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Suzlon Energy: Risks on rise - Views on News from Equitymaster

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Suzlon Energy: Risks on rise
Jul 26, 2007

Performance summary
  • Consolidated topline grows 82% YoY, led by strong order bookings and execution.

  • Operating margins contract to 7.2%, from 17.4% in 1QFY07 – supply delays the culprit.

  • Consolidated net profits decline 80% YoY owing to compression in operating margins and higher interest expenses.

  • Order backlog stands at Rs 135 bn (2,882 MW) – 89% are international orders.

Financial performance snapshot
  Standalone Consolidated
(Rs m) 1QFY07 1QFY08 Change 1QFY07 1QFY08 Change
Sales 9,338 8,392 -10.1% 10,689 19,446 81.9%
Expenditure 6,945 7,264 4.6% 8,831 18,048 104.4%
Operating profit (EBDIT) 2,393 1,128 -52.9% 1,858 1,398 -24.8%
Operating profit margin (%) 25.6% 13.4%   17.4% 7.2%  
Other income 129 237 83.4% 161 426 164.7%
Interest 163 289 77.2% 366 1,079 195.0%
Depreciation 149 177 18.6% 347 585 68.5%
Profit before tax 2,210 899 -59.3% 1,306 161 -87.7%
Tax 274 5 -98.3% 346 (40) -111.5%
Profit after tax 1,936 894 -53.8% 960 200 -79.1%
Minority interest - - - 7 11 -
Net income 1,936 894 -53.8% 953 189 -80.2%
Net profit margin (%) 20.7% 10.7%   9.0% 1.0%  
No. of shares (m)   287.7     287.7  
Diluted earnings per share (Rs)*   33.3     27.4  
P/E ratio (x)*   38.9     47.3  
* On a trailing 12-month basis

What is the company’s business?
Suzlon Energy (Suzlon) is Asia’s leading manufacturer of wind turbine generators (WTGs) having over 50% share of India’s wind power installations. On a cumulative basis, Suzlon has installed around 36% of India’s total wind power capacity of 4,500 MW. The company is amongst 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 German wind turbine major, REpower Systems AG.

What has driven performance in 1QFY08?
Volumes, realisations aid topline: On a consolidated basis, Suzlon installed 317 MW of WTGs during 1QFY08, which was higher by 62% over the volumes sold in 1QFY07. Out of these volumes sold, India and US contributed to 39% and 32% respectively. Apart from this increase in volume sales, the company has also recorded a 12% QoQ improvement in its realisation per MW, which as per the management, is both a result of improved pricing and increased scope of work. Against being a pure equipment supplier earlier, Suzlon now also provides EPC (engineering, procurement and construction) services to its clients, which has helped it earn a larger proportion of the overall project cost. At the end of the quarter, the company’s order backlog stood at nearly Rs 135 bn (Rs 95 bn at the end of FY07), inclusive of Rs 17 bn of domestic orders and Rs 118 bn of international orders. Based on volumes, while international backlog stands at 2,567 MW, the domestic backlog stands at 315 MW. The company won some large orders during the quarter, including a 630 MW repeat order from Edison Mission Group in the US, and a 700 MW order from PPM Energy (largest ever contract for Suzlon and also in the history of the US wind energy market).

Consolidated segment-wise performance
(Rs m) 1QFY07 1QFY08 Change
Wind turbine generator (WTGs) 7,518 14,880 97.9%
EBIT margin 18.8% 8.6%  
Gear Box (Hansen) 3,152 4,429 40.5%
EBIT margin 16.5% 7.0%  
Others 23 167 627.1%
EBIT margin -165.5% 21.7%  
Overall PBIT margin 17.7% 8.4%  

Supply delays, forex volatility impacts margins: In continuance with the past few quarters performance, Suzlon recorded some supply related bottlenecks during 1QFY08 as well. The management has quantified such bottlenecks at 50 MW each for the domestic and international markets. While delay in domestic sales was on account of heavy rains in Maharashtra and issues at windmill sites at some locations, the international delay was on the back of delay in sourcing towers from suppliers. Hansen (Suzlon’s gearbox subsidiary) also lost some volumes on account of delay in sourcing some components for its product. The rupee’s appreciation against the US dollar also impacted margins in the negative (by around 2%). Also, the fact that EPC earns relatively lower margins than equipment business, the increased presence of the former in Suzlon’s total project revenues also impacted margins during 1QFY08. The management though expects to maintain margins at last year’s levels of 17%.

Lower margins, higher interest costs dents bottomline: Suzlon recorded an 80% YoY decline in its net profits for 1QFY08. This was owing to the compression in operating margins as also due to higher interest costs (up 195% YoY), the latter due to debt taken for funding of REpower. At the end of June 2007, Suzlon’s consolidated debt stood at Rs 63 bn, which is higher than what we have estimated for the full year. As a consequence, we would have to revise upwards our interest cost estimates for the company for this fiscal.

What to expect?
At the current price of Rs 1,295, the stock is trading at a multiple of 14.3 times our estimated FY10 earnings. While Suzlon’s 1QFY08 results have been a disappointment on the profitability front, we shall wait for the half-year performance before reviewing our FY08 and forward numbers for the company. It is definite that risks have increased for the company owing to consistent delays in equipment supplies, especially in the international markets. Against this, the company continues to win large size orders for equipment supply, which raises the concern whether it will be able to execute these orders in time or not.

The management has indicated that the numbers of REpower will be amalgamated into Suzlon’s numbers from next quarter onwards (on the 34% share which Suzlon directly holds in the former). However, these numbers will be incorporated with a quarter’s lag, i.e., REpower’s April to June quarter numbers will be incorporates in Suzlon’s July to September quarter performance and so on.

With strong demand for wind turbines continuing from the US, China and Europe over the next few years, we are positive on Suzlon’s long-term growth prospects. However, considering the low profitability of Hansen and REpower as also component supply bottlenecks, we believe that risks for the company have increased over time.

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