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Suzlon: Remains in a mess - Views on News from Equitymaster

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Suzlon: Remains in a mess

Jun 29, 2009

Performance summary
  • Consolidated topline grows 91% YoY in FY09, boosted by consolidation and acquisition of further stake in REpower Systems during the year.
  • Operating margins contract by 4.7% YoY during the fiscal. A substantial increase in other expenditure, along with an increase in employee costs responsible for the deterioration in margins.
  • Consolidated net profits fall by 77% YoY in FY09. Performance impacted by contraction in operating margins and significant increases in interest, depreciation, tax expenses and substantially higher extraordinary expenses. Excluding extraordinary expenses, net profits fall by 14% YoY during FY09.

Consolidated financial performance
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Sales 49,238 91,213 85.2% 136,794 260,817 90.7%
Expenditure 40,618 83,885 106.5% 116,604 234,429 101.0%
Operating profit (EBDIT) 8,620 7,328 -15.0% 20,191 26,388 30.7%
Operating profit margin (%) 17.5% 8.0% 14.8% 10.1%
Other income 963 2,000 107.6% 2,680 4,488 67.5%
Interest 1,290 3,082 139.0% 5,320 9,012 69.4%
Depreciation 978 2,009 105.5% 2,894 5,731 98.1%
Profit before tax 7,315 4,236 -42.1% 14,657 16,133 10.1%
Extraordinary income/(expense) (2,407) 602 (2,852) (8,963)
Tax 343 740 115.7% 1,633 2,881 76.4%
Profit after tax 4,566 4,098 -10.2% 10,172 4,289 -57.8%
Share in profit of associates 458 - 558 23
Minority interest 374 949 428 1,947
Net income 4,649 3,149 -32.3% 10,301 2,365 -77.0%
Net profit margin (%) 9.4% 3.5% 7.5% 0.9%
No. of shares (m) 1,497.1 1,498.5
Diluted earnings per share (Rs) 6.9 1.6
P/E ratio (x) 74.1

What has driven performance in FY09?
  • Suzlon recorded a strong 91% YoY growth in consolidated sales during FY09. This was largely a result of a consolidation of REpower, and to that extent, the companyís results are not comparable to its last yearís sales performance. In all, the company sold 2,790 MW of wind power installations during FY09, higher by 21% YoY. Out of this, only 749 MW was installed in India, and the rest in international locations. As on June 25, 2009, Suzlonís order backlog stood at nearly Rs 79 bn for 1,463 MW of installations.

    The management has indicated that all the retrofit, replacement and availability compensation costs have been fully provided for during the year and no more costs are expected to be booked in the coming year on that account. Further, 80% of the retrofit work has already been completed and the rest is expected to be completed by August of this year. The exceptional losses that have affected this yearís performance have partly been due to these charges.

    Consolidated segment-wise performance
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Wind turbine generator            
    Revenue 41,879 84,404 101.5% 114,442 229,694 100.7%
    % share 83% 89%   82% 85%  
    PBDIT margin 18.0% 8.2%   15.5% 9.8%  
    Gear Box            
    Revenue 8,652 10,359 19.7% 24,048 39,936 66.1%
    % share 17% 11%   17% 15%  
    PBDIT margin 17.2% 18.5%   14.1% 17.5%  
    Revenue 61 197 223.2% 247 532 115.2%
    % share 0% 0%   0% 0%  
    PBDIT margin -127.1% 36.1%   28.8% 19.1%  
    Revenue 50,592 94,960 87.7% 138,738 270,163 94.7%
    PBDIT margin 17.7% 9.4%   15.3% 11.0%  
    * Excluding inter-segment adjustments     # Others includes the foundry and forgings business

  • Suzlon recorded a 4.7% YoY contraction in operating margins during FY09. A substantial increase in other expenditure, along with an increase in employee costs was responsible for this deterioration in margins. The management has indicated that the other expenditure consisted of costs like freight charges, bank charges, operating and maintenance charges, consulting fees and other such miscellaneous charges, of which a certain portion is non-recurring in nature and to that extent are not expected to sustain at these levels going forward.

  • Suzlonís net profits fell by a steep 77% YoY during FY09. Its performance was impacted by a combination of factors, namely the contraction in operating margins, significant increases in interest expenses, higher depreciation, higher effective tax rates and substantially higher extraordinary expenses (as discussed above). Excluding extraordinary expenses, net profits have still registered a fall of 14% YoY during FY09.

What to expect?
At the current price of Rs 117, the stock is trading at a multiple of 15.5 times its trailing 12 months earnings. The management of the company has indicated that it expects a rebound of sorts in the wind industry by 2010. The management is planning to increase the provisions it makes for things like warranties and availability guarantees from 2.5% to 3.5% going forward on account of sustained higher costs on this front. During the year, lending to the sector has been badly hit on account of the credit crisis and the global financial turmoil. But going forward, the management expects the effect of the stimulus packages announced by government all over the world to kick in, which will improve the financing conditions in the industry. A possible reduction in interest rates may also be a big booster for the wind industry.

The demand-supply gap in the wind power equipment industry that was earlier working to the advantage of the company has slightly changed due to the global dampening of demand on account of the short term adverse factors and the incremental wind equipment capacities that have come on stream in recent times.

With respect to REpower, Suzlon may choose to file a domination agreement as per German law, or further increase its holding in the company to 95% (from the current 91%), either of which will permit it further access and control of the former. We shall soon update you with our view on the stock.

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