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Suzlon Energy: A financial tightspot - Views on News from Equitymaster
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Suzlon Energy: A financial tightspot
Feb 3, 2009

Performance summary
  • Standalone topline declines by 9% YoY during 3QFY09. Order backlog at the end of December 2008 for wind business stood at Rs 104 bn, while order backlog for the component business stood at about 11 bn.
  • Operating margins contract to 5.3%, from 24.3% in 3QFY08. Deterioration in margins is largely on account of an increase in the employee costs and huge jump in other costs which include freight cost, foreign exchange loss, guarantees, and warranties (all as percentage of sales).
  • Bottomline shows a loss during the quarter. This is on the back of forex losses on international borrowings recorded by the company, mark-to-market losses and cracked turbine restoration costs. Excluding these one-off losses for both periods, net profits have fallen by over 87% YoY for the quarter.


Standalone# financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 16,550 15,017 -9.3% 41,816 51,985 24.3%
Expenditure 12,536 14,215 13.4% 32,442 43,491 34.1%
Operating profit (EBDIT) 4,014 802 -80.0% 9,375 8,494 -9.4%
Operating profit margin (%) 24.3% 5.3%   22.4% 16.3%  
Other income 282 460 63.3% 832 1,101 32.4%
Interest 358 1,094 206.1% 929 2,243 141.6%
Depreciation 245 231 -5.9% 613 693 13.1%
Profit before tax 3,693 (63)   8,665 6,660 -23.1%
Extraordinary income/(expense) (74) (4,363)   (446) (9,439)  
Tax 238 (516)   388 80  
Profit after tax 3,382 (3,909)   7,832 (2,859)  
Net profit margin (%) 20.4% -26.0%   18.7% -5.5%  
No. of shares (m)         1,498.5  
Diluted earnings per share (Rs)*         1.3  
P/E ratio (x)*         34.3  
*On a trailing 12-months basis
#Excluding the financials of Hansen & Repower

What has driven performance in 3QFY09?
  • Suzlon recorded a 9% YoY decline in sales during 3QFY09. Order backlog at the end of December 2008 for wind business stood at Rs 104 bn, while order backlog for the component business stood at about 11 bn. All of this is excluding the order backlog for Hansen and REpower.

  • Suzlon recorded a drastic fall of 19% YoY in operating margins during 3QFY09.The main reasons for this were a rise in employee costs and other expenditure as a percentage of sales. According to the company, higher employee costs was mainly due to the capacity expansion for which new staff have been recruited but revenues have not been booked completely. The rise in other expenditure was due to a combination of freight cost, foreign exchange loss, guarantees, and warranties. The other costs also include Rs 835 m as ‘liquidated damages’ in terms of a contractual obligation with a customer of its company’s subsidiary.

  • The company witnessed a net loss of Rs 3,909 m during the quarter. This was largely on the back of the sharp drop in operating margins, spike in interest costs, forex losses on international borrowings recorded by the company, mark-to-market losses, and cracked wind turbine restoration costs which were incurred as part of the retrofit program which the company has undertaken to rectify the blade crack problems faced by its turbines in the US. Excluding the one-off extraordinary losses for both periods, net profits have fallen by over 87% YoY during the quarter.

  • While its subsidiary Hansen witnessed a sales growth of 79% YoY in 3QFY09, its profit after tax went from a net loss of Rs 196 m during the 3QFY08 to a net profit of Rs 154 m in 3QFY09.

What to expect?
At the current price of Rs 45, the stock is trading at a multiple of 34.3 times its trailing 12 months earnings (excluding Hansen and REpower). In the midst of expanding its capacity, Suzlon currently has an installed capacity of 4,200 MW. In terms of the domestic outlook, the management has said that demand continues to be healthy but the pace of execution is a problem. Financing too has been an issue for projects in the recent past but is slowly improving. It expects a 15% to 20% growth in the Indian market in FY09-FY10 with an estimated 30% domestic and 70% international sales breakup in FY10.

As for REpower, Suzlon will acquire the stake in three tranches by payment of Euro 65 m in December 2008, Euro 30 m in April 2009 and the final tranche of Euro 175 m in May 2009, which will take Suzlon’s stake to approximately 91% in REpower. Suzlon completed the acquisition of the first tranche of shares in December, 2008, taking the company’s holding in REpower to 73.7%. A major concern and focus area for Suzlon currently is meeting its obligation of paying up for the next two tranches due in April and May this year.

The management is still not completely sure as to the exact mode of funding, but hopes to raise funds through a combination of internal accruals, inventory cost cutting, asset sales, and through fund raising of either debt or equity at the parent level.

The company has also sold 10% stake in Hansen Transmissions to Ecofin, UK to raise funds, following which its stake in Hansen now stands at 61.3%. Given the exceptional losses and margin deterioration during 9mFY09, we will have to revise our future estimates downwards for Suzlon.

The company continues to suffer under the weight of its aggressive growth aspirations. We shall soon update our numbers and finalise our latest view on the stock.

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