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Suzlon Energy: Research meeting extracts - Views on News from Equitymaster
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Suzlon Energy: Research meeting extracts
Mar 31, 2006

We met the management of Suzlon yesterday to get its view on wind energy potential in the country and the companyís forays into the international markets. Here is a small brief on the company followed by the extracts of our research meeting. Company background
Suzlon Energy incorporated in 1995, is the country's leading manufacturer of wind turbine generators (WTG) having around 59% share of domestic installations in 2005. On a cumulative basis, Suzlon has installed around 37% of Indiaís total wind power capacity of 4,430 MW. As at the end of 2005, the company was among the five largest manufacturers of WTGs globally in terms of annual installed capacity. It is the first Asian company to manufacture WTGs, which have MW and multi-MW capabilities. The products manufactured by Suzlon include rotor blades, control panels, nacelle cover and tubular towers. The company had recently acquired the Belgian Hansen Transmissions, which is one of the three major multi-MW gearbox suppliers in the world.

Research meeting extracts

On global wind power industry: As per the management, the global wind energy sector holds great potential for integrated players like Suzlon. As per the Global Wind Energy Council (GWEC), the sector experienced another record year in 2005, with total installations growing by over 43% YoY to 11,769 MW (8,207 MW in 2004). The total value of new generating equipment installed was over US$ 14 bn, or US$ 1.2 m per MW. This takes the total global wind power capacity to 59,322 MW. Europe continues to lead the market with over 40,500 MW of installed capacity (68% of total installed capacity). The year 2005 was also witness to India overtaking Denmark as the fourth largest wind market in the world with installations of 1,430 MW. Suzlon completed almost 59% (840 MW) of these installations in the country. India, with 4,430 MW of capacity, forms around 62% of total wind power capacity in Asia and amongst the fastest growing in the region. Suzlonís dominant position in the country thus provides it with a strong potential to grow going forward.

The management indicated that the cost per kWh of wind-generated electricity has fallen from US$ 0.38 in the early 1980s to around US$ 0.03-0.06 currently. This has been mainly brought about by the continued focus on improving cost efficiency of wind turbine generators. Considering that the frequency of rise in oil prices is increasing each decade, the possibility of a downward trend in global oil prices seems bleak thus making power generated from crude related resources uncompetitive vis-ŗ-vis renewable sources of power like wind.

On domestic wind power industry: The management seemed pretty buoyant on the growth of wind power capacity in the country from the current levels of 4,430 MW. This is considering the governmentís acknowledgement of the need for alternate source of power generation. In fact, the Electricity Act of 2003 has made it mandatory for all electricity distributors to procure a minimum percentage from renewable sources (nuclear and wind). As a result of which seven states have taken the initiative and are sourcing electricity from alternate sources (wind power). Few other states are expected to follow suit. In India, the attractiveness of setting up wind energy projects lies in relatively low regulations and various incentives that state governments provide for wind power generators.

On capex plans: Suzlon is investing US$ 60 m to set up a 600 MW integrated manufacturing unit in China, which will produce rotor blades, generators and control panels. This will begin production by September 2006. Apart from meeting the mandatory requirement of sourcing 70% of components from local manufacturing units, this initiative from Suzlon is largely towards capturing in the fast growing demand for wind power from the country. China is a big potential market for Suzlon considering that wind power installations in the country have increased at a CAGR of around 174% during 2003 to 2005. The country is faced with immense energy shortages and, thus is prioritizing aggressive development of renewable energy sources. Chinese authorities passed a new renewable resources law early this year, which aims at 5,000 MW of wind power capacity by 2010 and 30,000 by 2020 (1,260 MW in 2005).

Suzlon is also investing US$ 25 m to set up a 600 MW rotor blade manufacturing unit in the US. This unit shall begin production by July 2006. In totality, the management has estimated to spend Rs 9,810 m in FY07 (including Rs 1,060 m of working capital) towards growth opportunities around the world. The US and Chinese expansion shall take Suzlonís capacity to 2,660 MW by September 2006, from 1,460 currently.

On the Belgian acquisition: Suzlon had recently acquired Hansen Transmission, one of three major multi-MW gearbox suppliers in the world. The consideration for this acquisition was US$ 564 m (Hansenís 2005 revenues were US$ 258 m). Hansen has a manufacturing capacity of 3,600 MW of wind turbine gearboxes and 3,000 units of industrial gearboxes per year. We believe that this acquisition highlights the strategic importance of the supply chain in the wind turbine industry. Further, Suzlon's control of Hansen is expected to challenge its competitors to source from a major rival and remain price competitive. Considering, sourcing bottlenecks across a range of components, even the management believes that this acquisition gives Suzlon a strong competitive advantage vis-ŗ-vis its peers.

On improving cost efficiency: The management outlined the fact that since all of Suzlonís manufacturing units are located in India (Daman, Diu and Pondicherry), it gives the company a significant cost advantage over its global peers, a majority of whom are located in the high cost region of Western Europe. The cost advantage is implicit from the fact that compared to sub-15% operating margins of global wind power majors like Vestas and Repower, Suzlon earns around 24% (as per 9mFY06 numbers). The companyís implementation of backward integration strategy (whereby it will manufacture rotor-blades in-house) and acquisition of Hansen shall provide it with a greater control over its supply chain for key components. It shall also enable quicker and more efficient assembly and delivery to its customers. We believe that this shall further prop up the margins.

What to expect?

At the current price of Rs 1,308, the stock is trading at a price to earnings multiple of 52.6 times its trailing 12-month earnings. These valuations seem stretched from a medium term perspective. However, considering Suzlonís international forays, global wind power potential and strong control over supply chain, we are positive on the growth prospects of the company. We shall soon be initiating our coverage on Suzlon.

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Feb 21, 2018 11:07 AM


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