Sowmay Jain

(A Quick Analysis) Inox wind at its 52 weeks low.

Drawing growth graph in notebook with heap coins stair, financial plan concept

INOX WIND remains a controversial company. Sometimes I heard buy ratings and other time, sell. The company’s IPO, in April 2015, was one of the most successful of the year, being oversubscribed 18.6 times. Listed at Rs 300, it opened at Rs 400 on April 10 and closed at Rs 438.

Img – business-standard.com

Img – livemint.com

But what made the share price dropped from an all-time high of 447 to the low of 181? A drop of 56% with no drastic change in the books. What is the reason behind the consistent drop & Is the drop justified? – That is what you’re going to get in this quick analysis.

Img – Google SE

And a few day back INOX WIND was at its 52 weeks low at 181.

What is the reason behind the consistent drop of Inox Wind share price?

#1) Increase in Trade Receivables (TR).

Trade receivables are the money payable by clients. The aggregate receivables increased to 148 days in 2016, from 140 days in 2015. In simple terms, it means company takes 148 days to liquidate its sales into cash which can lead to the cash shortage. The days are much higher as compared to its industry and still increasing.

Have a look on how TR increased by more than double this year.

Img – Company’s official site

It’s a straight 68.5% increment in TR.

But remember, increase in TR is not a major concern instead increase in TR days is a matter of concern. It is good to have increasing TR due to high increasing sales and same is the case with Inox Wind but the increasing rate of sales is 63% which is lower than TR increasing rate which resulted in more days to liquidate sales. So here comes another fact – Increase (%) in sales should be more than an increase (%) in TR to reduce the total TR days.

Img – Company’s official site

Also, the profit in the balance sheet shows the accrual sales (transaction occurred but cash is not received yet) due to high TR which creates some negative effects like cash shortage.

Question: If Inox wind is not getting its sales converted into cash then from where they manage to get cash for further operations? This leads to another drawback which is explained further.

#2) Increase in Debt and Interest burden.

The company takes a long time to liquidate it cash so from where it is getting cash for further production?

Debt.

Which in turn increased the interest burden a bit. Even CRISIL has revised its outlook on the long-term bank facilities of the company to ‘Negative’ from ‘Stable’ and reaffirmed the ‘CRISIL AA-‘ rating. In short, something negative happened with the company.

Img – Company’s official site

#3) Competition from Suzlon.

The comeback of the rival company SUZLON created uncertainty towards Inox Wind among Investors. The following snapshot is enough to show how Suzlon is boosting up again after a huge downfall in past several years.

Img – Google SE

There are also some minor adversities like the declining financial health of its Austria based technology provider, some adverse tariff issues but the company remains confident and kept aside these issues.

Is the Inox Wind share price drop justified?

I’ve been tracking the ups and downs of this stock since it was 290. Financial books are bit attractive but I was afraid to lock money due to the adverse outcomes, quarter by quarter. However, entered the stock at slightly more than 200 INR.

Following are some facts and figures which (I think) makes Inox an attractive investment at the current low market price.

First of all…..

People are continuously asking Devansh Jain, Executive Director of Inox Wind, about – Why Inox Wind has not delivered any returns, in fact it has been hugely negative returns for shareholders since listing. When can your shareholders expect gains, when can the company show blockbuster numbers?

His reply was – “Having said that as a management the important thing for us to do is to achieve the targets we have committed. We delivered on the profit margins, we have delivered on the growth numbers, we have delivered on the absolute profitability”

Read more at http://bit.ly/2brLmyN

And Yes! He is up to the mark to his statements. They had performed well this year and why he should care about the stock price instead he should concentrate on its management. Well said by Warren Buffett:

“Players should concentrate on the playground, not on the scoreboard” (click to tweet)

Second.

Most of the sales were executed in the second half of the year which was around 70% of the sales. This is what put an immense pressure on Trade Receivables reflected in the year end annual reports. SO chances are, the company may release a huge amount of cash this accounting year.

Img – Company’s official site

Third.

I accept that there is an increment in TR days but if we see the other side, the company did the job up to the mark. What’s the other side?

Despite the increment in TR days, company managed to decrease the net working capital days by around 18 days to 130 days which is now further dropped to 122 days (have a look below)

Img – screener.in

Here’s the statement from company’s spokesperson:

“We came down from about 148 odd days to about 130 days while we have maintained that our eventual target is to get to about 90 days. I think we are well on track to do that. However, what is difficult to commit is – will it happen within Q1, will it happen within Q2…….”

But I’m still confused on why the stock dropped to such a great extent just because of high TR days (as claimed by many brokerage firms) despite the fact that the overall days declined.

Let us dig out how it company managed to decline its WC days but before have a look at the formulas:

Working capital = Current asset – Current liabilities.

Current Asset = Asset which had to be realised in under 1 year.

Current Liability = Obligations which had to be met under 1 year.

Working capital days = (Average Working Capital/Annual sales) * Number of days in the year.

Average WC = It is the average value of the WC which is maintained through out the year of operation.

These ratios show the operational efficiency of the company. In simple terms, how effectively the company is deploying its day to day operations.

Management had taken a very clever move to decrease their net working capital days as well as the long-term borrowings. I become a great fan of the management after I found this.

Let’s peek into their balance sheet.

Img – Company’s official site

Now just focus on the red marked elements. Company raised the short-term borrowings by an almost bit less than double and manage to get a high amount of float benefits from its suppliers which lead to increase the Trade Payables.

This 2 elements helped the company to decrease the Net WC days by 18 days. The contribution due to TP is appreciable.

And the company had also reduced its long-term borrowing by more than 25% as you can see in the image above. It ensures that company is getting rid of long term debt element in its balance sheet and raising out short-term obligations which should have to be paid under a year. It makes us believe that company will stay unaffected with interest burden in the long run.

But it will still incur short-term interest burdens?

Yes! It is and management is quite confident on this point that they are generating enough cash to pay their financial obligations without defaulting. Let us believe their board of directors a bit.

Also, Inox wind is already sitting on an order book which can sustain for almost next 4 years with most of the client remained government institute (one order is from my state – Telangana) which make sure that it will not turn out to be defaulted AKA this ensure that company will not get much affected by the short-term interest burden.

Should you buy Inox Wind shares?

After considering above all the facts and figures, it makes sense (at least for me) to buy the Inox Wind stocks at its current low valuation. It looks a good opportunity for a long term investment of 2-3 years time horizon. Hold on! I don’t own your money so don’t consider buying the stock on solely on this analysis. Invest with your own due diligence and also consult your financial adviser before you make any move.

Here’s a great saying: (#RT)

So it kinda possible with Inox Wind also (at least for this accounting period). Always remember the rule of long term investing – Think long, Don’t distract by shit like quarter results.

So what if any undervalued stock dropped out further?

Here comes the concept of Margin of Safety – It’s good to buy a stock valued 100 for 80 but its better to buy it for 50. Both are undervalued but later has more Margin against risks.

If the price dropped furthermore then it means that the Mr. Market gave you another chance for acquiring that asset for a more undervalued price.

I keenly track the stocks which touch their 52 weeks low because this is where the real gold mines are hidden. A perfect opportunity to get wonderful business at cheap rates. Not every stock which turned there are excellent but almost 5% of them are always great opportunities like my move with HCL made me some quick bucks, Tata steel on the day of BREXIT, ICICI bank when it touched its 10 years low etc.

Currently, I’m reading a book – The Little book by Aswath Damodar. He stated a quote at the very end of the first chapter – Success in investing doesn’t come from being right but from being wrong less often than everyone else. (click to tweet)

In the stock market, it’s not possible to be accurate on all of your 10 bets. The real success is from being right for 7 bets and for rest 3, even Warren Buffett lose.

All this shit is just to clear out the point that it may possible that something adverse happens in the future and Inox Wind turns out to be the worst performing stock but it doesn’t mean that you lost. Keep your portfolio with concentrated excellent stocks.

Some stocks may perform good, some may be bad and some may not move the needle in either direction but just make sure that the overall portfolio return should always be positive.