Tuesday, May 29, 2012

>SUZLON ENERGY: Third consecutive year of loss on missed guidance

FY12 performance worse than expectations. Suzlon reported a net loss of INR4.8bn vs consensus of a loss of INR150m and our estimate of a INR339m net loss. When it reported its nine months’ results on 11 February, the company reduced its FY12 sales guidance to INR210-220bn (from INR240-260bn) and its EBIT margin guidance to 5-6% (from 7-8%). We attribute the higher-than-expected net loss to an EBIT margin of 4.2% (old schedule VI format), lower than guidance. Under the new format, EBIT works out to INR11.6bn, for a 5.5% EBIT margin, but the old schedule reporting applies for comparison with guidance,
in our view. Due to the shift in certain items from operating expenses to finance charges (of cINR2.8bn in FY12), both the finance charges and the EBIT margin are higher under the new format. The group’s order book remained flat q-o-q, with c5.7GW of orders valued at INR415bn.

FY13 EBIT guidance is lower than expectations. Suzlon has guided to FY13 revenue of INR270-280bn and an EBIT margin of 6%. On revenue, current consensus and HSBC’s forecast are in the range of INR254-256bn. Our EBIT margin forecast is 6.2%, and consensus is at 6.6%. Our forecasts are based on the old schedule VI; under the new format, our finance charge forecasts might be higher. The company will hold its annual results conference call on 29 May at 16.30 IST, after which we will revisit out forecasts and provide an update.

More funds required for meeting FY13 repayments. In our note of 27 March, Cash crunch seems more severe than expected, we highlighted that Suzlon (ex REpower) has debt repayments of cUSD700m in FY13 and is short cUSD600m (cINR30bn) to meet its repayment obligations. Besides the USD300m being raised from the banks, we believe the remaining deficit will be met through other sources/measures, as highlighted in our note.

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 better capture the sector’s market value, reflecting the 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 CY12e PE, which we believe is not justified given the debt overhang. At the average global peer group CY12e PE of 15.7x, the stock would be valued
at cINR13.9, which is lower than our target price.

Potential catalysts: (1) Performance below expectations over the next few quarters, (2) a slowdown in orders, (3) further rupee depreciation, and (4) news flow on decline in Suzlon’s Indian market share, given the increasing competition.

To read report in detail: SUZLON ENERGY