>SUZLON ENERGY LIMITED

Lowering forecasts: We continue to expect Suzlon to end FY12 in the black after two consecutive years of losses. However, we reduce volume sales and margin assumptions because: (1) A weak global macro environment has tightened project financing and we expect shipment delays for REpower despite a strong order book of 2.7GW (as at October 2011), even if this is compensated by a higher EUR/INR rate (9% in the past 5 months). (2) We expect the Indian wind market to decline in 2012/13 and anticipate more pricing pressure leading to margin compression. We cut our FY12 and FY13 EPS (pre-exceptional) by c90% and c60% respectively, and remain below management guidance for FY12 and consensus. Cash flows strain from forex rate: At INR18, the shares are substantially below the foreign currency convertible bonds (FCCB) cINR77-97 conversion price range, making the possibility of an FCCB conversion remote. The sharp INR depreciation over the past few months is negative for Suzlon’s finances, already strained with loan repayments of INR37bn due in FY13, including FCCB payments.


Uncertainties create share overhang: We believe REpower loans have covenants limiting the free transfer of cash to Suzlon, although we continue to look for greater visibility from management on this. There is little clarity on the timing of the INR10bn payment from Edison Wind, due for around two years, and on further renegotiation of the FCCB conversion price. These uncertainties lead to share overhang, especially as the FCCB conversion deadline approaches. Any visibility from the company on these should help reduce this overhang


Trading at fair value: Our DCF-based valuation is INR40. However, due to continuing uncertainties around some of our key assumptions, we raise the discount to our DCF value to 50% from 15%. This increase is also supported by the fact that the stock trades at a premium to the average peer group 2012e PE. Our new 12-month target price is INR20 and implies 6% potential return; we retain our Neutral (V) rating. At the average global peer CY2012e PE of 10x, the stock would be valued at INR10.50, which we believe reflects a worst-case scenario; however, there are various catalysts that could bring up the shares to their DCF valuation.


Key catalysts: (i) improved visibility on cash inflows over the next few quarters (ii) continued
new order flow momentum and (iii) announcement / improvement of regulatory support in
new and existing wind markets and (iv) decline in interest rates in India. Key risks: (i) further
INR depreciation; (ii) margins and sales volumes lower than our expectations.


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