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SUZLON ENERGY LTD
PRICE: RS.48
RECOMMENDATION: REDUCE
TARGET PRICE: RS.49
FY12E P/E: 64.1X
q Success on international order intake remains elusive due to prevailing
economic crisis in Eurozone.
q Management maintains that prevailing under capacity in the renewable
energy space in India with changing regulatory guidelines could lead to
significant capacity addition for the same in domestic market.
q While we would be monitoring the domestic orders inflow trend going
ahead, we are concerned about bleak business visibility reflected by subdued
order book of the company.
q We estimate the company to break even at 1900 MW whereas current
order backlog stands close to 1550 MW. Given these concerns, we expect
the stock to under perform the broader market.
q In view of company's weak balance sheet position and increasing competitive
intensity in the industry, we remain cautious on the company's
stock.
q We maintain 'REDUCE' rating on the stock with one year SOTP based revised
price target of Rs.49 (56 earlier).
Management conference call Highlights
We recently interacted with the company to get perspective on the overall business
environment unfolding in domestic and overseas markets. Below are the key highlights
of our interaction.
n Company's current order book stands at 1550 MW that includes 693 MW of
domestic and 857 MW of international orders. Average realization of the order
book stands at Rs 60.2 mn/MW.
n Overseas business remains challenging mainly due to the prevailing economic
crisis in the US and European regions. While the offshore market in Europe has
shown some signs of resilience, onshore market has failed to gain traction. Orders
from US market continues to remain elusive in terms of new installations
and is likely to get reduced by 25-30% in the current fiscal. There is still uncertainty
prevailing on the renewal of tax credits in US (scheduled to get expired in
CY10).
n China is likely to grow on back of recently amended RE laws that targets to
generate 15% of electricity from renewable source by the year 2020. Brazil has
also passed a legislation to reduce carbon emissions substantially by increasing
emphasis on green energy. It is expected to add 3GW of capacity by FY13.
n Going ahead, company expects meaningful demand in the domestic business
driven by increasing emphasis on green power generation by the regulator. The
central power regulator has made it mandatory for all power utilities to purchase
6% green power of the total required capacity in a year.
n The option given to power utilities, in case of a failure to procure green electricity,
is to buy 'Renewable Energy Certificates' (REC). Designed on the lines of
carbon credits, these certificates can be bought from utilities that generate green
power.
n According to Ministry of New and Renewable Energy, India added 2.33GW
(1.57GW wind) of grid-connected renewable power capacity during the year
FY10. While country's total installed capacity of renewable energy currently
stands at 16.8GW, we still perceive it as sub-optimal levels.
n Unlike international peers, company has a marked its presence in the EPC business
and provides turnkey solutions to its customers. We believe that that provides
a competitive edge to the company in the domestic market where it currently
enjoys 50% market share.
n Despite company's strong positioning in the domestic market, we are concerned
about its weak balance sheet position and sub-optimal order book growth. We
estimate the company to break even at 1900 MW whereas current order backlog
stands close to 1550 MW offering 12-14 months of business visibility.
n Suzlon has been continuously making efforts to contain its interest costs over the
last few quarters. Interest cost stood at Rs 2671 mn at consolidated levels at the
end of 2QFY11.
Stock Valuation and Recommendation
n We have been cautious on Suzlon given the reduced level of visibility from order
backlog point of view. We opine that company's current order book at 1550 MW
is inadequate vis-à-vis our breakeven estimate of 1900 MW.
n In our projections we build 25% CAGR in domestic wind business over FY10-12E.
We expect that the company is likely to benefit from its higher operating leverage.
However we opine that liquidity related concerns regarding debt repayments
would make it vulnerable to economic crisis in US and Eurozone
n We expect that the company would continue to reduce cost overheads at the
consolidated levels mainly by integrating work force at Suzlon and RE Power.
Hence, we expect margin expansion at RE Power over FY11-12.
n Company currently holds 26% stake in Hansen (Valued at Rs 10.6 bn) in investments.
n We believe that the company would continue its ongoing efforts to restructure
debt. However weaker performance in the overseas business is likely to maintain
pressure on free cash flow generation. We do not foresee significant improvement
in the balance sheet position over FY12.
n The company currently has cash of Rs 28 bn and net operating working capital
stands at Rs 60 bn. Net D/E for the company stands at 1.48.
n At consolidated level, we expect that company would show marginal profits in
FY12E driven by higher operating leverage and reduction in cost overheads. We
build volume growth of 25% in FY12E and EBITDA% of 7.8% for FY12E.
n We believe that Suzlon would trade at a discount to other domestic players like
BHEL, L&T and Siemens that trade at an average EV/EBITDA of 12x based on
FY12 estimates. We also opine that the company is likely to command a premium
over the international peer group for having a leadership position in the
domestic market. We therefore value Suzlon wind and RE Power business at 9x
EV/EBITDA on FY12E earnings.
n We believe that company would under perform the broader market due to high
debt levels and insufficient estimated free cash flow generation over next two
years. We arrive at a one year price target of Rs 49.
n We maintain our REDUCE rating on the stock with a SOTP based price target
based on Rs 49 (56 earlier).
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