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Suzlon Energy: Global winds blowing hard - Views on News from Equitymaster
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Suzlon Energy: Global winds blowing hard
May 20, 2008

Performance summary
  • Consolidated topline grows 71% YoY in FY08, duly helped by 69% YoY growth in 4QFY08. Growth led by strong order bookings and execution - volume sales grow 59% YoY during the fiscal. Actual sales 11% higher than our estimates. Order backlog stands at Rs 183 bn for 3,454 MW of installations.
  • Operating margins contract by 2.1% YoY during the fiscal. Stock related adjustments due to supply delays have led to this pressure on margins.

  • Consolidated net profits grow by 19% YoY in FY08, significantly lower than the topline growth. Performance impacted by contraction in operating margins and significant increases in interest, depreciation and tax expenses. A one-time provision of Rs 1.5 bn for site restoration (in Maharashtra) and rotor blade retrofit programme (in the US) also impact the bottomline growth. Excluding this extraordinary expense, net profits grew by 37% YoY during FY08. Actual profit figure 7% higher than our estimates.

  • Recommends dividend of Re 1 per share (dividend yield of 0.3%).

Consolidated financial performance
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Sales 29,159 49,238 68.9% 79,857 136,794 71.3%
Expenditure 24,206 41,991 73.5% 66,899 117,550 75.7%
Operating profit (EBDIT) 4,954 7,246 46.3% 12,958 19,245 48.5%
Operating profit margin (%) 17.0% 14.7% 16.2% 14.1%
Other income 463 959 107.0% 965 2,646 174.1%
Interest 972 1,290 32.8% 2,523 5,320 110.9%
Depreciation 600 978 63.0% 1,718 2,894 68.4%
Profit before tax 3,846 5,938 54.4% 9,683 13,676 41.2%
Extraordinary income/(expense) - (830) - (1,512)
Tax 256 543 112.4% 1,035 1,993 92.6%
Profit after tax 3,590 4,565 27.2% 8,648 10,172 17.6%
Share in profit of associates - 458 - 558
Minority interest (0) 374 8 428
Net income 3,590 4,648 29.5% 8,640 10,301 19.2%
Net profit margin (%) 12.3% 9.4% 10.8% 7.5%
No. of shares (m) 1,438.6 1,497.1
Diluted earnings per share (Rs) 5.8 6.9
P/E ratio (x) 46.2

What has driven performance in FY08?
  • Suzlon recorded a strong 71% YoY growth in consolidated sales during FY08. This was largely a result of a 112% YoY growth in the companyís international business, which formed 59% of the total revenues recorded during the year. In all, the company sold 2,311 MW of wind power installations during FY08, higher by 59% YoY. Out of this, 1,336 MW (58%) was installed at international locations.

    Further, Suzlon also benefited from improved realisations in both the international and domestic markets. While the same increased by 4% YoY in the international markets, the rise in realisation for domestic installations was as high as 32% YoY. This, the management has attributed to a better product mix (in terms of selling large capacity windmills) and also due to inclusion of EPC (simply engineering and construction) as part of the projects.

    As on May 19, 2008, Suzlonís order backlog stood at nearly Rs 183 bn for 3,454 MW of installations. This includes 3,294 MW of installations in the international markets alone. Importantly, almost 55% of the outstanding order book is from the US while India forms just around 5% of the backlog. As for average realisation for this backlog, the management has indicated that the same will be firm owing to sustained momentum in demand and supply constraints.

    The management has also indicated that the process of repair/replacement of cracked turbines in the US is going on in full flow. As a matter of fact, Suzlon had provided for an amount of Rs 1.2 bn as costs incurred on this retrofit programme and the same has impacted the bottomline performance in the fiscal.

    Consolidated segment-wise performance
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Wind turbine generator (WTGs) 21,950 40,849 86.1% 59,986 112,639 87.8%
    PBDIT margin 17.3% 12.5% 17.0% 13.8%
    Gear Box (Hansen) 6,508 8,652 32.9% 18,561 24,048 29.6%
    PBDIT margin 22.0% 18.7% 15.7% 14.6%
    Others 706 1,090 54.3% 1,321 2,051 55.2%
    PBDIT margin 40.3% 14.6% 29.6% 23.0%

  • Suzlon recorded a 2.1% YoY contraction in operating margins during FY08, which was largely a result of stock related adjustments. On the other hand, raw material costs declined from 73.8% of sales in FY07 to 69.7% in FY08, thus taking some pressure off from the operating profitability. As for segments, both the segment of WTGs and gearbox recorded margin contraction during the year.

  • Suzlonís net profits grew by 19% YoY during FY08. This was sharply in contrast with the growth in topline (71% YoY). Lacklustre performance on the bottomline front was on the back of higher interest and depreciation expenses (due to ongoing capex) as also due to contraction in operating margins. Further, Suzlonís effective tax rate increased from 10.7% in FY07 to 14.6% in FY08, thereby adding to the pressure on the bottomline. A one time provision of Rs 1.5 bn for site restoration (in Maharashtra) and rotor blade retrofit programme (in the US) also impacted the bottomline growth during the fiscal. Excluding these extraordinary expenses, net profits grew by 37% YoY during FY08.

What to expect?
At the current price of Rs 310, the stock is trading at a multiple of 19.8 times our estimated FY10 earnings, which we believe makes it fairly valued from a medium term perspective. Suzlon continues to ramp up its presence in the global wind power equipment market, as seen from the increase in its share from 7.7% at the end of 2006 to 10.5% in 2007. It is also in process of ramping up capacity, both for its own WTG and rotor blade manufacturing as also Hansenís gearbox manufacturing. While Suzlon plans to take up its integrated capacity from 2,700 MW currently to 5,700 MW by the end of this fiscal, Hansenís capacity is expected to be taken up to 14,300 MW (7,300 MW capacity currently) over the next four years. In the interim, however, the management has indicated of tightness in supply of gearboxes, towers and bearings that could impact the planned installations. We shall soon update our research report on the company.

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