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Suzlon Energy: No respite in sight - Views on News from Equitymaster

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Suzlon Energy: No respite in sight

May 31, 2010

Suzlon Limited has announced its FY10 results. The company has reported a 21% YoY fall in sales, and a Rs 9.8 bn loss at the bottomline level. Here is our analysis of the results.

Performance summary
  • Topline falls 33% YoY during 4QFY10. Order backlog at the end of March 2010 at the consolidated level stands at Rs 184 bn.
  • Operating margins contract to 7.5% from 8% in 4QFY09. Deterioration in margins on account of an increase in other expenses (as percentage of sales) for the company.
  • Bottomline shows a loss of Rs 1.9 bn during the quarter. This is largely on the back of the contraction in operating margins, as well as a relatively lesser decline in interest expenses. Plus, tax expenses saw a big spike during the quarter.

Consolidated Financial performance snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Sales 91,213 60,836 -33.3% 260,817 206,197 -20.9%
Expenditure 83,885 56,294 -32.9% 234,429 198,362 -15.4%
Operating profit (EBDIT) 7,328 4,542 -38.0% 26,388 7,835 -70.3%
Operating profit margin (%) 8.0% 7.5%   10.1% 3.8%  
Other income 2,000 910 -54.5% 4,488 2,290 -49.0%
Interest 3,082 3,002 -2.6% 9,012 11,950 32.6%
Depreciation 2,009 1,451 -27.8% 5,731 6,630 15.7%
Profit before tax 4,236 1,000 -76.4% 16,133 (8,455) -152.4%
Extraordinary income/(expense) 602 67   (8,963) 2,119  
Tax 740 2,953 299.1% 2,881 3,561 23.6%
Profit after tax 4,098 (1,887)   4,289 (9,897)  
Share in associate's profit   122   23 161  
Minority share in profits/(losses) 949 120   1,947 90  
Net profit 3,149 (1,885)   2,365 (9,826)  
Net profit margin (%) 4.5% -3.1%   1.6% -4.8%  
No. of shares (m)       1,498.5 1,556.8  
Diluted earnings per share (Rs)*         -6.3  
P/E ratio (x)*         NA  
* On a trailing 12-months basis

What has driven performance in 4QFY10?
  • Suzlon recorded a 33% YoY fall in sales during 4QFY10. This was mainly due to a 28% fall in sales of wind turbines. Also, 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). The overall sales also saw a decline on a year on year basis due to the fact that the company’s sales from the gear box business have not been consolidated for the full year as Suzlon now holds a minority stake in the same. Order backlog at the end of March 2010 for the company at the consolidated level stands at Rs 184 bn.
    Consolidated segment-wise performance
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Wind turbine generator sales 84,404 60,684 -28.1% 229,694 180,734 -21.3%
    Share of total sales 88.9% 99.1%   85.0% 86.6%  
    PBDIT margin 8.2% 10.1%   9.8% 5.3%  
    Gear box sales 10,359   -100.0% 39,936 26,561 -33.5%
    Share of total sales 10.9% 0.0%   14.8% 12.7%  
    PBDIT margin 18.5% 0.0%   17.5% 9.2%  
    Other sales 197 563 186.2% 532 1,473 176.7%
    Share of total sales 0.2% 0.9%   0.2% 0.7%  
    PBDIT margin 36.1% 5.0% 19.1% 6.1%  

  • Suzlon recorded fall in operating margins during 4QFY10.The main reasons for this were a rise in the cost of goods purchased for trading as well as a rise in other expenditure (as percentage of sales). Operating margins fell from 8% in 4QFY09 to 7.5% in 4QFY10. On the back of a drastic decline in sales, the proportion of fixed costs (to the net sales) increased in percentage terms.

  • The company witnessed a net loss of Rs 1.9 bn during the quarter. This was mainly due to the poor operating performance, as also a relatively lower fall in interest costs and depreciation charges when compared to the fall in turnover. Tax expenses also saw a big spike during the quarter adding to the bottomline woes.

  • 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 full year ended March 31, 2010 include the financial figures of Hansen only till November 2009 as subsidiary and subsequently as an associate.

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 20 billion during the quarter, and it now stands at Rs 98 bn. Suzlon also raised funds of US$ 198 m by issuing GDRs (global depositary receipts) as also US$ 90 m through an issue of zero coupon convertible bonds. It seeks to improve its debt to equity levels further with a rights issue, which the management has announced recently, though the specifics of which have yet not been announced. REpower Systems saw a 8% YoY rise in sales during 4QFY10, and a 31% 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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