>SUZLON ENERGY: Suzlon financed the Big Sky Project of Edison Mission Energy

■ Edison repayment before February 2013 is uncertain: In October 2009, Suzlon financed the Big Sky Project of Edison Mission Energy. This loan has a five-year final maturity. Edison filed Form 10-K for 2011 at end-February, which states that specific events, including project performance, may trigger earlier repayment of this loan. It also mentions that based on the operating history of the project, the loan could mature as early as February 2013. While Suzlon now expects to receive the Edison payment in 1H FY13 (April –October 2012), we feel that it might not receive the cUSD211m payment from Edison by June 2012, when the first FCCB repayment of USD306m/cINR15.5bn is due. Suzlon’s (ex REpower) cash flow analysis suggests a severe cash crunch: We believe there are covenants on the REpower loans that limit the free transfer of cash from it to Suzlon. Therefore, our analysis of Suzlon’s (ex REpower) cash flow suggests that it will be short by cINR7.5bn in June 2012 for the first tranche of the FCCB payment and by cINR30bn for FY13 in meeting all its repayment obligations.


■ Possible options for funds: Given the lack of visibility on REpower’s debt covenants, we
estimate the cash inflow from various possible options, such as: (i) sale of a wind farm; (ii) sale of a stake in other businesses/subsidiaries; (iii) dividend and advances from REpower; (iv) factoring for Edison receivables; and (iv) credit facilities not utilised. Based on our analysis, we continue to see an equity dilution risk, with Suzlon likely to convert around 50% of FCCBs to equity.


■ Our blended DCF- and RoE-based TP remains INR20: Our DCF-based valuation is INR25.6 (average of two DCF approaches). We blend this with an RoE-implied PB value of INR13.2 to capture the sector’s market value better and to reflect current uncertainties. This leads us to a target price of INR20 (rounded off). The stock is trading at a high premium to the average peer group on CY12 PE, which we believe is not justified given the debt overhang. At the average global peer group CY12 PE of 14.1x, the stock would be valued at cINR12.7, which is lower than our target price.


■ Catalysts: (i) continuing lack of visibility on cash inflow over the next few quarters; (ii) slowdown in order inflow; (iii) full-year volumes and margins below revised guidance; (iv) newsflow on increasing competition for Suzlon in the Indian market; and (v) further rupee depreciation.


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