Macquarie Research: sell Suzlon: Traget Rs 42

Suzlon Energy
Too early to cheer
Event
 Suzlon stock has rallied 18% from its lows on news of order inflows, IPOs of
Chinese wind turbine manufacturers. However, business fundamentals
remain worrisome, especially in overseas markets, and balance sheet issues
persist for the company. Significantly higher order inflows or sharp cost cutting
would make us turn more positive on the stock. Meanwhile, we retain our
Underperform rating with a target price of Rs42 on the stock.
Impact
 Large Indian orders only make for dry overseas markets: YTD Suzlon has
announced 820MW orders, 90% of which has come from India. These order
inflows are just creating incremental comfort in our existing FY12 sales
estimates of 2,010MW rather than creating any room for surprise.
 Outlook on wind installation remains grim: MAKE Consulting has cut
its forecast for wind installations in US in CY10 by 23% due to a weak
economy, soft gas prices and unfavourable policy environment. It expects
the market to remain soft until CY15.
 New CERC norms could boost wind sector in India, competition too
would increase: India’s power sector regulator has proposed issue of
tradable renewable energy certificates (RECs) for power generated from
renewable sources. This could be a significant positive for wind turbine
demand if the renewable energy targets are strictly imposed in each state.
Meanwhile, number of new players like GE, Siemens, WinWind etc are setting
up a manufacturing base in India.
 Comparisons with Chinese IPOs are not justified: Chian’s second largest
wind turbine manufacturer - Xinjiang Goldwind (002202 CH, CNY20.5, Not
rated) plans to raise US$815-915mn by an IPO which translates in 12-14x
1yr-fwd EV/EBITDA. Goldwind is exposed to the Chinese Wind market which
is one of the fastest growing markets in the world for wind turbine.
 Our target price already prices in high valuations: Revival of the
Goldwind IPO indicates an appetite for renewable energy plays amongst
investors, which would be a sentiment positive for the space. However,
we have already assigned 10x FY12 EV/EBITDA on Suzlon’s core wind
business.
Earnings and target price revision
 We introduce our 2013 estimates.
Price catalyst
 12-month price target: Rs42.00 based on a Sum of Parts methodology.
 Catalyst: weak order inflow in 2HFY11
Action and recommendation
 Too early to get excited, remain cautious on the stock: We believe that it’s
too early for us to get positive on the stock. Recent order flows just give
credence to our sales assumptions for FY12 rather than providing any
meaningful upside. We would watch out for further improvement in order
inflow before turning positive on the stock. We retain our Underperform rating
with a target price of Rs42.