Winds of change for Suzlon

Near-term concerns remain, but order flow and margins are picking up.

Suzlon’s stock, which has significantly underperformed the broader markets since early 2008 due to worsening fundamentals, has moved in line with the Sensex since January this year on hopes that the worst is perhaps over for the company. On Monday, thanks to better performance for the December quarter (versus the September quarter), its stock jumped 3.5 per cent when the Sensex was relatively flat. However, while the company’s fundamentals and growth visibility are improving with a turnaround seen in 2011-12, analysts expect it to face headwinds on account of input costs, rising interest rates and a weak economic outlook in key developed markets in the next year. Hence, they suggest that investors with an appetite for risk and patience may consider the stock, which is currently trading at a PE of 10 times the estimated 2011-12 earnings.

Performance improving, but concerns remain
Although Suzlon Energy continued its streak of reporting losses, with a net loss of Rs 254 crore for the December 2010 quarter, the losses are declining (see chart). The improvement has been aided by lower raw material costs, higher volumes and other savings like reduction in employee expenses, which have helped Suzlon report a 300 basis points improvement in operating margins at 8 per cent. While the company more than doubled its earnings before interest to Rs 212 crore, it was unable to avoid losses at the net level primarily due to interest costs, which rose sequentially as well as on a year-on-year basis to Rs 252 crore. Excluding the impact of Hansen (its former subsidiary), during the December quarter, revenues declined marginally by 9.3 per cent year-on-year to Rs 4,433 crore.

While its order book has improved substantially and its standalone operations have reported a turnaround, on a consolidated basis, analysts still remain concerned due to the subdued outlook for its international operations, primarily in the US and Europe which are the major revenue contributors.

The company though sounds confident. “While the business environment remains challenging, particularly in the US and parts of Europe, our competitive position remains strong with a global sales and service organisation,” says Tulsi Tanti, Chairman and Managing Director, Suzlon Group.

Rising commodity prices and interest rates are some other concerns for the future. The latter is more of a concern given that the company still has net debt of Rs 9,809 crore in the books, which is 1.5 times its current networth (equity). The company, however, believes it will be able to reduce its debt in the coming quarters on the back of improving profitability.

On the whole, analysts expect the company to report losses in the current financial year, with a turnaround seen in 2011-12.

Orders on the rise
Analysts believe the break-even point for the company in terms of capacity utilisation is at about 1,900 Mw, wherein it will be able to cover up the fixed costs. And, this doesn’t seem far away. The company’s outstanding order book has seen a very strong turnaround. From a mere 1,126 Mw in the March 2010 quarter, its order book has risen to 2,578 Mw as of February 4, 2011. Of this, 1,624 Mw has been bagged from India-based entities.

The company can now make use of its facilities, generate more revenue and improve margins. The company sold equipment worth 1,029 Mw for the nine months ended December 2010 and analysts expect it to end the current fiscal with 1,500-1,600 Mw. In the next financial year, they expect the company to sell about 2,200-2,400 Mw — which looks achievable given that the current order book is well above the break-even sale. Based on these expectations, analysts estimate Suzlon’s sales to grow 30 per cent and operating margins to jump from about 6 per cent in 2010-11 to close to 11 per cent in 2011-12, thereby leading to a turnaround at the net level.

That apart, the order book of its European subsidiary REpower has improved marginally from $3.55 billion at the end of September 2010 to $4 billion at end-December 2010, taking the overall group order book to $7 billion (Rs 32,000 crore) compared with $5.4 billion in September 2010. This development also points to improved visibility for the next few years.