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Suzlon Energy: The losses widen

Aug 16, 2010

Suzlon Limited has announced its 1QFY11 results. The company has reported a 42% YoY fall in sales, and a Rs 9.1 bn loss at the bottomline level. Here is our analysis of the results.

Performance summary
  • Topline falls 42% YoY during 1QFY11. Order backlog at the end of June 2010 at the consolidated level stands at Rs 227 bn.
  • Operating losses widen during the quarter. Deterioration in operating performance on account of an increase in all the cost heads (as percentage of sales) for the company.
  • Bottomline shows a large loss of Rs 9.1 bn during the quarter. This is largely on the back of the poor operating performance, as well as a relatively lesser decline in interest expenses.

Consolidated Financial performance snapshot
(Rs m) 1QFY10 1QFY11 Change
Sales 41,527 23,987 -42.2%
Expenditure 41,590 29,504 -29.1%
Operating profit (EBDIT) (64) (5,518) 8575.6%
Operating profit margin (%) -0.2% -23.0%  
Other income 400 293 -26.8%
Interest 3,128 2,611 -16.5%
Depreciation 1,626 1,265 -22.2%
Profit before tax (4,417) (9,101) 106.0%
Extraordinary income/(expense) (183) (373)  
Tax 26 (237)  
Profit after tax (4,625) (9,236)  
Share in associate's profit - (69)  
Minority share in profits/(losses) (99) (183)  
Net profit (4,527) (9,122)  
Net profit margin (%) -11.1% -38.5%  
No. of shares (m) 1,498.3 1,556.8  
Diluted earnings per share (Rs)*   (9.3)  
P/E ratio (x)*   NA
* On a trailing 12-months basis

What has driven performance in 1QFY11?
  • Suzlon recorded a 42% YoY fall in sales during 1QFY11. This was mainly due to a fall in volume sales of wind turbines. Also, the gear box sales are not fully comparable due to the company's stake sale in its gear box subsidiary (Hansen Transmissions) during FY10. Thus the overall sales also saw a decline on a year on year basis due to the fact that the company's sales from the gear box business have not been consolidated during 1QFY11 as Suzlon now holds a minority stake in the same. Order backlog at the end of June 2010 for the company at the consolidated level stands at Rs 227 bn.

    Consolidated segment-wise performance
    (Rs m) 1QFY10 1QFY11 Change
    Wind turbine generator sales 32,188 23,828 -26.0%
    Share of total sales 77% 97%  
    PBDIT margin 0.1% -21.3%  
    Gear box sales 9,248 - -100.0%
    Share of total sales 22% 0%  
    PBDIT margin 6.9% 0.0%  
    Other sales 292 640 118.9%
    Share of total sales 1% 3%  
    PBDIT margin 29.6% 11.4%  

  • Suzlon recorded a loss at the operating level during 1QFY11.The reasons for this were a rise in all the company cost heads as a percentage of sales. Raw material costs, cost of goods purchased for trading as well as a rise in other expenditure all saw a rise. The company also had a notional forex loss during the quarter, compared to a gain in the previous year's quarter. Operating losses came in at Rs 5.5 bn during 1QFY11.

  • The company witnessed a net loss of Rs 9.1 bn during the quarter. This was mainly due to the poor operating performance, as also a relatively lower fall in interest costs and depreciation charges when compared to the fall in turnover.

What to expect?
The stock's price to earnings ratio cannot be reliably calculated considering its losses for the past four quarters and which may continue going forward too. The company has achieved financial closure of its debt refinancing of Rs 107 bn. This refinancing includes a holiday of two years in principal repayments and removal of many debt covenants. The company has also successfully completed a rights issue of about Rs 12 bn which will go towards reduction of debt.

As per the management, the company is seeing a strong momentum for the wind sector led out of emerging economies particularly India, China, Brazil and Western Europe. The US and some European markets continue to remain difficult.

Suzlon has a very high amount of both operating as well as financial leverage. This is a risky proposition for an investor, especially due to the fact that it is still uncertain when the company's business will see a turnaround. Considering the precariousness of the company's balance sheet and the business problems it is facing and has faced in the past, we reiterate our negative view on the stock.

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