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Suzlon Energy: The big losses continue - Views on News from Equitymaster

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Suzlon Energy: The big losses continue

Feb 1, 2010

Performance summary
  • Topline falls 19% YoY during 3QFY10. Order backlog at the end of January 2010 for Suzlon’s standalone wind business stands at Rs 81 bn.
  • Operating margins contract to 4.6% from 11% in 3QFY09. Deterioration in margins on account of an increase in all major operating cost heads (as percentage of sales) for the company.
  • Excluding extraordinary items, bottomline shows a loss of Rs 2.2 bn during the quarter. This is largely on the back of the contraction in operating margins, as well as increases in interest and depreciation costs during the quarter.

Consolidated financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 69,217 55,900 -19.2% 169,604 145,361 -14.3%
Expenditure 61,615 53,338 -13.4% 150,544 142,068 -5.6%
Operating profit (EBDIT) 7,602 2,563 -66.3% 19,060 3,293 -82.7%
Operating profit margin (%) 11.0% 4.6%   11.2% 2.3%  
Other income 685 359 -47.6% 2,489 1,380 -44.5%
Interest  2,339 2,895 23.8% 5,930 8,949 50.9%
Depreciation 1,468 1,673 14.0% 3,722 5,179 39.1%
Profit before tax 4,481 (1,647) -136.8% 11,897 (9,455) -179.5%
Extraordinary income/(expense) (4,489) 2,438   (9,565) 2,052  
Tax 385 564 46.4% 2,141 608  
Profit after tax (393) 227   191 (8,011)  
Share in associate's profit -   40   23 40  
Minority share in profits/(losses) 256 126   998 (30)  
Net profit (649) 141   (784) (7,941)  
Net profit margin (%) -0.6% 0.4%   0.1% -5.5%  
No. of shares (m)       1,498.5 1,556.8  
Diluted earnings per share (Rs)*         (3.1)  
P/E ratio (x)*         NA  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • Suzlon recorded a 19% YoY fall in sales during 3QFY10. This was mainly due to a 20% fall sales of wind turbines. The gear box sales are not fully comparable due to the company’s stake sale in its gear box subsidiary during the quarter (mentioned below in detail). Sales in volume terms fell from 679 MW to 404 MW during the quarter. Order backlog at the end of January 2010 for Suzlon’s wind business stood at Rs 81 bn.

    Consolidated segment-wise performance
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Wind turbine generator sales 60,804 48,845 -19.7% 145,290 120,050 -17.4%
    Share of total sales 85.5% 86.9%   82.9% 81.4%  
    PBDIT margin 11.6% 4.9%   10.8% 2.8%  
    Gear box sales 10,192 6,991 -31.4% 29,578 26,561 -10.2%
    Share of total sales 14.3% 12.4%   16.9% 18.0%  
    PBDIT margin 11.8% 18.6%   17.1% 9.2%  
    Other sales 95 348 267.2% 336 910 171.1%
    Share of total sales 0.1% 0.6%   0.2% 0.6%  
    PBDIT margin -136.3% -1.6%   9.2% 6.8%  

  • Suzlon recorded a drastic fall in operating margins during 3QFY10.The main reasons for this was a rise in all its operating cost heads (as percentage of sales). Operating margins fell from 11% in 3QFY09 to 4.6% in 3QFY10. On the back of a drastic decline in sales, the proportion of fixed costs (to the net sales) increased in percentage terms.

  • Excluding extraordinary items, the company witnessed a net loss of Rs 2.2 bn during the quarter. This was mainly due to the poor operating performance, as also a spike in interest costs and higher depreciation charges. During the quarter interest costs increased by 24% YoY, while depreciation costs saw an increase of 14% YoY.

  • Suzlon sold 35.22% of equity stake in its erstwhile subsidiary Hansen Transmissions International NV ("Hansen") on November 24, 2009. Consequently, the holding of the company in Hansen has reduced to 26.06%. Thus Hansen has ceased to be a subsidiary of the company. Hence, the consolidated financial figures for the quarter and nine months ended December 31, 2009 include the financial figures of Hansen only till November 2009 as subsidiary and subsequently as an associate. The profit on sale of the investment in Hansen has been shown under exceptional items. Profit on sale of the stake in Hansen Transmissions amounted to Rs 2.5 bn during the quarter.

What to expect?
The stock’s price to earnings ratio cannot be reliably calculated considering its losses for the past four quarters and which may continue going forward too. The company has reduced its net debt by Rs 33 billion from Rs 138 bn in September 2009 to Rs 105 billion in December 2009. Part of this has been made possible by the company’s stake sale in Hansen. REpower Systems saw a 14% YoY rise in sales during 3QFY10, and a 73% YoY rise in operating profits during the same period, mainly on account of an expansion in EBIDTA margins.

Suzlon has a very high amount of both operating as well as financial leverage. This is a risky proposition for an investor, especially due to the fact that it is still uncertain when the company’s business will see a turnaround. Considering the precariousness of the company’s balance sheet and the business problems it is facing and has faced in the past, we reiterate our negative view on the stock.

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