Time to renew interest in Suzlon?

After 3 years of deep losses, profit of Rs 482 cr in FY16

At the start of FY16, Suzlon promised to close the financial year with profits. While Suzlon did live up to its promise by posting a net profit of Rs 482 crore in FY16 after three years of losses, the Street isn’t happy as it was helped by the reversal of goodwill impairment of Rs 1,039 crore. But, the results point to a turnaround.

First, Suzlon turned profitable before accounting for taxes and extraordinary items in the March quarter (Q4). This is after 12 quarters of operating losses. Kirti Vagadia, financial chief, says it could get better. “The wind market is expected to grow at 30 per cent in FY17. Our order flows and order book (Rs 7,989 crore or 1,243 megawatts of projects) indicates we'll continue to outpace the sector."

Second, the criticism that Suzlon’s business is dependent on tax breaks is a thing of the past. Eighty-nine per cent of the order book is from independent power producers, nine per cent from public-sector companies and two per cent is guided by accelerated depreciation policy of the Income-tax Act.

New products such as S97-120 and S111-90, which offer higher plant load factor (PLF), are gaining prominence in order book (69 per cent of total orders) and they reiterate Suzlon’s technological capabilities. In fact, the prototype of S111-120 (its latest offering) boasts of 40 per cent PLF and has been installed in FY16. According to Pawan Parakh, analyst at HDFC Securities, if Suzlon delivers the PLF that it promises with S111-120, it would offset the impact of lower preferential tariff in wind power. About 10 states where Suzlon operates in, mandate certain percentage of power demand to be met from wind energy. Of late, the differential between thermal and wind power rates are narrowing. So, a higher PLF could boost the viability of wind energy projects.

Last, although most of the 14 per cent reduction in Suzlon’s debt to Rs 9,226 crore in FY16 compared to FY15 is due to conversion of fully convertible currency bonds, interest costs are down 42 per cent year-on-year. If Suzlon is able to cut its debt further, especially using operational cash flows, it will boost sentiments. That might not be far given that HSBC analysts estimate a strong 40 per cent compounded annual growth in Suzlon’s earnings before interest, taxes, depreciation and amortisation over next two years; and a 32 per cent fall in interest cost in FY17.

While Suzlon’s valuations are far from comfortable, after results, two of two analysts polled on Bloomberg recommend ‘buy’. Parakh feels since there are no earnings threat hereon, Suzlon looks attractive given the government’s focus on renewables.