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Suzlon Energy Ltd.
Upgrade to Buy; emerging
B(R)IC wind-power play
„Focus on India + China + REpower = Turnaround; Up to Buy
Post its 48% underperformance over the past year, we up Suzlon to Buy on a
structural turnaround, led by a) rebound in the Indian wind-energy markets on new
regulation/ entry of IPPs, b) pick-up in China/Brazil orders on competitive product
launches and c) REpower’s 54% PAT CAGR in FY11-13E on high margin in
offshore wind. Its back-to-basics strategy to has paid-off, with YTD orders up 4x in
India. We are 19% ahead of consensus for FY12E EPS. We increase our PO to
Rs70 (Rs54) on an FY12 EPS upgrade by 3%, despite the FY11E cut, roll-forward
and re-rating (15x) on visibility of turnaround. Risks to our non-consensus Buy call
(6 of 27 brokers) are delivery push-back by clients, currency and execution.
Regulation drive India rebound; YTD Inflows ~4x; sales 132%
We up our India WTG market new-add CAGR to 23% (16%) over FY11-13E, driven
by transformational change caused by regulatory support and higher feed-in tariffs.
Suzlon, a 50% market leader, is the key beneficiary with order wins from Vedanta
(150MW) and new IPPs such as Caparo (1GW), led by its ‘end-to-end’ model,
orders from Govt. cos and improved 2.1MW turbine. The shift toward a profitable
Indian market (61% of FY12E MW vs. 47% in FY10) will not only drive a turnaround
in profitability, but also improves its visibility. The first sign of turnaround is visible in
3QFY11 – EBITDA margin 7% v/s -3%. Balance sheet stable – 3Q net D/E 1.5.
Other key catalysts: Brazil, China & REpower
A) New products & pricing in China, b) new orders in Brazil and c) shift in productmix to high-margin off-shore wind in FY12/13E and manufacturing to low-cost
Asian regions to up REpower competitiveness / margins. Integration of REpower
and leveraging consolidated D/E structure to support Suzlon’s high parent debt.
Orders picking up; B-T-B at 1.2x, but its still early days…
SUEL backlog of 2.6GW (B-T-B of 1.2) vs our 2.5GW in FY12 ex-REpower, address
business continuity concerns. Over-supply in global markets, delay in US RPS and
weak power prices are concerns. Strong oil helps sentiments on renewables and
27% rise in US gas price over last 3 months raise hopes of recovery.
Upgrade to Buy as turnaround visible
Focus on India + China + REpower =Turnaround
Upgrade Suzlon to Buy (UPF) as we believe that it is indeed showing early signs
of bottoming out, led by a) its new strategy of focusing on its roots (India), where
markets are rebounding, led by feed-in tariffs, b) it is fixing its weaknesses in big
markets like China and c) focus on high-margin off-shore market and cost-cutting
at REpower until the global markets revive. This strategic transformation shall
realign Sulzon’s product mix into profitable markets and cause turnaround in
profitability in FY12E after 2 years of losses. B(R)IC markets a/c for 80% of its
FY12E sales. Raise PO to Rs70 (54) on EPS hike, re-rating led by improving
visibility of profits in FY12E on shift in sales-mix to India (61% vs 45% earlier) and
roll-forward of EPS. Risks are stretched balance sheet, over-supplied global wind
markets increasing pressure on pricing and dependence on India, which faces
on-ground execution challenges such as land acquisition and grid connection.
India: back on growth path led by regulation/feed-in tariffs
We raise our India WTG new installation forecast by 17% for FY12E led by: a)
entry of IPP into Indian market on introduction of generation-based incentives and
RE certificates, which will not only take markets into new orbit but also make it
sustainable v/s volatile tax-driven buyers, and b) higher feed-in tariffs with flexible
models. SUEL with 48% market leader in India, new products (S95, S97) with
variable-speed drives for low wind speeds and its ‘end-to-end’ model is well
positioned to benefit from the exponential growth in world’s 3
rd
-largest wind
market. Hence, we up Suzlon’s FY12 & 13E India volumes by 17% & 20%, resp.
Fixing China with new products, pricing & global strategy
Suzlon has indigenized its China turbine to cut costs, launched new products with
+15% generation, cut price ~20% to close gap v/s local ASPs and has made
China global export hub with cheap funding to turnaround its operations there.
REpower – profitable growth led by high margin off-shore
REpower, its 91% sub., is the only EU player with historical high BTB. Catalysts:
improving pricing power led by shift in production to low-cost countries such as
India and scale-up in high-margin off-shore business from 2011 onwards, led by
its new 6.15MW turbine and financial closure at clients like C-power & RWE.
Deleveraging led by sell-down in debtors and asset-sale
Apart from business improvement, we see three catalysts for Suzlon to fix its
stretched balance sheet. 1) Recover of ~Rs10bn (27% of FY11E consol. debtors)
from one USA client in 1HFY12, 2) sale of its 26% stake in HSN worth Rs7bn and
c) sale its plants to REpower, which is planning to shift its production into low-cost
countries such as India to improve its cost-competitiveness and gain share.
Not all is well, but 48% stock UPF & turn is worth playing
Over-supply in global markets, delay in US RPS and weak power prices are
concerns. Suzlon still faces balance-sheet risks given its excessive leverage and
sticky debtors (esp. from its one large USA client). It still has 1 more year of loanrepayment moratorium after which it will have to start re-paying debt. If markets
don’t rebound, company may have to re-structure its debt again. In FY13E, it has
$958mn CB redemption, if not converted. We believe that Suzlon stock’s underperformance by 48% over the last 1 year does captures the negatives. However,
the stock doesn’t reflect structural bottoming-out in its business from 4QFY11
onwards, in our view. Strong oil helps sentiments on renewables and 27% rise in
US gas price in last 3 months and our team est. of $5.15/mmbtu by 4Q11 v/s
$4.35 in 1Q, raise hopes of recovery in power prices by end-11.
Valuations: Upgrade to Buy
Buy: order pick-up & stock under-performance
„ A huge 48% under-performance of the stock in last one year
„ Improved visibility of ‘path-to-profitability’ with build-up of order backlog led
by flurry of new orders driving YTD new order inflows 4x (see Chart 13).
„ The stock trading at P/BV of 1.2x FY11E (including losses for FY11E). Risk
to this book value is from debt and business losses. Suzlon can repay its
entire M&A debt of Rs20.7bn and FCCB of Rs21bn with its value of REpower
shares at Rs62bn at current stock price. So if India business remains even
stable (current situation), then the stock should find support in the worst
case.
Up PO to Rs70 v/s 54
„ We have valued Suzlon at Rs70 per share based on SOTP valuation
implying a 46% upside.
1. We have valued Suzlon and REpower WTG business at 15x (13x
earlier) 1-year forward EPS, to Rs70 per share, v/s 13x earlier, to factor
in the improving visibility of ‘path-to-profitability’ in FY12E and its
compelling business mix supported by stable growth markets of BRICs.
2. Roll forward of multiples and
3. Suzlon’s 26% stake in Hansen is valued at CMP of GBp53.1 v/s 43 to
Rs4 (3) per share.
Table 1: Suzlon - Sum of the parts valuation
Parts Rationale Value (Rs mn) Value (Rs /share)
Suzlon + REpower WTG 15x 1-year forward EPS 117,688 66
Hansen stake At CMP of GBp53.1 for Suzlon's 26% stake 6,584 4
Total 124,271 70
Source: BofA Merrill Lynch Global Research
Suzlon vs. Indian Market / E&C players
After its 48% under-performance in last 1 year, Suzlon is the worst-performing
stock in our universe, supporting our UPF view.
The stock currently trades at a 10% premium to Sensex on FY12E PE, which is
not unusual for stocks recovering from losses into profits. The stock trades at
33% discount to FY13E Indian engineering universe PE and that leaves scope for
re-rating once the profitability is established in FY12E
Suzlon vs Asian / Global Peers
Suzlon is currently trading at a significant discount to its European / Chinese
comps on FY13E, while trading 9% discount to EU comps on FY12E and 18%
discount to its Asian peers.
Note that the decline in global wind markets has dealt a body blow on the
entire WTG sector profitability and that has led to ~50% decline in all wind stocks
in EU and in India. Pace and timing of recovery shall decide the valuations of
these stocks from here on, in our view. Suzlon with its shift in product-mix toward
BRIC countries and its core profitability (see Chart 10) may be ahead on the
improving visibility of ‘path-to-profitability’ in FY12E. However, its M&A loans and
untimely capex to double capacity over FY09-10 shall limit its potential of
recovery, which is factored in to our estimates. Consequently, we believe that
Suzlon could trade in line or even at a premium to global comps with its global
delivery model, which signifies -
„ Focus on high-growth BRIC markets until developed markets recover
„ Technology edge of REpower
„ Cost competitiveness of low-cost country manufacturing.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Suzlon Energy Ltd.
Upgrade to Buy; emerging
B(R)IC wind-power play
„Focus on India + China + REpower = Turnaround; Up to Buy
Post its 48% underperformance over the past year, we up Suzlon to Buy on a
structural turnaround, led by a) rebound in the Indian wind-energy markets on new
regulation/ entry of IPPs, b) pick-up in China/Brazil orders on competitive product
launches and c) REpower’s 54% PAT CAGR in FY11-13E on high margin in
offshore wind. Its back-to-basics strategy to has paid-off, with YTD orders up 4x in
India. We are 19% ahead of consensus for FY12E EPS. We increase our PO to
Rs70 (Rs54) on an FY12 EPS upgrade by 3%, despite the FY11E cut, roll-forward
and re-rating (15x) on visibility of turnaround. Risks to our non-consensus Buy call
(6 of 27 brokers) are delivery push-back by clients, currency and execution.
Regulation drive India rebound; YTD Inflows ~4x; sales 132%
We up our India WTG market new-add CAGR to 23% (16%) over FY11-13E, driven
by transformational change caused by regulatory support and higher feed-in tariffs.
Suzlon, a 50% market leader, is the key beneficiary with order wins from Vedanta
(150MW) and new IPPs such as Caparo (1GW), led by its ‘end-to-end’ model,
orders from Govt. cos and improved 2.1MW turbine. The shift toward a profitable
Indian market (61% of FY12E MW vs. 47% in FY10) will not only drive a turnaround
in profitability, but also improves its visibility. The first sign of turnaround is visible in
3QFY11 – EBITDA margin 7% v/s -3%. Balance sheet stable – 3Q net D/E 1.5.
Other key catalysts: Brazil, China & REpower
A) New products & pricing in China, b) new orders in Brazil and c) shift in productmix to high-margin off-shore wind in FY12/13E and manufacturing to low-cost
Asian regions to up REpower competitiveness / margins. Integration of REpower
and leveraging consolidated D/E structure to support Suzlon’s high parent debt.
Orders picking up; B-T-B at 1.2x, but its still early days…
SUEL backlog of 2.6GW (B-T-B of 1.2) vs our 2.5GW in FY12 ex-REpower, address
business continuity concerns. Over-supply in global markets, delay in US RPS and
weak power prices are concerns. Strong oil helps sentiments on renewables and
27% rise in US gas price over last 3 months raise hopes of recovery.
Upgrade to Buy as turnaround visible
Focus on India + China + REpower =Turnaround
Upgrade Suzlon to Buy (UPF) as we believe that it is indeed showing early signs
of bottoming out, led by a) its new strategy of focusing on its roots (India), where
markets are rebounding, led by feed-in tariffs, b) it is fixing its weaknesses in big
markets like China and c) focus on high-margin off-shore market and cost-cutting
at REpower until the global markets revive. This strategic transformation shall
realign Sulzon’s product mix into profitable markets and cause turnaround in
profitability in FY12E after 2 years of losses. B(R)IC markets a/c for 80% of its
FY12E sales. Raise PO to Rs70 (54) on EPS hike, re-rating led by improving
visibility of profits in FY12E on shift in sales-mix to India (61% vs 45% earlier) and
roll-forward of EPS. Risks are stretched balance sheet, over-supplied global wind
markets increasing pressure on pricing and dependence on India, which faces
on-ground execution challenges such as land acquisition and grid connection.
India: back on growth path led by regulation/feed-in tariffs
We raise our India WTG new installation forecast by 17% for FY12E led by: a)
entry of IPP into Indian market on introduction of generation-based incentives and
RE certificates, which will not only take markets into new orbit but also make it
sustainable v/s volatile tax-driven buyers, and b) higher feed-in tariffs with flexible
models. SUEL with 48% market leader in India, new products (S95, S97) with
variable-speed drives for low wind speeds and its ‘end-to-end’ model is well
positioned to benefit from the exponential growth in world’s 3
rd
-largest wind
market. Hence, we up Suzlon’s FY12 & 13E India volumes by 17% & 20%, resp.
Fixing China with new products, pricing & global strategy
Suzlon has indigenized its China turbine to cut costs, launched new products with
+15% generation, cut price ~20% to close gap v/s local ASPs and has made
China global export hub with cheap funding to turnaround its operations there.
REpower – profitable growth led by high margin off-shore
REpower, its 91% sub., is the only EU player with historical high BTB. Catalysts:
improving pricing power led by shift in production to low-cost countries such as
India and scale-up in high-margin off-shore business from 2011 onwards, led by
its new 6.15MW turbine and financial closure at clients like C-power & RWE.
Deleveraging led by sell-down in debtors and asset-sale
Apart from business improvement, we see three catalysts for Suzlon to fix its
stretched balance sheet. 1) Recover of ~Rs10bn (27% of FY11E consol. debtors)
from one USA client in 1HFY12, 2) sale of its 26% stake in HSN worth Rs7bn and
c) sale its plants to REpower, which is planning to shift its production into low-cost
countries such as India to improve its cost-competitiveness and gain share.
Not all is well, but 48% stock UPF & turn is worth playing
Over-supply in global markets, delay in US RPS and weak power prices are
concerns. Suzlon still faces balance-sheet risks given its excessive leverage and
sticky debtors (esp. from its one large USA client). It still has 1 more year of loanrepayment moratorium after which it will have to start re-paying debt. If markets
don’t rebound, company may have to re-structure its debt again. In FY13E, it has
$958mn CB redemption, if not converted. We believe that Suzlon stock’s underperformance by 48% over the last 1 year does captures the negatives. However,
the stock doesn’t reflect structural bottoming-out in its business from 4QFY11
onwards, in our view. Strong oil helps sentiments on renewables and 27% rise in
US gas price in last 3 months and our team est. of $5.15/mmbtu by 4Q11 v/s
$4.35 in 1Q, raise hopes of recovery in power prices by end-11.
Valuations: Upgrade to Buy
Buy: order pick-up & stock under-performance
„ A huge 48% under-performance of the stock in last one year
„ Improved visibility of ‘path-to-profitability’ with build-up of order backlog led
by flurry of new orders driving YTD new order inflows 4x (see Chart 13).
„ The stock trading at P/BV of 1.2x FY11E (including losses for FY11E). Risk
to this book value is from debt and business losses. Suzlon can repay its
entire M&A debt of Rs20.7bn and FCCB of Rs21bn with its value of REpower
shares at Rs62bn at current stock price. So if India business remains even
stable (current situation), then the stock should find support in the worst
case.
Up PO to Rs70 v/s 54
„ We have valued Suzlon at Rs70 per share based on SOTP valuation
implying a 46% upside.
1. We have valued Suzlon and REpower WTG business at 15x (13x
earlier) 1-year forward EPS, to Rs70 per share, v/s 13x earlier, to factor
in the improving visibility of ‘path-to-profitability’ in FY12E and its
compelling business mix supported by stable growth markets of BRICs.
2. Roll forward of multiples and
3. Suzlon’s 26% stake in Hansen is valued at CMP of GBp53.1 v/s 43 to
Rs4 (3) per share.
Table 1: Suzlon - Sum of the parts valuation
Parts Rationale Value (Rs mn) Value (Rs /share)
Suzlon + REpower WTG 15x 1-year forward EPS 117,688 66
Hansen stake At CMP of GBp53.1 for Suzlon's 26% stake 6,584 4
Total 124,271 70
Source: BofA Merrill Lynch Global Research
Suzlon vs. Indian Market / E&C players
After its 48% under-performance in last 1 year, Suzlon is the worst-performing
stock in our universe, supporting our UPF view.
The stock currently trades at a 10% premium to Sensex on FY12E PE, which is
not unusual for stocks recovering from losses into profits. The stock trades at
33% discount to FY13E Indian engineering universe PE and that leaves scope for
re-rating once the profitability is established in FY12E
Suzlon vs Asian / Global Peers
Suzlon is currently trading at a significant discount to its European / Chinese
comps on FY13E, while trading 9% discount to EU comps on FY12E and 18%
discount to its Asian peers.
Note that the decline in global wind markets has dealt a body blow on the
entire WTG sector profitability and that has led to ~50% decline in all wind stocks
in EU and in India. Pace and timing of recovery shall decide the valuations of
these stocks from here on, in our view. Suzlon with its shift in product-mix toward
BRIC countries and its core profitability (see Chart 10) may be ahead on the
improving visibility of ‘path-to-profitability’ in FY12E. However, its M&A loans and
untimely capex to double capacity over FY09-10 shall limit its potential of
recovery, which is factored in to our estimates. Consequently, we believe that
Suzlon could trade in line or even at a premium to global comps with its global
delivery model, which signifies -
„ Focus on high-growth BRIC markets until developed markets recover
„ Technology edge of REpower
„ Cost competitiveness of low-cost country manufacturing.
BAKWAS BAJI NAHI CHALEGA IT IS A FUNDAMENTALLY LOSS MAKING CO. ITS PRODUCTS CANT STAND THE TEST OF STRONG WINDS. HAZARDIOUS. AVAOID ALL GALLIABLE ADVISES.
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