Sunday, January 22, 2012

>SUZLON ENERGY- World’s 3rd largest wind turbine manufacturer : Indian Operations (Suzlon Wind) & REpower (Europe Operations)

Suzlon Energy Ltd (SEL), with manufacturing capacity of 6GW in India, China, Germany and USA is the world’s 3rd largest wind turbine manufacturer. The company enjoys10% market share globally and more than 50% market share in India.

• SEL is the one of the low cost producer of wind turbine in the world, with cost of production of per MW of 1.32mn euro as compared to world average of 1.8mn euro in FY11.

• Due to the ongoing volatile growth in developed economics, the company has diverted its focus on emerging markets like BRICS countries. As on Q2FY12, the Suzlon Wind order book comprised of 96% of domestic order as compared to 80% in the same quarter last year. SEL through its fully owned subsidiary REpower, supplies wind turbine to Euro zone. As on Q2FY12, the subsidiary has an order book of USD 4.1bn, giving an earning visibility for the next two years.

• The management is confident of turning around the operating performance of the group by taking initiatives like focusing on high revenue and margin markets, reduction in COGS and lower CAPEX. For FY12, the management has given top line guidance of Rs. 240 – 260bn with EBIT margin of 7-8%.

• In Q2FY12, the company has fully acquired its German subsidiary REpower, which has cash and cash equivalent balance of Rs. 11bn as on FY11. This huge cash reserve will help in reducing the group leverage position in future.

• The concern for the company could be the highly leveraged balance sheet, lower order book from USA & Euro Zone, depreciating rupee against USD/ Euro and competition threat from Chinese manufactures.


Leveraged balance sheet: The company is planning to deleverage its balance sheet by using cash from the 26% stake sale in Hansen Transmissions and also by using the cash from its wholly owned subsidiary REpower. As of H1FY12, the company had total debt of Rs. 134bn as compared to debt of Rs. 121bn in H1FY11. Due to high leverage, the company may find difficulties in raising funds.

Lower new order: Due to ongoing volatile economic position of developed world especially USA and Euro Zone, the company may find difficulties in getting new order. In Q2FY12, Suzlon Wind, the international orders fell by 65% Y-o-Y to 25MW. Thus the sustained economic downturn in developed countries can adversely affect the company’s performance.

Increase in international competition: China has added wind energy capacity aggressively for the last three years. Because of better outlook of wind energy, various international players have ventured resulting into competition. SEL may be affected both in domestic and in international markets by losing its market share.

Lower wind turbine realization: Due to increase in number of players in wind turbine manufacturing, the  capital cost for per MW of wind energy has declined drastically from 1.2mn euro to less than 1mn euro in FY11. This may affect SEL in getting international orders as in most countries the orders are placed through competitive bidding process. SEL’s domestic market is not expected to be much affected because of various import duties.

Foreign exchange risk: A significant part of SEL’s revenue, costs, assets and liabilities are denominated in foreign currency. Unhedged trade and financial exposure can adversely impact the company’s overall profitability. SEL’s presence across geographies helps in providing natural hedging by offsetting purchase and sales transactions amongst various currencies. Also the company is expected to repay FCCB worth USD 389mn by FY13 as the stock is trading at 70% discount to the conversion price.

To read the full report: SUZLON ENERGY