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Turnaround delayed

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Energy's plan of turning around may take some more time to materialise. This can be attributed to the resurfacing of execution issues and the lowering of revenue and margin guidance by the management. Earlier, the management had given a revuene guidance of Rs 24,000-26,000 crore and Ebit margin of seven-eight per cent for FY12, which have been revised to Rs 21,000-22,000 crore and five-six per cent, respectively, post-results on Saturday.

The company also reported higher-than-expected loss of Rs 286 crore for the quarter (compared to a profit in each of the two preceding quarters, totalling Rs 108 crore).

Some analysts who were expecting Suzlon to report a net profit in FY12, no longer see that as a possibility. These events saw the stock fell over seven per cent on Monday and another 3.5 per cent the following day, before recovering some ground to Rs 29.50 levels.

While analysts remain positive on the company's longer-term prospects, they have turned a bit cautious from a near-term perspective and await clarity regarding volume growth and debt repayment.

WEIGHED DOWN BY INTEREST COSTS
In Rs crore FY11 Q3’ FY12 % chg
Net sales 17,879 4,986 12.5
PBIDT 859 360 67.0
PBIDT (%) 4.8 7.1

234 bps

Interest expenditure 1,333 358 21.2
Adjusted net profit -1,111 -288 -13.6
% change is y-o-y and pertains to Q3' FY12                      Source: CapitaLine Plus

Back to losses
For the nine months ended December, the company recorded consolidated turnover of Rs 14,383 crore and loss of Rs 178 crore. While revenues and margins improved during this period, it's still not enough to cover the interest cost, which remains at elevated levels.

For the December quarter, it reported a net interest expense of Rs 357.6 crore, whereas the earnings before the interest cost came to Rs 152 crore, leading to loss at the net level. If the lower end of revenue and margin guidance is taken, the earnings before interest could be in the region of Rs 1,050 crore, which is not enough to cover the estimated interest cost of Rs 1,250-1,300 crore in FY12 (for first nine months, the actual is Rs 908 crore). Thus, FY12 could see the company again end up with losses.

Turnaround delayed
For the next financial year, the key factors to watch are improvement in volumes (execution) and reduction in debt. Any delays on these fronts could push back Suzlon's turnaround further. With a strong order book, an all-time high in the December quarter at 5,755 Mw the company should hopefully clock better volumes in FY13. A large part of the setback in December quarter was on account of lower volumes, which the management attributed to the extended monsoon in India, delay in working capital funding and slow grid infrastructure ramp-up in China. However, it is hopeful of achieving revenue growth of about 40 per cent in FY13, backed by a strong order book and partly from spillover of unexecuted projects. At this pace, the company will have to execute volumes of about 4,500-4,700 Mw, as against 3,200-3,500 Mw estimated for FY12.

Assuming an Ebit margin of six-seven per cent, analysts expect the company to report Rs 1,750-2,000 crore in profit before interest, which should help absorb the estimated interest cost of Rs 1,300 crore for FY13, making room for it to report a net profit.

Next year, the reduction in debt will also be crucial. Foreign currency convertible bonds (FCCBs) of Rs 3,700 crore are due in FY13. Analysts expect part of this to be met through internal accruals (Rs 1,000 crore), recovery of receivables (Rs 1,000 crore) along with funds lying with (a subsidiary) of about Rs 1,700 crore. The Street, though, is cautious and will be closely watching the progress on these fronts.

"Given the lack of clarity on any covenants limiting the free transfer of cash from REpower, the timing of the $200-million payment from Edison Wind, due for around two years, and further renegotiation of the FCCB conversion price, we continue to be somewhat cautious, especially as the FCCB conversion deadline approaches. Based on our cash flow analysis, we see a dilution risk, with Suzlon likely to convert around 50 per cent of to equity," says Charanjit Singh, who tracks the company at HSBC Global Research, in his recent note.

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