>SUZLON ENERGY (MORGAN STANLEY)

Another Stock Placement

Quick Comment: Due to a strained B/S (being repaired) and large stock pledges (promoters), the market has been concerned about stock overhang. While we were not expecting it, the promoters have announced a stock placement. Positives such as strong RE Power results and guidance, successful renegotiation of the bulk of its CBs, potential for better domestic credit conditions, and likely higher domestic infrastructure investment are being partially negated by
weak Hansen results and potential stock overhang from second promoters’ sale of $120mn (after selling $45mn two weeks ago). While the future risk of dilution from a primary stock offer or overhang from secondary sale cannot be ruled out, we believe that the restructuring of the remaining debt, potential stake sale in Hansen, and new order wins are likely to serve as positive catalysts.

What's new: Suzlon’s negotiations with Martifer to delay the last payment of €175mn (Rs11.4bn) for acquisition of RE Power have been unsuccessful. To raise cash, promoters are in the process of selling 4%+ of Suzlon stock to raise ~Rs5.5bn. Proceeds will be loaned to Suzlon (via Inter Corporate Deposits). Furthermore, Suzlon has secured a new credit line to draw down an additional Rs6bn. Proceeds from these two borrowings will be used to pay Martifer.

What we like: First, a solution to Martifer payment via this route compared with issuance of new shares at Suzlon avoids dilution to existing shareholders. Second, uncertainty regarding payment to Martifer is eliminated.

What we do not like: First, we are concerned about the frequency of the promoter sell-downs. Unless promoters assure the market that there are not going to be further disposals, it is likely to create a significant overhang. Second, a disposal of a partial stake in Hansen to reduce acquisition debt may have been a better strategic alternative. Potentially freeing up debt capacity, it may have allowed it to raise bank debt for full payment. Third, we are concerned about the timing of stake sales during a period when the market is awaiting its FY09 results and the results of its debt restructuring.

To see full report: SUZLON ENERGY