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Suzlon Energy: Supply constraints remain - Views on News from Equitymaster

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Suzlon Energy: Supply constraints remain
Jan 29, 2008

Introduction to results
  • Consolidated topline grows by 66% YoY in 3QFY08, 73% YoY in 9mFY08. Growth led by strong order bookings and execution. Volume sales grow 61% YoY to 545 MW during the quarter. However, sales are lower by 138 MW as compared to the previous quarter (2QFY08).

  • Operating margins contract by 1% in 3QFY08. Supply delays and higher raw material costs (as percentage of sales) have led to this pressure in margins.

  • Consolidated net profits decline by 13% YoY in 3QFY08 Ė impacted by contraction in operating margins and significant increases in interest, depreciation and tax expenses.

  • Order backlog stands at Rs 171 bn, including Rs 147 bn of international orders.

Consolidated financial performance
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 19,139 31,698 65.6% 50,698 87,557 72.7%
Expenditure 16,593 27,809 67.6% 42,693 76,401 79.0%
Operating profit (EBDIT) 2,546 3,889 52.7% 8,005 11,156 39.4%
Operating profit margin (%) 13.3% 12.3%   15.8% 12.7%  
Other income 254 725 185.4% 502 1,686 236.1%
Interest 638 1,565 145.3% 1,551 4,031 159.9%
Depreciation 343 747 118.2% 1,118 1,916 71.3%
Profit before tax 1,820 2,302 26.5% 5,837 6,896 18.1%
Tax 93 873 844.0% 779 1,290 65.6%
Profit after tax 1,727 1,428 -17.3% 5,058 5,606 10.8%
Share in profit of associates - 95   - 100  
Minority interest (17) 6   8 54  
Net income 1,744 1,517 -13.0% 5,050 5,653 11.9%
Net profit margin (%) 9.0% 4.5%   10.0% 6.4%  
No. of shares (m)         1,496.9  
Diluted earnings per share (Rs)*         6.2  
P/E ratio (x)*         54.9  
* On a trailing 12-month basis

What has driven performance in 2QFY08?
  • Suzlon has recorded a strong 66% YoY growth in consolidated sales during 3QFY08. This growth has been largely aided by robust performance of its WTG (wind turbine generator) business, which has recorded sales growth of 81% YoY during the quarter. In volume terms, Suzlon sold 545 MW of turbines during 3QFY08, which was higher by 61% YoY. Further, the company also benefited from improved realisations (12% YoY growth). Volume sales were however lower on a QoQ basis, as the company sold 138 MW lesser than what it did in 2QFY08. The management has attributed this decline to some execution delays in the US market due to supply related constraints. The company has reported that some of the companyís wind turbines in the US recorded cracks and were in the process of being repaired/replaced. The management has indicated of its technology team looking into the matter and had avoided any further comments on the same.

    As on January 25 2008, Suzlonís order backlog stood at nearly Rs 171 bn, inclusive of Rs 24 bn of domestic orders and Rs 147 bn of international orders. Based on volumes, while international backlog stands at 2,916 MW, the domestic backlog stands at 442 MW. Almost 63% of the international backlog is from the US, and Australia contributing 12%.

    Consolidated segment-wise performance
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Wind turbine generator (WTGs) 14,432 26,076 80.7% 38,036 71,790 88.7%
    PBDIT margin 13.9% 11.4%   16.8% 13.4%  
    Gear Box (Hansen) 4,533 5,691 25.6% 12,053 15,396 27.7%
    PBDIT margin 10.8% 14.2%   12.3% 11.5%  
    Others 174 271 55.6% 615 960 56.1%
    PBDIT margin 19.1% 87.8%   17.3% 32.5%  
    Overall PBDIT margin 13.2% 12.7%   15.7% 13.3%  

  • Suzlon recorded a 1% YoY contraction in operating margins during 3QFY08, which was largely a result of higher raw material costs. These costs increased from 59% of sales in 3QFY07 to 69% in 3QFY08. But for this impact, the profitability would have been higher as other major cost heads like staff and other costs actually declined as percentage of sales. As for segments, while WTGs recorded margin contraction, there was an improvement in gearbox margins (see above table). Cost escalation in some of the domestic projects and duties imposed on the US projects have also hit the companyís profitability during the quarter.

  • As for the net profits, these declined by 13% YoY during the quarter. As reported above, higher interest and depreciation expenses (due to ongoing capex) and significantly higher tax expenses (due to deferred taxes) have taken a toll on Suzlonís net profits during the quarter. Considering the nine-month performance, where net profits have grown by a mere 11% YoY, we will have to revise downwards our profits estimates for the company for FY08.

What to expect?
At the current price of Rs 339, the stock is trading at a multiple of 17.3 times our estimated FY10 earnings, which we believe makes it fairly valued. While Suzlon has continued to win large size orders for equipment supply especially in the international markets, supply side bottlenecks remain a concern. The management has itself indicated of tightness in supply of gearboxes, towers and bearings. We shall soon update our research report on the company.

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