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Suzlon Energy: Forex losses hit hard

Jul 31, 2008

Performance summary
  • Standalone topline grows by 75% YoY during 1QFY09. Consolidated sales up 42% YoY. Execution of a part of large order book leads to this strong growth during the quarter. Order backlog at the end of June 2008 stood at Rs 164 bn, comprising Rs 14 bn of domestic orders and Rs 150 bn of international orders.
  • Consolidated operating margins expand to 15.4%, from 7.8% in 1QFY08. Improvement in margins is largely on account of stock related adjustments and lower other costs (both as percentage of sales).
  • Standalone and consolidated bottomline decline by 2% YoY and 93% YoY during the quarter. This is largely on the back of a large Rs 1.6 bn forex loss on international borrowings recorded by the company. Excluding this one-off loss, net profits have jumped by over 400% for the consolidated operations.

Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change 1QFY08 1QFY09 Change
Sales 8,392 14,706 75.2% 19,446 27,605 42.0%
Expenditure 7,132 11,536 61.7% 17,924 23,365 30.4%
Operating profit (EBDIT) 1,260 3,170 151.7% 1,523 4,240 178.4%
Operating profit margin (%) 15.0% 21.6%   7.8% 15.4%  
Other income 237 257 8.4% 426 742 73.9%
Interest 289 382 32.2% 1,079 1,386 28.4%
Depreciation 177 217 22.6% 585 929 58.8%
Profit before tax 1,031 2,828 174.4% 285 2,667 835.2%
Extraordinary income/(expense) (132) (1,638)   (125) (1,640)  
Tax 5 310 6630.4% (40) 634  
Minority interest NA NA   11 409 3491.2%
Share of profit & loss of associates NA NA   - 29  
Profit after tax 894 880 -1.5% 189 13 -92.9%
Net profit margin (%) 10.7% 6.0%   1.0% 0.0%  
No. of shares (m)       1,438.6 1,497.2  
Diluted earnings per share (Rs)*         6.8  
* On a trailing 12-months basis

What has driven performance in 1QFY09?
  • Suzlon recorded a strong 42% YoY growth in consolidated sales during 1QFY09. This was largely a result of strong growth in both the wind turbine generator (WTG) and gearbox sales. While the former grew by 39% YoY, the latter recorded a stupendous growth of 88% YoY during the quarter. At the end of June 2008, the company’s order backlog stood at nearly Rs 164 bn. This includes Rs 150 bn of international orders and Rs 14 bn of domestic projects in hand.

    Consolidated segment-wise performance
    (Rs m) 1QFY08 1QFY09 Change
    Wind turbine generator sales 14,880 20,697 39.1%
    Share of total sales 76.4% 70.9%  
    PBDIT margin 7.9% 16.0%  
    Gear box sales 4,429 8,314 87.7%
    Share of total sales 22.7% 28.5%  
    PBDIT margin 7.0% 14.0%  
    Other sales 167 184 10.4%
    Share of total sales 0.9% 0.6%  
    PBDIT margin 21.7% 2.1%  

  • Suzlon recorded an almost doubling of consolidated operating margins during 1QFY09, which was largely a result of stock related adjustments. On the other hand, raw material costs (as percentage of sales) increased from 76% in 1QFY08 to 90% in 1QFY09, thus paring some further gains in operating profitability. As for segments, both the segments of WTGs and gearbox recorded strong margin expansion during the year.

  • On account of a forex loss of Rs 1.6 bn on its international borrowings, Suzlon recorded a 93% YoY decline in its consolidated net profits during the quarter. Excluding this one-off loss, net profits have jumped by over 400% YoY. Suzlon’s bottomline numbers also include March quarter profits of REpower (which the company had acquired in May 2007). As a matter of fact, as was indicated by the management in the last quarter’s conference call, Suzlon will be consolidating REpower’s numbers with a three month (one quarter) lag. The latter, now a subsidiary of the former was treated as an associate in the March quarter as the Indian company owned only 36% then. Now, in June 2008, Suzlon has acquired a further 30% stake in REpower held by Areva, thus taking its total shareholding to 66%.

What to expect?
At the current price of Rs 226, the stock is trading at a multiple of 16.5 times our estimated FY10 consolidated earnings, which we believe is expensive. While Suzlon has continued to win large size orders for equipment supply especially in the international markets, supply side bottlenecks remain a concern. The management has itself indicated of tightness in supply of gearboxes, towers and bearings.

The company is currently in process of expanding its manufacturing capacities and has outlined an investment of Rs 26 bn to be spent over the next few quarters. While this will ease supply constraints of key inputs, logistic issues are something it has to contend with going forward.

Overall, we maintain a negative stance on the company owing to the abovementioned concerns as also the stock's valuations. As this point of time, we believe, risks far outweigh the returns for investors in the stock. We shall however update you more on the company post a meting with the management.

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