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Suzlon Energy (SUEL IN)
UW(V): Bottoming out but not rebounding yet
2Q results miss estimates on weaker margins
Consensus too high, premium valuation unjustified
Reiterate Underweight (V) with 7% lower TP of INR40 after
increasing FY11 net loss forecast by 11%
Order recovery encouraging but profit rebound missing. Suzlon’s order book grew to
over 1.5GW from 1.1GW earlier this year, driven by its continued dominance in the
strong domestic market. While this has a positive bearing on its revenue outlook, Suzlon’s
margins continue to disappoint due to high OpEx, employee and interest costs. 2Q EPS
(excluding one-offs) of –INR2.30, as a result, missed our forecast of –INR1.58.
Downward revision in consensus estimates likely. The company has accumulated a net
loss of INR8/share in 1HFY11, but the IBES consensus is modelling a loss of only
INR1.4/share for the full year. To meet consensus in FY11, Suzlon will have to
approximately double its sales and EBITDA margins in FY11 compared to the year
before. Despite the recent rebound in orders, this appears far too optimistic a scenario.
FY11 EPS and valuation trimmed, FY12-13 estimates nudged up. Our assumptions for
sales and Repower margins move up after 2Q performance, but these are more than offset by
weaker margins at Suzlon’s legacy business in FY11. Profitability should be better in 2HFY11
due to seasonal factors, but we expect the net loss to widen to INR11.6bn in FY11, which is
more than 3x the loss of INR3bn estimated by IBES consensus.
Target price cut by 7% to reflect lower net profit estimate in FY11. We cut our target
price to INR40/share, which is based on FY11e PB of 1.13x. This is inline with our
valuations in the wind sector (ex-China); however, currently the stock trades at a 25%
premium to sector, which we think is unjustified. In our view, deleveraging and full
integration with Repower remains the key catalyst for the stock.
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