Wind blowing in the right direction for Suzlon

Recovery in operations, debt pressure easing, fortunes on the mend

Suzlon Energy’s liquidity issues, which began easing from 2015, have helped its stock rebound. Over the past year, it is up 80 per cent.

The sale of German subsidiary Senvion (earlier REpower) for Rs 7,000 crore and equity capital infusion (and non-fund based working capital support) by Dilip Shanghvi and Associates (DSA) have strengthened Suzlon’s balance sheet. From Rs 15,000 in January 2015, Suzlon’s net debt (excluding foreign currency convertible bonds or FCCBs) came down to Rs 7,010 crore at the end of the June quarter. These events helped Suzlon obtain positive rating from CARE on fund-based facilities.

It still has $29 million of FCCBs due for conversion in April 2016 and $299 million in July 2019, at Rs 15.5 a share. While this would dilute equity and lower the stake of promoters, DSA, lenders and other shareholders, it will also cut debt significantly.

Reintroduction of accelerated depreciation (AD) scheme by the Centre last year has begun to bear fruit. Suzlon’s volumes were up 28 per cent (205 Mw) in the June 2015 quarter. This, along with cost reduction initiatives, pushed up earnings before interest, taxes, depreciation and amortisation to Rs 237 crore from Rs 57 crore in the year-ago period and margin to 15.3 per cent from 3.3 per cent.

Interest cost, too, reduced from Rs 474 core to Rs 293 crore. Adjusted for one-time gains from Senvion deal, Suzlon’s net loss fell from Rs 661 crore in the first quarter of FY15 to Rs 210 crore, lower than Street’s expectations. With debt constraints easing, Suzlon should benefit from the AD scheme and generation-based incentives offered as part of the government’s ambitious wind energy generation target of 60 gigawatts by 2022. With new order inflow up 28 per cent year-on-year to 188 Mw in June quarter, its order book stood at 1,107 Mw. New projects awarded in the September 2015 quarter have already totalled to 205 Mw.

Any reduction in incentives (albeit unlikely) could impact prospects of wind equipment makers like Suzlon. Operationally, Suzlon is profitable, but overall profitability might still be a few quarters away. Centrum Broking estimates Suzlon's execution to remain subdued for the second quarter of FY16 at 128 Mw due to seasonal trends and pegs its losses at Rs 260 crore. Given that customers usually opt for AD scheme in the second half of a financial year, December and March quarters of FY16 hold potential. Investors could consider buying Suzlon on dips.