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Suzlon Energy: Wind in its sails? - Views on News from Equitymaster

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Suzlon Energy: Wind in its sails?
Oct 23, 2007

Performance summary
  • Consolidated topline grows by 75% YoY in 2QFY08, 77% YoY in 1HFY08. Growth led by strong order bookings and execution. Volume sales grow 76% YoY to 683 MW during the quarter.
  • Operating margins contract by 1.2% in 2QFY08, from 17.3% in 2QFY07 Ė supply delays the culprit.

  • Consolidated net profits surge 68% YoY in 2QFY08, largely aided by strong topline growth and higher other income; Net profits grow 25% YoY in 1HFY08, suppressed due to lower profits during the first quarter.

  • Board recommends stock split in the ratio of 5:1

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 20,870 36,413 74.5% 31,559 55,859 77.0%
Expenditure 17,270 30,543 76.9% 26,101 48,592 86.2%
Operating profit (EBDIT) 3,600 5,870 63.0% 5,458 7,268 33.1%
Operating profit margin (%) 17.3% 16.1% 17.3% 13.0%
Other income 87 535 518.0% 248 961 288.1%
Interest 547 1,387 153.4% 913 2,466 170.1%
Depreciation 428 583 36.2% 776 1,168 50.7%
Profit before tax 2,711 4,434 63.6% 4,017 4,595 14.4%
Tax 340 457 34.3% 686 417 -39.3%
Profit after tax 2,371 3,978 67.8% 3,331 4,178 25.4%
Share in profit of associates - 5 - 5
Minority interest 17 36 - 25 48 -
Net income 2,354 3,947 67.7% 3,306 4,136 25.1%
Net profit margin (%) 11.4% 10.9% 10.6% 7.5%
No. of shares (m) 288.0
Diluted earnings per share (Rs)* 32.9
P/E ratio (x)* 53.2
* On a trailing 12-month basis
* On a trailing 12-month basis

What is the companyís business?
Suzlon Energy (Suzlon) is Asiaís leading manufacturer of wind turbine generators (WTGs) having over 50% share of Indiaís wind power installations. On a cumulative basis, Suzlon has installed around 36% of Indiaís 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 2QFY08?
WTGs lead the way: Suzlonís WTG (wind turbine generator) business recorded a strong growth of 92% YoY during 2QFY08, thereby leading the topline growth for the company. This business saw a record 683 MW of installations during the quarter, which was 76% YoY higher (388 MW in 2QFY07). As on October 20, 2007, the companyís order backlog stood at nearly Rs 163 bn (Rs 95 bn at the end of FY07), inclusive of Rs 20 bn of domestic orders and Rs 143 bn of international orders. Based on volumes, while international backlog stands at 2,882 MW, the domestic backlog stands at 369 MW. The company won some large orders during the quarter, including a 400 MW order from Horizon Wind, the largest wind turbine developers in the US and a 150 MW contract from real estate major DLF in India.

Consolidated segment-wise performance
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Wind turbine generator (WTGs) 16,087 30,834 91.7% 23,604 45,713 93.7%
EBIT margin 18.4% 17.3% 18.5% 14.5%
Gear Box (Hansen) 4,368 5,276 20.8% 7,520 9,705 29.0%
EBIT margin 10.8% 12.4% 13.2% 9.9%
Others 418 522 25.0% 441 689 56.3%
EBIT margin 26.5% 7.2% 16.5% 10.7%
Overall PBIT margin 17.0% 16.5% 17.2% 13.6%

Stock adjustments, restoration expenses impact margins: Suzlon recorded a 1.2% YoY contraction in operating margins during 2QFY08, which was largely a result of higher cost of stock in trade. But for this impact, the profitability would have been higher as other major cost heads like raw materials and staff costs actually declined as percentage of sales. As for segments, while WTGs recorded margin contraction, there was an improvement in gearbox margins (see above table). The management has indicated that issues at its windmill sites in Sangli and Dhule (both in Maharashtra) cost the company around Rs 660 m during 1HFY08, which impacted WTG profitability for this period as well.

Strong topline, higher other income aids bottomline: The 68% YoY growth in Suzlonís consolidated bottomline during 2QFY08 was largely a result of the strong growth in sales and substantially higher other income (up 518% YoY). The rise in other income is seemingly a result of interest on funds that remain unutilised of the foreign bonds that were issued earlier this fiscal. The rise in interest costs can also be attributed to this debt issue, which has been assumed for funding of REpower as also for capital expenditure purposes.

Capex plans
Particulars Capacity Investment (Rs m) Place Targeted commencement
Integrated turbine mfg. facility 3,000 MW 15,000 India Phased manner in 1Q, 2Q and 3QFY09
Forging & Machining 70,000 MT 11,000 India 2QFY09
Foundry & Machining 120,000 MT India 1QFY09
Total capex 26,000
Source: Company presentation

What to expect?
At the current price of Rs 1,749, the stock is trading at a multiple of 19.8 times our estimated FY10 earnings, which we believe makes it fairly valued. 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.

Suzlonís management has also indicated of a foreign listing for Hansen in order to fund the expansion of its gearbox manufacturing capacity to 14,600 MW in the future (3,600 at the end of FY07). With strong demand for wind turbines continuing from the US, China and Europe over the next few years, we remain positive on Suzlonís long-term growth prospects. Although timely execution of projects is what we remain concerned about, as has been the case in the past. Also considering the low profitability of Hansen and REpower, component supply bottlenecks, as also the stockís valuations, we believe that risks have increased for the company and, thereby, for investors in it.

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