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Suzlon Energy: Still in the doldrums - Views on News from Equitymaster

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Suzlon Energy: Still in the doldrums
Aug 4, 2009

Performance summary
  • Net sales increase by 33% YoY during 1QFY10.
  • Operating margins dropped to -0.2%. The company’s management has attributed the same to lower sales volumes.
  • Net loss stands at Rs 4.5 bn as compared to a profit of Rs 93 m during 1QFY09.
  • At the end of the quarter, the company had an order book of 1,501 MW, which has a value of about Rs 83 bn.


Consolidated financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Sales 31,178 41,527 33.2%
Expenditure 25,904 41,590 60.6%
Operating profit (EBDITA) 5,274 (64)  
Operating profit margin (%) 16.9% -0.2%  
Other income 793 400 -49.5%
Interest 1,432 3,128 118.4%
Depreciation 986 1,626 64.9%
Exceptional gains/(losses) (2,298) (183)  
Profit before tax 1,351 (4,599)  
Tax 827 26 -96.8%
Profit after tax/(loss) 525 (4,625)  
Share in profits of associates 23 -  
Minority share (455) 99  
Net profit 93 (4,527)  
Net profit margin (%) 1.7% -11.1%  
No. of shares (m)   1,498.3  
Diluted earnings per share (Rs)*   6.1  
P/E ratio (x)*   15.8  
* On a trailing 12-month basis, adjusted for extraordinary items

What has driven performance in 1QFY10?
  • Suzlon Energy (Suzlon) reported a consolidated topline growth of 33% YoY during the quarter. It may be noted that the growth is after including REPower’s results for the full quarter. The quarter ending June 2008, included only one month of the company’s numbers. At a standalone level, Suzlon’s revenues declined by nearly 79% YoY. The company’s management has attributed the fall in sales to slow order intake, which led to lower sales volumes. In all, the company sold 123 MW of wind power installations during 1QFY10, lower by 64% YoY as compared to 1QFY09. Out of this, only 58 MW was installed in India and the balance was in the US. At the end of the quarter, the company’s order backlog stood at nearly Rs 83 bn for 1,501 MW of installations, wherein China and the US have a share of about 38% each. The other major contributors are Europe, Australia and India.

    Consolidated segment-wise performance
    (Rs m) 1QFY09 1QFY10 Change
    Wind turbine generator
    Revenue 23,333 32,188 38.0%
    EBIT Margins 15.3% 0.1%  
    % of sales 71.7% 77.1%  
    Gear box
    Revenue 9,108 9,248 1.5%
    EBIT Margins 21.5% 6.9%  
    % of sales 28.0% 22.2%  
    Others#
    Revenue 96 292 205.3%
    EBIT Margins 77.2% 29.6%  
    % of sales 0.3% 0.7%  
    Total*
    Revenue 32,537 41,728 28.2%
    EBIT margins 17.2% 1.8%  
    *Excluding inter-segment adjustments; # Others includes the foundry and forgings business

  • Suzlon reported an operating loss of Rs 64 m as against a profit of Rs 5.3 bn in the corresponding quarter last year. As mentioned above, this is largely on the back of a decline in sales volumes. In addition, costs were also higher due to the consolidation effect. While raw material costs stood at 70.1% of sales (57.4% in 1QFY09), staff costs and other expenditure stood at about 14.3% and 15.8% of sales respectively as against 13.6% and 12.1% during the quarter ending June 2008.

  • Suzlon reported a net loss of about Rs 4.5 bn as against a net profit of Rs 93 m during 1QFY09. The huge loss is largely on the back of a poor operating performance. In addition, the company was also impacted by the high interest and depreciation charges. During the quarter ending June 2008, the company incurred an extraordinary loss of about Rs 2.3 bn. During 1QFY10, the company had an extraordinary loss of about 183 m.

  • The extraordinary losses during the quarter were largely on account of foreign exchange losses on convertible bonds. However, as the company restructured its FCCBs during the quarter, it recorded some gains. The net effect was a loss of Rs 183 m. One positive for the company was that it made no provisions for the blade retrofit programme during the quarter as it had made full provision for the same in the previous year. As per the company, nearly 90% of the project is complete and the balance is likely to be completed by August this year.

What to expect?
At the current price of Rs 97, the stock is trading a price to earnings multiple of 15.8 times its trailing 12-month earnings. Giving its outlook, the management of Suzlon expects the order book position to improve during the second half of the current year. It attributed the slowdown in order inflow in the domestic markets to the delayed budget, which in turn led to customers not placing orders earlier. As for international markets, the management believes that the global economic crisis has led to many clients deferring some of their orders to the second half of this fiscal.

On an overall basis, the industry is still facing the impact of the slowdown. However, the management believes that the effects of the US$ 163 bn green stimulus initiatives announced by various governments across the world will come in soon. While the prospects of the wind energy business are strong in the long run, we maintain our negative view on the stock.

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