Suzlon Energy: RE-powered

German buy will give access to high-value, high-capacity turbines

Suzlon's acquisition of the Germany-based REpower puts the equity value of the overseas company at ¤1.35 billion and at around 30 times estimated CY07 EV/EBITDA, ends the suspense surrounding the purchase.

Areva, the rival bidder for REpower has backed out and will support Suzlon. Areva has 30 per cent stake in REpower, which Suzlon can acquire at a later date.

Suzlon also has an agreement with Martifer, which owns 23 per cent stake. Along with Suzlon's 7.7 per cent, it now controls over 60 per cent of REpower's voting capital.

The acquisition brings substantial benefits to Suzlon as it becomes a major player globally in the wind power business. REpower will give Suzlon access to high-value, high-capacity turbines ranging between 1.5-5 MW that are used largely in developed countries, and also technology for offshore turbines.

Suzlon has presence in Asia and America, while REpower will open the European markets, which accounts for 50 per cent of global wind power capacity. It is also a good deal for Suzlon as it has gained management control without paying the entire cost upfront.

The Suzlon management expects an initial investment of around ¤250 million, inclusive of its earlier purchase of about ¤103 million. Suzlon had recently earlier issued FCCBs worth $300 million, which should fund the current outflow.

Though REpower has turbine technology, it does not manufacture components in-house, which Suzlon will provide. The margins at REpower are low-EBITDA margin in CY06 was just 3.6 per cent. Suzlon management said it will take six to nine months before margins start improving as that is the time it will take to streamline supplies.

In FY08, REpower's margins will improve from volume growth, and in FY09, lower material costs will start contributing. With uncertainties cleared and the price of acquisition digested, the Suzlon stock gained nearly 20 per cent on Friday. Besides improving REpower's margins, Suzlon will also have to up its margins from the current 16.2 per cent.

At the current price, the near-term upsides seem priced in for the Suzlon stock.

GE Shipping: In calm waters

GE Shipping reported an improved performance in the March 2007 quarter, helped by enhanced fleet capacity and its long-term contracts with clients, which helped it to offset the decline in the average spot freight rates in the key tanker segment. In addition, the company leveraged strong freight rates in the dry bulk segment, thanks to strong demand especially from China.

As a result, operating profit (excluding sale of ships and other income) grew 10.6 per cent y-o-y to Rs 299.2 crore in Q4 FY07, while income from operations grew 2.9 per cent to Rs 543.8 crore. Operating profit margin also improved 380 basis points y-o-y to 55 per cent in the last quarter.

GE Shipping added nearly half a million DWT of capacity in Q4 FY07, which helped it to transport enhanced volume of freight on a y-o-y basis.

In addition, it kept a tight check on operating costs in the last quarter; for instance, repairs and maintenance costs declined 52.5 per cent y-o-y, while other expenses fell 25.3 per cent.

Clearly, the company's strategy helped offset weak spot freight rates in the tanker segment - the average spot freight rate of VLCC was $36,306 a day in Q4 FY07 as compared to $53,666 a day a year earlier, say analysts. In FY07 too, the company's margin grew 335 basis points y-o-y to 49.3 per cent.

Meanwhile, freight rates in the tanker segment have shown signs of improving over the last few weeks.  At Rs 254, the stock trades at a reasonable 4.2 times trailing 12 month earnings.