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Suzlon Energy Ltd Overweight
SUZL.BO, SUEL IN
Post earnings call, business momentum appears positive but margin turnaround not convincing enough
• The order book and execution equation for FY12 is quite clear now:
Of Suzlon's 2,578MW OB (1,624MW domestic + 954MW international),
~1,200MW is executable in FY12 (50% international). Since domestic
orders are largely short cycle, strong YTD inflow momentum has reduced
skepticism in our India sales est. of 1500MW next fiscal. Coupled with
this, only 150MW of new overseas orders are required to meet our overall
FY12 volume est. (2250MW). Suzlon has reported a string of order wins
from India and other emerging markets like Brazil, which it has said will
be the focus markets.
• But margin improvement data points not as clear: Management said a)
Margin improvement would be driven by introduction of new products (S-
95 and 97, both 2.1MW, for less windy sites) and b) absolute gross profit
may not reduce significantly from current level of Rs20M/MW. But to us,
mgt did not sound confident enough and did not provide a clear outlook. If
gross profit is Rs18M/MW (5% lower than Rs19M/MW est. in FY12),
wind business and consol. PAT for FY12 could be lower by 41% and 22%
respectively, reducing our SOP to Rs51. A steep increase in material cost
ratio and severe pricing pressures constitute the risks to our margin
improvement thesis (and price target).
• REpower estimates deteriorating: Based on a recent downward revision
of sales / margins by mgt, we now est. PAT of Euro57Mn in FY12, down
~16%, slightly below Bloomberg consensus. Owing to this our FY12
consolidated EPS is down 6.7% to Rs4.4.
• Maintain OW with Mar-12 PT of Rs64: Improving domestic regulatory
environment for wind energy investments and shift in Suzlon's revenue
mix towards India remain the key underpins to our OW call. Given high
sensitivity of earnings to margin assumptions, we think the stock may be
range-bound until mgt issues a clear outlook or, early quarterly data points
emerge. Our PT includes Rs33 for wind business, at P/E of 12x, and Rs28
for REpower stake and Rs3 for Hansen, both at 20% discount to CMP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Suzlon Energy Ltd Overweight
SUZL.BO, SUEL IN
Post earnings call, business momentum appears positive but margin turnaround not convincing enough
• The order book and execution equation for FY12 is quite clear now:
Of Suzlon's 2,578MW OB (1,624MW domestic + 954MW international),
~1,200MW is executable in FY12 (50% international). Since domestic
orders are largely short cycle, strong YTD inflow momentum has reduced
skepticism in our India sales est. of 1500MW next fiscal. Coupled with
this, only 150MW of new overseas orders are required to meet our overall
FY12 volume est. (2250MW). Suzlon has reported a string of order wins
from India and other emerging markets like Brazil, which it has said will
be the focus markets.
• But margin improvement data points not as clear: Management said a)
Margin improvement would be driven by introduction of new products (S-
95 and 97, both 2.1MW, for less windy sites) and b) absolute gross profit
may not reduce significantly from current level of Rs20M/MW. But to us,
mgt did not sound confident enough and did not provide a clear outlook. If
gross profit is Rs18M/MW (5% lower than Rs19M/MW est. in FY12),
wind business and consol. PAT for FY12 could be lower by 41% and 22%
respectively, reducing our SOP to Rs51. A steep increase in material cost
ratio and severe pricing pressures constitute the risks to our margin
improvement thesis (and price target).
• REpower estimates deteriorating: Based on a recent downward revision
of sales / margins by mgt, we now est. PAT of Euro57Mn in FY12, down
~16%, slightly below Bloomberg consensus. Owing to this our FY12
consolidated EPS is down 6.7% to Rs4.4.
• Maintain OW with Mar-12 PT of Rs64: Improving domestic regulatory
environment for wind energy investments and shift in Suzlon's revenue
mix towards India remain the key underpins to our OW call. Given high
sensitivity of earnings to margin assumptions, we think the stock may be
range-bound until mgt issues a clear outlook or, early quarterly data points
emerge. Our PT includes Rs33 for wind business, at P/E of 12x, and Rs28
for REpower stake and Rs3 for Hansen, both at 20% discount to CMP.
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