Suzlon: Blowing in the wind

Analysts refuse to get carried away with the turnaround story, as the firm needs to win orders worth 600 Mw each quarter.

Over the last couple of weeks, a segment of analysts has been debating the turnaround story of Suzlon, the world’s third largest wind turbine manufacturer. The process started a few quarters ago, with the company shifting focus to the home market, undertaking asset sale to generate cash and fixing weaknesses in some big markets. Over the last fortnight, it has bagged several orders, too. Announced on Thursday, the latest one has come from Germany, where the company will be required to supply 47 turbines, with a combined output of 114.83 Mw. Commenting on the trend, Bank of America Merrill Lynch says the company’s business visibility has improved, with the group winning 214 Mw of orders in the last two weeks. Of this, 163 Mw of orders are in India, while REPower has won a 51-Mw (+114) order.

Additionally, the stock price corrected sharply in August, but has recovered slightly over the last few trading sessions on news of order inflows.

However, not all are so bullish about the turnaround story just yet, as there is a sharp slowdown in the investment cycle in India and Europe. According to Kotak Institutional Equities, Suzlon has reported sedate inflows of 350-400 Mw in FY12 so far (205 Mw in the first quarter of FY12 and 163 Mw in the second). To sustain a turnaround, the company needs to clock order inflows of over 600 Mw each quarter and not the 350-400 Mw levels it has been reporting so far. Traction in international business also continues to remain modest for the fourth year. Analysts claim the company needs to grow despite the natural constraints in the Indian market. A key risk could come in the form of a slowdown in the domestic/overseas markets.

While order flow may be improving, Suzlon’s balance sheet remains stretched with high debt (Rs 10,900 crore) and working capital levels (Rs 4,200 crore) at the end of the first quarter. According to Kotak, “Suzlon may have four times consolidated debt/Ebitda and two times Ebitda/interest in FY13E after building in receivables from Edison, Hansen sale proceeds.” What this essentially means is that due to the high debt, interest is a large part of its operating profit. Thus, the company could find it difficult to withstand volume disappointments and needs to deleverage quickly. Also internationally, analysts claim the company seems slightly expensive compared to rival Vestas, which is trading at a forward price to earnings of 8-9 times.