Suzlon: A Trap or the Best Opportunity of the Year?

When I log into the archives section of our website, I see three recommendation reports on Suzlon Energy. This means we have recommended the stock of Suzlon Energy to our subscribers thrice.

And all have been right on the money.

Our first report was published in April 2006. The stock was trading at Rs 1,261 per share (unadjusted price before stock split, dilution etc). We had a target of Rs 1,600.

Our second report was a few months later, in November. We raised the target price from Rs 1,600 to Rs 2,020 per share.

Why? Well, because Suzlon had just completed its acquisition of one of the biggest gearbox suppliers in the world. We were convinced this was a big positive for the stock. Hence the upgrade.

We were in one of the strongest bull markets in history back then. We were also betting on one of the fastest growing stocks. So it didn't take long for the stock to come within touching distance of our target price. In fact, it was there in less than a year.

Worried the stock had run up too fast too soon, we recommended our subscribers to book profits. We closed the position in November 2007.

Our third and final recommendation came in July 2009. This time it was a SELL recommendation.

Yes, that's correct. Even though the stock had become very cheap from a valuation standpoint, we did not give a BUY on it. This time, the deteriorating fundamentals worried us.

We knew it would be difficult for Suzlon to come out of the hole it had dug itself into. So we came out with a long report about why we didn't like the stock anymore and why it is in danger of falling further.

Yet again, we were proven correct. The stock did fall further from our SELL price. In fact, it has been almost 14 years since the SELL report. The stock is down 85% from our SELL price.

A brutal combination of demand destruction, a highly leveraged balance sheet as well as regulatory flip-flops, turned the stock into one of the biggest wealth destroyers in recent history.

Between FY13 and FY22, the company has been profitable in only one year. Its net worth has gone into the negative since FY14.

But of late, the stock has been on a comeback trail. It has multiplied more than 8x since the lows of March 2020. It has almost doubled in the last one year.

To be honest, this is not the first time the stock has attempted to make a comeback. It has tried doing it few times in the past as well.

But to me this appears to be the stock's strongest comeback bid. In fact, the company recently released its full year FY23 results and they seem to be quite encouraging.

Here are the key positives...

• Consolidated FY23 PAT before any exceptional items turned positive after six years.
• Substantial reduction in net finance costs from Rs 7.1 bn in FY22 to Rs 4 bn in FY23.
• Net debt to EBITDA (pre-forex) is 1.4x vs 7x for FY22.
• Costs came under control as the economy and commodity prices stabilized.

So, as you can see, profits have received a big boost. Both debt as well as interest costs have also come down a lot. The order book and hence the revenue visibility, is also looking stronger than ever.

So has the risk-reward equation finally turned in favour of the investors after the improvement in fundamentals that we just saw?

I'm not so sure.

You see, when we recommended the stock back in 2006, the company had both fundamentals as well as valuations going for it.

Although the stock was not cheap, we were confident that growth would cover for the small premium in valuations. Besides, its balance sheet was not loaded with debt and its net worth was also positive.

This is not the case right now.

We are not in a position to value the stock right now because we don't know the earnings the stock is capable of achieving on a sustainable basis.

Both, its losses as well as profits have been all over the place over the last few years, making it difficult to value the company on a PE basis.

We can try to take the future earnings into account. However, we need some kind of assurance about the profit it can achieve on a sustainable basis. We don't think we will be following good investing principles if we value the company on just on its future earnings.

This way, any loss-making company can claim to have any market value it likes. This is a dangerous path that we don't like to follow.

Valuing the company based on book value is another option. However, the company's less than Re 1 book value per share versus the current price of Rs 14 per share, makes this exercise meaningless.

The company's book value is in rebuilding phase. Therefore, it doesn't make sense to value company on its current book value.

Besides difficulty in valuing the company, there's also the issue of debt which continues to remain higher than equity. There is always a risk it can spiral out of control given the working capital-intensive nature of the business.

I'm of the firm belief that every investor should have his or her own circle of competence.

The most successful investors are the ones who know the boundaries of their circle of competence really well and have the discipline to invest within those boundaries. They rarely venture outside their circle of competence.

My circle of competence are stocks with good balance sheets and decent, if not the best track records.

Unfortunately, Suzlon, despite strong signs of a turnaround and concrete plans for de-leveraging, falls outside my circle of competence. It hasn't turned consistently profitable yet and still has high debt.

So I may still not call it an 'investment'. At best, it could be termed as an 'intelligent speculation' based on how I define my own circle of competence.

Now this doesn't have to be the case for you. Maybe Suzlon's business is in your circle of competence.

But if you're confused whether to invest in the stock or not, then perhaps you don't know your circle of competence well enough.

So, it would be best to sort that out first. Only then take a call on Suzlon based on whether it falls outside inside your personal circle of competence.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter