Suzlon: Right way to go

The Suzlon stock fell 6 per cent to Rs 182 on Thursday very close to the 52-week low of Rs 179 hit in early July this year.The Street was somewhat surprised that the company is considering a Rs 1,800 crore rights issue and will be taking a decision next month. In early September, Suzlon had announced that it would be buying out the 22.5 per cent stake held by Martifer in REPower for 270 million euro (Rs 1800 crore).

The purchase was to have been funded by debt and taking that into account, the company’s debt-equity ratio by the end of the current year would have been at 1:1. However, it’s possible that the company may be finding it difficult to raise resources in a tight credit environment. Moreover, even if it does so, the cost would be high because both interest rates and risk premiums have risen sharply. Under the circumstances, the management has decided to opt for a rights issue.

However, with the equity markets unlikely to recover in a hurry, the stock may not fetch a big premium. If the issue is made at a price of say Rs 190, the dilution in the company’s equity would be around 6 per cent which is not too large. It is important that Suzlon acquires Martifer’s stake as soon as possible because that would give it complete control over the technology and allow it to speed up the integration of REpower with itself.

That will help the business because REpower and Suzlon can operate together with a common strategy. So if debt is not available at a reasonable cost, it’s perhaps better that the management raises funds through the equity route. At the current price of Rs 182, the stock trades at around 15 times estimated FY09 earnings.