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Suzlon Energy: Red ink continues to flow - Views on News from Equitymaster

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Suzlon Energy: Red ink continues to flow

Nov 1, 2010

Suzlon Limited has announced its 2QFY11 results. The company has reported a 21% YoY fall in sales, and a Rs 3.7 bn loss at the bottomline level. Here is our analysis of the results.

Performance summary
  • Topline falls 21% YoY during 2QFY11. Order backlog at the end of the quarter at the consolidated level stands at approx. Rs 240 bn.
  • Operating margins expand to 2.7% from 1.7% in 2QFY11 helped by lower staff costs (as a percentage of sales).
  • Bottomline shows a loss of Rs 3.7 bn during the quarter. This is largely on the back of the contraction in operating margins, as well as a relatively lesser decline in interest expenses. Plus, tax expenses see a big spike during the quarter.

Consolidated financial performance snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 47,933 37,716 -21.3% 89,460 61,702 -31.0%
Expenditure 47,140 36,711 -22.1% 88,730 66,215 -25.4%
Operating profit (EBDIT) 794 1,004 26.6% 730 (4,513) -718.3%
Operating profit margin (%) 1.7% 2.7%   0.8% -7.3%  
Other income 621 675 8.6% 1,022 968 -5.3%
Interest 2,926 2,671 -8.7% 6,054 5,282 -12.7%
Depreciation 1,880 1,373 -27.0% 3,506 2,638 -24.8%
Profit before tax (3,391) (2,365) -30.3% (7,808) (11,465) 46.8%
Extraordinary income/(expense) (203) -   (385) (373)  
Tax 18 1,323 7211.0% 44 1,086 2346.4%
Profit after tax (3,612) (3,688)   (8,238) (12,924)  
Share in associate's profit - (94)   - 163  
Minority share in profits/(losses) (57) (90)   (156) (273)  
Net profit (3,555) (3,692)   (8,082) (12,489)  
Net profit margin (%) -7.5% -9.8%   -9.2% -20.9%  
No. of shares (m)       1,556.8 1,745.4  
Diluted earnings per share (Rs)*         -8.15  
P/E ratio (x)*         NA  
* On a trailing 12-months basis

What has driven performance in 2QFY11?
  • Suzlon recorded a 21% YoY fall in sales during 2QFY11. This was mainly due to a 4% fall in 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 in the recent past (mentioned below in detail). Thus the 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 for the quarter as Suzlon now holds a minority stake in the same. Order backlog at the end of the quarter for the company at the consolidated level stands at roughly Rs 240 bn.

    Consolidated segment-wise performance
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Wind turbine generator sales 39,017 37,344 -4.3% 71,205 61,170 -14.1%
    Share of total sales 79% 97%   78% 97%  
    PBDIT margin 2.5% 5.1%   1.4% -5.1%  
    Gear box sales 10,322 -   19,570 -  
    Share of total sales 21% 0%   21% 0%  
    PBDIT margin 5.0% NA   5.9% NA  
    Other sales 270 1,076 299.2% 562 1,716 205.4%
    Share of total sales 1% 3%   1% 3%  
    PBDIT margin -7.2% 15.7%   11.9% 14.1%  

  • Suzlon saw relatively better operating margins during 2QFY11 as compared to the same quarter in FY10.The main reasons for this was a fall in employee costs (as percentage of sales). Operating margins expanded from 1.7% in 2QFY10 to 2.7% in 2QFY11.

  • The company reported a net loss of Rs 3.7 bn during the quarter. This was mainly due to the poor operating performance, as also a relatively lower fall in interest costs when compared to the fall in turnover. Tax expenses also saw a big spike during the quarter adding to the bottomline woes.

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.

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. We reiterate our negative view on the stock.

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