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Suzlon Energy: Wind on fire! - Views on News from Equitymaster

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Suzlon Energy: Wind on fire!
Jul 31, 2006

Introduction to results
Wind energy equipment major, Suzlon Energy announced yet another quarter of strong performance, wherein it reported 204% YoY growth in topline for 1QFY07 (standalone numbers). Further, on the back of lower raw material costs, operating margins expanded by 140 basis points (1.4%). Consequently, the bottomline grew at a superior rate of 222% YoY during the quarter. The analysis also includes extracts from the conference call, which was held today.

Standalone financial performance: A snapshot…
(Rs m) 1QFY06 1QFY07 Change
Sales 3,076 9,338 203.6%
Expenditure 2,331 6,945 198.0%
Operating profit (EBDIT) 745 2,393 221.1%
Operating profit margin (%) 24.2% 25.6%  
Other income 80 129 61.0%
Interest 96 163 70.3%
Depreciation 85 149 75.2%
Profit before tax 645 2,210 242.9%
Tax 43 274 535.3%
Profit after tax/(loss) 601 1,936 221.9%
Net profit margin (%) 19.6% 20.7%  
No. of shares 260.7 287.5  
Diluted Earnings per share (Rs)*   33.2  
P/E ratio (x)*   32.2  
*On a trailing 12-months basis

What is the company’s business?
Suzlon Energy (Suzlon) is Asia’s leading manufacturer of wind turbine generators (WTGs) having around 53% share of India’s domestic installations in 2005. On a cumulative basis, Suzlon has installed around 36% of India’s total wind power capacity of 4,500 MW. 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. During the period between FY02 and FY06, Suzlon has grown its revenues and net profits at compounded rates of 65% and 61% respectively.

What has driven performance in 1QFY07?
Growth, growth everywhere! Strong volume growth alongwith stable to positive realisations have helped Suzlon post such a superlative growth in its topline during 1QFY07. In volume terms, total sales for the quarter was 301 MW, almost four times the sales in 1QFY06 (72 MW). Out of the 1QFY07 volume sales, domestic sales’ contribution was 173 MW (57%) with the rest (128 MW) attributable to exports. Further, at the end of the quarter, Suzlon has an order backlog of 816 MW – 207 MW domestic and 609 MW exports. As indicated by the management in the conference call, the execution cycle for this backlog is around 3-6 months. In value terms, the order backlog stands at Rs 37.6 bn, almost equal to the company’s total sales in FY06.

Investors must note that apart from providing greater visibility to the company and being a route of geographical diversification, exports are also likely to reduce the seasonality factor in Suzlon’s performance across quarters (with growth spread out across quarters and not restricted to the second half of the fiscal). Also, the fact that new export orders are coming at around 3% to 5% higher realisations is a positive for Suzlon.

Performance of Hansen Transmission: During FY06, Suzlon acquired the Belgium based Hansen Transmission, one of the three major multi-MW gearbox suppliers in the world, for a consideration of US$ 564 m. As a matter of fact, Hansen has a manufacturing capacity of 3,300 MW of wind turbine gearboxes, which the company shall be taking up to 4,500 MW going forward. Hansen reported revenues of Rs 3.2 bn during the 2-month period of May 2006 and June 2006. The company’s PBT margins during this period stood at 12.3%. We believe that a successful integration of Hansen with itself will be of immense strategic importance to the company, as it will help the latter secure supply of one of the most critical components of the overall wind power equipment.

Capacity addition: Suzlon is in the process of expanding its manufacturing footprint globally. This includes an investment of US$ 60 m in China, where the company is setting up a 600 MW integrated manufacturing unit, which will produce rotor blades, generators and control panels. The company is also investing US$ 25 m in setting up a 600 MW rotor blade manufacturing unit in the US. Both these units are expected to commence production by September 2006. Over that, the company will also be spending US$ 325 m towards setting up a dedicated export facility in Karnataka (1,500 MW) and integrating its foundry, forging and machining units with core operations. These facilities are expected to commence production by June 2007. Consequently, by the end of June 2007, Suzlon will take its capacity to 4,200 MW (including Chinese and US capacities), from 1,500 MW currently.

Lower costs aid margins: Lower input and staff costs have helped Suzlon report 140 basis points (1.4%) expansion in its operating margins for 1QFY07. As a matter of fact, Suzlon’s raw material costs, including purchase of traded goods, have declined from 130% of 1QFY06 sales to 68% of sales in 1QFY07. Lower reliance on external purchases through capacity expansion has helped the company on this front.

Do we say more for the bottomline? Apart from the strong growth in topline, the expansion in operating margins and higher other income has played their part in sprucing up Suzlon’s bottomline during 1QFY07. On the back of these factors, the company has improved its net margins by almost 1% YoY. We expect Suzlon to report net margins of 20.5% during FY07.

What to expect?
At the current price of Rs 1,068, the stock is trading at a price to earnings multiple of 15.4 times our estimated FY08 earnings. Considering the thrust by policymakers across the world towards ramping up renewable energy capacities (wind power included), the strong growth from Suzlon has been on expected lines. We believe that the full effect of an integrated supply chain shall also be visible in the times ahead. This shall help the company improve its profitability further. We maintain our positive view on the stock from a long-term perspective.

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