Suzlon Energy -Too early to cheer; target Rs 42; Macquarie Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Suzlon Energy
Too early to cheer
Event
 Suzlon held a conference call Monday, 7 Feb, to discuss its 3QFY11 results.
Demand for wind turbines in developed markets (US and Europe) remains
soft and has made the order inflow heavily skewed towards India and other
emerging markets. We retain our Underperform rating on the stock with a
target price of Rs42.

Impact
 Reduction in other operating expenses drives margins: Suzlon Wind’s
other operating expenses fell by 4% YoY despite a two-fold jump in sales in
3QFY11. This helped Suzlon Wind clock EBITDA margin of 6.9%. Maintaining
other expenses would help Suzlon lower its breakeven sales by 200–250MW.
 Large portion of domestic order book has not achieved financial
closure: Suzlon Wind’s (parent entity) India order book of 1,624MW contains
1,000MW from Caparo Energy (CEL LN, £1.19, Not rated) which has to be
delivered in two tranches of 500MW each in FY12 and FY13. CEL’s recent
equity raising of £50m could be of some help in achieving financial closure for
these projects, in our view.
 Pricing pressure evident in large framework contracts: Suzlon Wind’s
1,000MW deal with Caparo Energy has an average realisation of
Rs57.3m/MW, which is 5–6% lower than its average realisation for similar
projects. While such large projects ensure revenue visibility, we believe
sustaining margins could be a big issue.
 Orders from developed markets remain dry: Suzlon Wind has won orders
worth 2,481MW in 9MFY11 from India and other emerging markets. A lack of
order inflow from developed markets highlights the tough business
environment especially in the US and Europe.
 No upside to our FY11 and FY12 sales estimates: We are currently
estimating 1,722MW and 2,010MW in sales for FY11 and FY12, respectively,
for Suzlon Wind. Given the delivery schedule of existing orders, we do not see
any upside risk to our sales estimates.
Breakeven still 2–3 years away: Suzlon Wind is unlikely to break even
until FY13–14 considering the current order inflow and margin estimates.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs42.00 based on a Sum of Parts methodology.
 Catalyst: Increasing competition in the Indian market and lack of order inflow
in developed markets.
Action and recommendation
 Too early to get excited, remain cautious on the stock: We believe that it’s
too early for us to be positive on the stock. Recent order flows give credence
to our sales assumptions for FY12 and we do not see any meaningful upside.
We would watch out for any further improvement in the order inflow before
turning positive on the stock. We retain our Underperform rating with a target
price of Rs42.