to Rs. 622.5 Million in FY2015, mainly due to increase in debt levels because of increase in level of operations. Debrciation expenses grew to Rs. 203.6 Million in FY2015 from Rs. 116.1 Million in FY2014. 5. Return on Capital Employed and Return on Equity Return on capital employed grew from 19.9% in FY2014 to 26.9% and Return of Equity grew from 26.9% to 32.6% in FY2015 due to improvement in capacity utilisation. 9. Management Outlook Going forward, with strong operating performance, a solid quality management team, excellent technology tie-ups and Governmental thrust on Renewables, the Company is on a strong growth footing. The management is confident of maintaining a high growth trajectory in the wind power space. Continuous order inflows reflect customer confidence on our superior product quality and project delivery capabilities. We expect our healthy order backlog to translate into incremental revenues, providing good visibility and driving earnings growth. We foresee wind energy capacity additions to witness a faster pace compared to other conventional segments, such as thermal or hydro, over the next couple of years further improving the industry prospects. What lends significant confidence to the business is that we provide turnkey solutions and control one of the largest project site inventories. Being a leading player in the wind energy segment, we stand to reap the benefits of higher sectoral growth. We are well positioned to scale higher with a healthy order book and a strong balance sheet. We hope to sustain a robust growth rate, which will further improve our return ratios. We aim to be the market leader in the coming two years and sbrad operations to all the seven windy States from the brsent five States. 10. Human Resources The Company recognises that its people are its most important resources. The Company's workforce comprises highly-skilled and qualified employees and it strives to provide amongst the best working conditions. No compromise is made for the health and safety of its people either at its offices, plants or its project sites. The Company's work culture is based on sincerity, hard work and a penchant for perfection and pursuit for excellence. The Company encourages the development of necessary and relevant skills of its workforce and regularly holds training sessions to upgrade these. The Company also has a system of recognising and rewarding exceptional performance of its employees with commensurate incentives. As on March 31, 2015, the Company had over 1,678 employees. 11. Internal Control Systems The Company has sufficient and commensurate internal control systems to match the size and the sector it falls under. The Company has well-defined and clearly laid-out policies, processes and systems. These are strictly and regularly monitored by the top management and any digression or discrepancy is immediately flagged off and corrected. All requisite regulations, rules and laws of the land are strictly followed. The Company has a sound system for financial reporting and well-defined management reporting systems. These are supported by Management Information Systems (MIS) that regularly check, monitor and control all operational expenditure against budgeted allocations. The Company also has a regular internal audit process that is monitored and reviewed by the Audit Committee, which ensures that any deviations from set benchmarks are immediately reported and corrected. The Company regularly keeps upgrading its systems and processes to ensure these are up-to-date 13. Safety Measures Safety is a matter of continuous evaluation and utmost priority at Inox Wind. Assurance and management of safety is essentially aimed towards protecting our operating staff, general public and the environment. Our HR policy strives to provide a safe working environment not only to our corporate and plant staff, but also the workers at each project site. We ensure that safety is maintained across all the stages of project development - design, construction, commissioning and operation & maintenance. We maintain a very high standards of health and safety measures at our plants. We are also fully compliant with the environmental laws. 14. Cautionary Statement Statements in this Management Discussion & Analysis may deemed to be 'forward looking statements' within the meaning applicable securities laws and regulations. As 'forward looking statements' are based on certain assumptions and expectations of future events over which the Company exercises no control, the Company cannot guarantee their accuracy nor can it warrant that the same will be realised by the Company. Actual results could differ materially from those exbrssed or implied. Significant factors that could make a difference to the Company's operations including domestic and international economic conditions affecting demand, supply and price conditions, changes in Government regulations, tax regimes and other statutes. 15. List of Abbreviations BU : Billion Units CDM : Clean Development Mechanism CSR : Corporate Social Responsibility GDP : Gross Domestic Product CEA : Central Electricity Authority CAGR : Compounded Annual Growth Rate GW : Gigawatt GBI : Generator Based Incentive IMF : International Monetary Fund IRR : Internal Rate of Return kWh : Kilo Watt Hour MNRE : Ministry of Non-Renewable Energy MW : Megawatt NAPCC : National Action Plan on Climate Change O&M : Operation & Maintenance REC : Renewable Energy Certificates SAD : Special Additional Duty WTG : Wind Turbine Generator HR : Human Resource RPO : Renewable Purchase Obligations MIS : Management Information Systems FDI : Foreign Direct Investments IPP : Independent Power Producers FII : Financial Institutional Investors |