Suzlon Energy: Low on power

The last two years have been tough for shareholders of Suzlon Energy. They have been hoping for a recovery in the company’s performance: Against a 20 per cent return by the Sensex in the last one year, Suzlon’s share price is down 43 per cent. And, the company as well as its share price is showing no signs of a recovery.

A look at the company’s results for the quarter ended June suggests that its woes are not yet over. Suzlon reported a 42 per cent decline in consolidated revenues, while losses further deepened to Rs 912 crore from a loss of Rs 453 crore in the year-ago quarter.

The epicentre
Considering that about 50 per cent of Suzlon’s turnover is derived from the US and European markets, the slowdown in demand, higher capacities, postponement of projects and pricing pressure in these markets have resulted in the poor performance of the company. During the quarter, its European subsidiary, Repower, reported a 54 per cent decline in revenues and a Rs 102-crore loss in earnings before interest, taxes, depreciation and amortisation (Ebitda), compared to a positive Rs 130-crore Ebitda last year.
 

UNDER PRESSURE
In Rs cr	FY10	FY11E	FY12E
Revenue	20,620	17,543	22,037
EBITDA (%)	3.8	0.7	9.0
Net profit	-983	-1367	501
EPS (Rs)	-6.4	-7.8	3.0
PE (x)	NA	NA	16.9
Source: BNP Paribas Securities

Notably, even the standalone Indian operations (Suzlon WTG) did not receive any order during the quarter from these regions. It is considered that the problems may continue in these markets for two quarters, as a result of which there are concerns over revenue visibility in the near term.

The saving grace
Meanwhile, the company is increasing its focus on emerging markets like India, Brazil and China, where demand is projected to improve. Despite the decline in order backlog from the US and Europe, the company’s order backlog improved to 1,459 Mw in the quarter ended June, compared to 1,126 Mw in the March quarter. This was led by India’s order backlog touching an all-time high of 580 Mw on the back of higher demand. The company is also increasing its capacity in Brazil (by end-FY11), where it commands over half of the market share and expects more projects in the near term.

Outlook
Although the demand from the Indian and other emerging markets is growing, the subdued outlook for large markets like the US and Europe will remain an overhang on the company’s consolidated performance in the near term. Analysts expect the company to report further losses in the September quarter as well as for the year ending March 2011.

However, the outlook is expected to improve from the second half of the current year and into the next year on the back of the benefits of cost-reductions undertaken by the company as well as higher volumes led by better demand.

At Rs 50.20, the stock trades at 17 times its 2011-12 estimated earnings, wherein upsides, if any, look limited in the near term. However, as the turnaround is expected in 2011-12, investors with a long-term perspective may expect some gains.