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Suzlon Energy: Blowing in the wind

Nov 2, 2009

Performance summary
  • Topline falls 31% YoY during 2QFY10. Order backlog at the end of October 2009 for Suzlon’s wind business stands at Rs 82 bn.
  • Operating margins contract to 1.7%, from 8.9% in 2QFY09. Deterioration in margins is largely on account of an increase in the employee costs and other expenditure (both as percentage of sales).
  • Bottomline shows a loss during the quarter. This is largely on the back of a big increase in interest and depreciation costs during the quarter. Loss for the quarter stands at Rs 3.5 bn.

Consolidated financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 69,209 47,933 -30.7% 100,387 89,460 -10.9%
Expenditure 63,025 47,140 -25.2% 88,929 88,730 -0.2%
Operating profit (EBDIT) 6,184 794 -87.2% 11,458 730 -93.6%
Operating profit margin (%) 8.9% 1.7%   11.4% 0.8%  
Other income 1,012 621 -38.6% 1,804 1,022 -43.4%
Interest 2,160 2,926 35.5% 3,592 6,054 68.6%
Depreciation 1,269 1,880 48.2% 2,255 3,506 55.5%
Profit before tax 3,767 (3,391) -190.0% 7,416 (7,808) -205.3%
Extraordinary income/(expense) (2,778) (203)   (5,076) (385)  
Tax 930 18 -98.1% 1,756 44  
Profit after tax 59 (3,612)   584 (8,238)  
Share in associate's profit - -   23 -  
Minority share in profits/(losses) 287 (57)   742 (156)  
Net profit (228) (3,555)   (135) (8,082)  
Net profit margin (%) 0.1% -7.5%   0.6% -9.2%  
No. of shares (m)       1,498.3 1,556.8  
Diluted earnings per share (Rs)*         (3.6)  
P/E ratio (x)*         NA  
* On a trailing 12-months basis

What has driven performance in 2QFY10?
  • Suzlon recorded a 31% YoY fall in sales during 2QFY10. The was mainly due to a 36% fall sales of wind turbines. Sales in volume terms fell from 727 MW to 283 MW during the quarter. Order backlog at the end of October 2009 for Suzlon’s wind business stood at Rs 82 bn.

    Consolidated segment-wise performance
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Wind turbine generator sales 61,154 39,017 -36.2% 84,486 71,205 -15.7%
    Share of total sales 85.4% 78.6%   81.1% 78.0%  
    PBDIT margin 8.4% 2.5%   10.3% 1.4%  
    Gear box sales 10,277 10,322 0.4% 19,386 19,570 1.0%
    Share of total sales 14.4% 20.8%   18.6% 21.4%  
    PBDIT margin 18.5% 5.0%   19.9% 5.9%  
    Other sales 145 270 85.8% 241 562 133.3%
    Share of total sales 0.2% 0.5%   0.2% 0.6%  
    PBDIT margin 59.4% -7.2%   66.5% 11.9%  

  • Suzlon recorded a drastic fall in operating margins during 2QFY10.The main reasons for this was a rise in employee costs and other expenditure (both as percentage of sales). Operating margins fell from 8.9% in 2QFY09 to 1.7% in 2QFY10. The company’s fixed costs (overheads) could not be reduced despite a drastic fall in sales, thus increasing their proportion as a percentage of sales.

  • The company witnessed a net loss of Rs 3.5 bn during the quarter. This was mainly due to its fall in operating margins, as also a spike in interest costs and higher depreciation charges on the back of its capacity expansion program. Interest costs increased by 36% YoY during the quarter, while depreciation costs saw an even higher increase of 48% YoY.

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’s order book at the end of September 2009 stands at 1,488 MW which consists of 1,365 MW of international orders and 123 MW of domestic orders. As for its subsidiaries, while Hansen Transmissions saw small drop in sales for 1HFY10, while it slipped into the negative at the EBIT level. REpower Systems on the other hand saw a 15% YoY rise in sales for the half year, and a 35% YoY rise in EBIT during the same period.

Suzlon is still in the process of evaluating a possible full or partial sale of stake in Hansen Transmissions to decrease the debt on its books. It has also resorted to other methods to raise funds including a GDR issue during the quarter.

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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