>SUZLON ENERGY (MORGAN STANLEY)

Ready to Grow

Recuperation: Suzlon has largely restructured its balance sheet and hence some short-term risks have eased. The focus has shifted to a slower and perhaps longer part of the healing in terms of winning new customer orders and regaining its growth trajectory. With steady fossil fuel price increase, positive global policy risk for wind power and likely interest rate and export incentives from the Indian budget, we expect Suzlon’s growth and margin outlook to improve. Near-term worries may arise from lower shipments, lower margins and lingering concerns over stretched
balance sheet. We have lowered our shipment FY09 and FY10 estimates by about 250MW to reflect weak new orders in the domestic market this year and a smaller order backlog of 1,250MW.

Potential Positives: If the oil price were to continue to rise above US$85/barrel, it would make wind power cost competitive (with a nominal carbon cost), without any subsidy, thereby improving the FY11/beyond outlook.

What’s Changed?
Some near-term risks have eased, however, operating conditions remain difficult, in our view. In the interim, the stock price has increased by 85%+ over the past few weeks, outperforming the Sensex by 50%.

1. Shipment Estimates: Based on our recent discussions we gather that domestic orders in March quarter were weaker than our previous estimates. As a result, the shipments in FY09 were likely lower than our previous estimate of 2,750MW. We have lowered our estimate to 2,500 MW for FY09 and 2,450MW for FY10. Due to the high operating leverage, this has reduced our net profit by Rs1.8bn for FY09e and Rs1.9bn for FY10e.

2. Lower Margins: Due to higher costs related to capacity expansion and existing inventory at high costs, we believe that Suzlon’s EBITDA margins may be lower than our initial expectation for FY09 as well as FY10. We now factor in an EBITDA margin of 13.6% and 12.4% for FY09e and FY10e, respectively. This has reduced our net profit estimate by Rs3.5bn for FY09 and Rs450mn for FY10.

3. RE Power Results: Since our last report, RE power has released FY 09 results and FY 10 guidance as well, which were better than our expectation.

4. Balance Sheet Risk: Besides restructuring its CBs, Suzlon has also successfully renegotiated its outstanding acquisition debt of €503m. It has secured a covenant holiday. However, it has to pay an additional interest of 150bps only compared with our initial expectation of an additional 300bps.

5. CB and Debt Restructuring: Suzlon has restructured a large part of its outstanding CBs. As a result, there are now four categories of CBs outstanding, and in the process, it has reduced its outstanding debt by US$111mn. This has also resulted in exceptional gains of US$70mn (due to
buyback of the CBs at 55 and reissuance of CBs at 60) to be booked in FY10.

6. Equity Dilution: Due to new CBs issued with a conversion price of Rs76 per share, we believe that there could be an immediate equity dilution with up to 37mn new shares (2.5% of outstanding shares).

Where We Differ: Lower than Consensus
While our revenue, EBITDA and EBIT forecasts are slightly higher than the consensus expectations, our net profit and EPS estimates are lower than the consensus.

We believe that the consensus may be factoring a very weak new order and shipment outlook for the industry and the Suzlon group companies, resulting in the low revenue forecast. We are
assuming WTG shipments (Suzlon + RE Power) of 3.9GW and 4.4GW, respectively, for FY10e and FY11e, which implies growth of 2% in FY10e and 13% in FY11e. We believe that these are very conservative considering the long-term industry growth forecast of 14-15%.

1. Inflection in Global Wind Demand – While consensus expects about 9% growth in global wind demand in 2009 and 20% in 2010, we expect no growth in FY09 and 27% growth in FY10. We think FY10 should mark an inflection point for global wind demand and Suzlon should be well
positioned to grow strongly in FY11.

2. Inflection in India and US Demand – Due to potential decline in wind demand in India and the US (two of the largest markets for Suzlon) this year, we expect a strong rebound next year that should benefit the company

We suspect that the consensus estimates may be factoring a decline of 8–9% in FY10 and then 13% growth from this low base.

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