Inox Wind target price at Rs 230

Madhya Pradesh Electricity Regulatory Commission has, as per media, cut feed-in tariff for wind projects to be commissioned from April 1, 2016 by 19% (Madhya Pradesh’s steepest cut). The tariff now, at Rs 4.78/unit, is significantly below industry estimate of Rs 5.3-5.5/unit.

Developers told us this will hit investments in Madhya Pradesh unless OEMs rationalise pricing or use bigger, more efficient turbines. We see risk of equity IRRs falling to 13% from 20% at 23% PLF. Maharashtra recently cut tariff by 2.6% to R5.5/unit (low wind zone) and Rajasthan may follow suit – both high tariff states.

Given increasing indications that wind is falling out of favour with Government, we cut industry growth to a Madhya Pradesh compounded annual decline of 2% over FY17-22 from flat, and reduce Inox’s FY17E/FY18E PAT by 12%/22%.

We cut target price by 23% to R230 (12x FY17E P/E). Current valuation of 13x may look attractive given 26% EPS CAGR over FY15-17 and 28% RoE in FY17, but is expensive when viewed in light of a volume decline of 2% over FY17-22E.