Suzlon Energy: Inching ahead

Suzlon Energy announced last week the repayment of its entire outstanding acquisition loan facility of about $780 million. The repayment was funded through the sale of Suzlon’s stake in Hansen Transmissions International NV and a new five-year dollar denominated loan of $465 million from the State Bank of India. Effectively, its consolidated net debt is now lower by roughly $350 million or Rs 1,700 crore.

Although the move is positive, the company’s total debt has come down by just 15 per cent, and at Rs 12,000 crore, its debt-equity ratio is still high at 1.1 times. Post the loan repayment, the company will be able to save up to Rs 150 crore in interest costs annually, which is not significant when compared to the total interest costs of Rs 1,053 core in 2008-09. Notably, the company continues to work towards restructuring of its debt, which put together should ease its liquidity concerns going ahead.

Meanwhile, Suzlon had divested 35.22 per cent stake in Hansen for $370 million in November 2009, which brought down its share in the company to 26.06 per cent. While the company has used these funds for part payment of its debt, Hansen is no longer its subsidiary. Hence, its performance will not be consolidated with Suzlon’s financials going ahead. Given that Hansen had reported revenues of Rs 1,957 crore (a fifth of the company’s consolidated revenues) and operating profit of Rs 114 crore for the first half of 2009-10, Suzlon’s financials will be impacted to that extent.

On the positive side, the company’s business outlook has improved, albeit marginally, and there are signs of demand picking up in the key markets like the US and Europe. Suzlon’s Germany-based wind turbine manufacturing subsidiary, REpower Systems AG, recently bagged its largest ever onshore order for supplying equipment worth 954 Mw.

For the year ending March 2010, analysts expect Suzlon to report a decline of about 20 per cent in consolidated revenues, which they expect will only improve next year. The company had reported a cash loss of Rs 419 crore (net loss of Rs 770 crore) in the first half of the current financial year. But, with the business environment looking up, and considering that Suzlon has written-off most of the customer claims arising out of the sale of faulty blades, it should end the current year with a small profit. Thereafter, analysts expect its profitability to improve sharply; they have estimated consolidated earnings per share (EPS) of about Rs 1.3 for 2009-10 and Rs 5.5 for 2010-11.

The markets, however, don’t seem excited by the developments given that the stock has fallen by 2.6 per cent post the loan repayment announcement, as against the Sensex’s 1.7 per cent decline. At Rs 80.75, the stock is trading at 15 times its estimated 2010-11 earnings.