Sunday, December 27, 2009


1H’10 results uninspiring… Suzlon reported consolidated 1H’10 Sales -7.5%, EBITDA -88% and reported net loss of Rs10 bn vs. Rs2 bn loss in 1H’09. Costs were higher on increased fixed costs on new facilities (capacity ~2x to 5.7 GW in FY09-10) and lower WTG delivery volumes (-62% YoY in 1H’10 to 406 MW).

… but debt woes easing: Investors’ worries on high debt and its serviceability are easing as Suzlon sold Hansen’s 35.22% (of its 61.28%) stake to raise US$370 mn. The company has repaid US$780 mn worth of acquisition loans through combination of Hansen stake sale and refinancing from a new US$430 mn offshore facility from SBI. It may also convert promoter’s Rs12 bn loan to equity through preferential/ or rights issue (see Annexure I).

Global demand rising

Visibility improving; ~23 GW of wind capacity addition probable: Improving global economic scenario, continued policy support and higher credit availability has led to better order visibility for WTG companies. Developments over last 6M are promising- a) ~$1.7 bn cash grants have been infused in the system; b) MoM improvement in order inflow to 350 MW/month (from 150 MW/month in Aug) + large framework on-shore orders being placed (954 MW to REpower); c) ~700 MW wind projects commissioned after debt tie-ups. d) Gamesa estimates wind projects under development at ~23 GW, with ~2.2 GW projects to be ordered soon; and e) Iberdrola, EDP, Duke have not just raised wind capacity targets but also raised funds for future expansion (Exhibit 14).

Indian regulations bode well for Suzlon’s growth; market size may increase from 1.5-2x to 4 GW/pa: Regulatory changes in the form of new RE tariff norms (15.8% PT-ROE) and draft regulations for RE Certificates are a precursor to national RE Purchase Obligation (RPO), which has been agreed to by Forum of Regulators at 5% for 2010, & 1% increase p.a. till 2020. We think Indian markets will inch to 4 GW/p.a by CY’11 from ~1.5-2 GW/pa currently.

Price target lowered to Rs95; Maintain Buy: Post Hansen divestment, there is lack of clarity on Suzlon’s consolidated balance sheet. We have cut our estimates to factor in lower volumes; unconsolidated Hansen (considered as profit from associates) and introduced FY12E (Exhibit 18). We have changed our valuation methodology from DCF to a one-year forward PE multiple, and now value Suzlon Wind at 15x FY12E earnings, at a 25% discount to current peers’ average (20x), while REpower and Hansen are valued at 18x. We get a Mar’11 target price of Rs95 for fully diluted equity of Rs3,835 mn including Rs1.0 bn YTM for out-of-the-money FCCB. Maintain Buy as- a) we remain optimistic on recovery in wind taking lead from positive commentary by Siemens, REpower & Crompton; b) regulatory push & market expansion in India; c) easing debt concerns; and d) management’s focus to legally integrate REpower in FY11E.

Risks: Oversupply concerns in China and their possible global foray could lower WTG prices. 200 MW variation in volumes will vary earnings by ~7%.

To read the full report: SUZLON ENERGY