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Suzlon Energy: All in the air - Views on News from Equitymaster

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Suzlon Energy: All in the air
Nov 1, 2008

Performance summary
  • Topline grows by 33% YoY during 2QFY09. Order backlog at the end of September 2008 for wind and component business stood at Rs 151 bn, comprising Rs 13 bn of domestic wind orders, Rs 128 bn of international wind orders and Rs 11 bn of orders in the component business.
  • Operating margins contract to 9.9%, from 17.2% in 2QFY08. Deterioration in margins is largely on account of an increase in the employee costs and a spike in freight costs incurred by the company (both as percentage of sales).
  • Bottomline shows a loss during the quarter. This is largely on the back of forex losses on international borrowings recorded by the company, mark-to-market losses and cracked turbine restoration costs. Excluding these one-off losses for both periods, net profits have fallen by over 62% YoY for the quarter.


Consolidated# financial performance snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 31,375 41,818 33.3% 46,392 62,684 35.1%
Expenditure 25,971 37,692 45.1% 39,713 55,536 39.8%
Operating profit (EBDIT) 5,404 4,126 -23.6% 6,679 7,148 7.0%
Operating profit margin (%) 17.2% 9.9% 14.4% 11.4%
Other income 435 159 -63.5% 793 588 -25.8%
Interest 1,213 1,885 55.3% 2,188 3,090 41.2%
Depreciation 384 625 62.8% 712 1,111 56.1%
Profit before tax 4,241 1,775 -58.1% 4,572 3,536 -22.7%
Extraordinary income/(expense) (165) (2,778) (372) (5,076)
Tax 328 302 -7.8% 278 654
Profit after tax 3,748 (1,305) 3,921 (2,194)
Net profit margin (%) 11.9% -3.1% 8.5% -3.5%
No. of shares (m) 1,439.9 1,498.3
Diluted earnings per share (Rs)* 4.4
P/E ratio (x)* 10.1
* On a trailing 12-months basis # Excluding the financials of Hansen & REpower

What has driven performance in 2QFY09?
  • Suzlon recorded a strong 33% YoY growth in sales during 2QFY09. The growth in sales was mainly due to a 25% growth in realisations and 6% growth in volumes. Order backlog at the end of September 2008 for wind and component business stood at Rs 151 bn, comprising Rs 13 bn of domestic wind orders, Rs 128 bn of international wind orders and Rs 11 bn of orders in the component business. All of this is excluding the order backlog for Hansen and REpower.

  • Suzlon recorded a drastic fall in operating margins during 2QFY09.The main reasons for this were a rise in employee costs and other expenditure as a percentage of sales. According to the company, the rise in the employee costs is due to the capacity expansion of its manufacturing facilities for which new staff has been increased but revenues have not been booked completely. The main driver for the rise in other expenditure was a spike in the freight rates for shipping due to the rise in oil prices.

  • The company witnessed a net loss of Rs 1,305 m during the quarter. This was largely on the back of forex losses on international borrowings recorded by the company, mark-to-market losses, and cracked wind turbine restoration costs which were incurred as part of the retrofit program which the company has undertaken to rectify the blade crack problems faced by its turbines in the US. Excluding these one-off losses for both periods, net profits have fallen by over 62% YoY during the quarter.

What to expect?
At the current price of Rs 44, the stock is trading at a multiple of 10.1 times its trailing 12 months earnings (excluding Hansen and REpower). Given the exceptional losses and margin deterioration during 1HFY09, we will have to revise our future estimates downwards for Suzlon. The management of Suzlon however continues to be optimistic about the long-term prospects of the wind energy business in spite of any short-term hiccups due to the current global financial turmoil. Though the huge demand supply mismatch that earlier existed in the wind equipment business may neutralise in the short term due to the liquidity crunch. None of the orders placed with the company have been cancelled till date.

Also, Suzlon cites the problem of the blade cracks as the stiffness of the blades not being enough, and will now add an additional layer to its blades to rectify the same. Our concerns with respect the stock’s valuations came more than true this quarter as the company suffered under the weight of its aggressive growth aspirations. Cancellation of the rights issue and issues in raising stake in REpower have also dealt the stock a severe blow. We shall soon update our numbers and finalise our latest view on the stock.

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