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SUZLON ENERGY LTD
PRICE: RS.44 RECOMMENDATION: REDUCE
TARGET PRICE: RS.51 FY12E P/E: 14X
q Emerging wind markets viz. Brazil, India and China remain on the
growth track. Success on international order intake remains elusive for
the company.
q With prevailing crisis in Eurozone, we see further increase in competitive
intensity among wind turbine players in domestic as well as international
markets.
q Prevailing under capacity in the renewable energy space in India with
changing regulatory guidelines could lead to meaningful capacity addition
in India between FY11-FY15.
q Company's order book currently stands at 2578 MW vis-à-vis break even
levels of 1900 MW. Company has restructured the entire debt of USD 2.1
bn. However we remain concerned on the high net debt levels and interest
outflow of the company.
q We maintain 'Reduce' rating on company's sock with one year forward
revised target price of Rs 51.
Management Meet Highlights
We recently interacted with the company to get perspective on the overall business
environment unfolding in the domestic and overseas markets. Below are the key
highlights of our interaction.
Domestic wind market looks buoyant
n Company's current order book stands at 2578MW offering 18-20 months of revenue
visibility.
n The current order book includes 924 MW of international orders and highest ever
domestic order backlog of 1624MW. Average realization of the order book
stands at Rs 56.7 mn/MW.
n Company continues to expect 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 installed capacity in a year.
n Company has bagged several orders in the domestic market in last few quarters.
Successful implementation of REC's (Renewable energy certificate) trading and
GBI (generation based incentive) has given the thrust to the domestic demand.
n Company has bagged a large single order of 1000 MW from Caparo group in
Q3FY11. This order is valued at USD 1.28 bn and is to be executed over next
two years with 500 MW in FY12 and remaining in FY13.
Demand in US and Europe still looks elusive; emerging markets
offer momentum
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.
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.
n 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.
Complimentary regulatory changes, inclusion of RECs and GBIs
boost domestic demand for renewable energy in India
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 The central power regulator has made it mandatory for all power utilities to purchase
6% green power of the total installed capacity in a year.
n The sources include solar, wind, mini and micro-hydro projects, along with electricity
generated by using biomass.
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 These certificates are aimed at plugging the gap between between the availability
of renewable energy sources and the requirement of various entities to meet
their renewable energy purchase obligation.
n REC trading has been commenced at PXIL and volumes are expected to pick up
going ahead. CERC has put a floor and cap of Rs 1.5 and Rs 3.9 per unit of
power respectively for the certificates.
n Ministry of Renewable energy has announced that any Green Power generator
will receive a Generation based incentive (GBI) of Rs 0.5/unit in addition to the
applicable tariff. This is applicable for 4-6 years period.
n We believe that this augers well for the industry as this is likely to benefit independent
power plants (IPPs) by providing incentives for generation.
Company continues with efforts to heal its financial health
through ongoing initiatives; it could successfully refinanced its
entire $2.1 bn worth of debt
n The company has been able to contain increase in gross debt despite the pressure
on cash flow. It has received two year moratorium of debt repayment as
part of the debt refinance.
n Following the refinancing, the overall cost of debt has increased. The company
expects interest cost to average close to Rs 11 bn in FY11.
Financials
n In recent quarters, the stock has been sensitive to corporate developments focused
mainly on debt restructuring measures and balance sheet repair. This has
made the stock movement highly volatile and speculative in nature.
n Going forward, the company needs to maintain momentum in terms of order
accretion. In absence of which we expect that the stock could continue to remain
range bound.
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 current rising interest rate scenario.
n We expect that the company is likely to continue reducing 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 We believe that the company would continue with its ongoing efforts to improve
its balance sheet. It currently holds 26% stake in Hansen (Valued at Rs 10.6 bn)
in investments. 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 At consolidated level, we expect that company would post recovery in FY12E
driven by higher operating leverage and reduction in cost overheads. We build
volume growth of 25% in FY12E and EBITDA margin (consolidated) of 8.9% for
FY12E.
Stock outlook and Recommendation
n At current price of Rs 44 stock is trading at 14x and 7.7x P/E and EV/EBITDA
FY12E earnings.
n Current order book position of the company is still far below its peak level of
3400 MW in FY08. 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.
n We maintain REDUCE rating on the stock with a SOTP based one year price target
of Rs 51.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SUZLON ENERGY LTD
PRICE: RS.44 RECOMMENDATION: REDUCE
TARGET PRICE: RS.51 FY12E P/E: 14X
q Emerging wind markets viz. Brazil, India and China remain on the
growth track. Success on international order intake remains elusive for
the company.
q With prevailing crisis in Eurozone, we see further increase in competitive
intensity among wind turbine players in domestic as well as international
markets.
q Prevailing under capacity in the renewable energy space in India with
changing regulatory guidelines could lead to meaningful capacity addition
in India between FY11-FY15.
q Company's order book currently stands at 2578 MW vis-à-vis break even
levels of 1900 MW. Company has restructured the entire debt of USD 2.1
bn. However we remain concerned on the high net debt levels and interest
outflow of the company.
q We maintain 'Reduce' rating on company's sock with one year forward
revised target price of Rs 51.
Management Meet Highlights
We recently interacted with the company to get perspective on the overall business
environment unfolding in the domestic and overseas markets. Below are the key
highlights of our interaction.
Domestic wind market looks buoyant
n Company's current order book stands at 2578MW offering 18-20 months of revenue
visibility.
n The current order book includes 924 MW of international orders and highest ever
domestic order backlog of 1624MW. Average realization of the order book
stands at Rs 56.7 mn/MW.
n Company continues to expect 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 installed capacity in a year.
n Company has bagged several orders in the domestic market in last few quarters.
Successful implementation of REC's (Renewable energy certificate) trading and
GBI (generation based incentive) has given the thrust to the domestic demand.
n Company has bagged a large single order of 1000 MW from Caparo group in
Q3FY11. This order is valued at USD 1.28 bn and is to be executed over next
two years with 500 MW in FY12 and remaining in FY13.
Demand in US and Europe still looks elusive; emerging markets
offer momentum
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.
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.
n 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.
Complimentary regulatory changes, inclusion of RECs and GBIs
boost domestic demand for renewable energy in India
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 The central power regulator has made it mandatory for all power utilities to purchase
6% green power of the total installed capacity in a year.
n The sources include solar, wind, mini and micro-hydro projects, along with electricity
generated by using biomass.
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 These certificates are aimed at plugging the gap between between the availability
of renewable energy sources and the requirement of various entities to meet
their renewable energy purchase obligation.
n REC trading has been commenced at PXIL and volumes are expected to pick up
going ahead. CERC has put a floor and cap of Rs 1.5 and Rs 3.9 per unit of
power respectively for the certificates.
n Ministry of Renewable energy has announced that any Green Power generator
will receive a Generation based incentive (GBI) of Rs 0.5/unit in addition to the
applicable tariff. This is applicable for 4-6 years period.
n We believe that this augers well for the industry as this is likely to benefit independent
power plants (IPPs) by providing incentives for generation.
Company continues with efforts to heal its financial health
through ongoing initiatives; it could successfully refinanced its
entire $2.1 bn worth of debt
n The company has been able to contain increase in gross debt despite the pressure
on cash flow. It has received two year moratorium of debt repayment as
part of the debt refinance.
n Following the refinancing, the overall cost of debt has increased. The company
expects interest cost to average close to Rs 11 bn in FY11.
Financials
n In recent quarters, the stock has been sensitive to corporate developments focused
mainly on debt restructuring measures and balance sheet repair. This has
made the stock movement highly volatile and speculative in nature.
n Going forward, the company needs to maintain momentum in terms of order
accretion. In absence of which we expect that the stock could continue to remain
range bound.
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 current rising interest rate scenario.
n We expect that the company is likely to continue reducing 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 We believe that the company would continue with its ongoing efforts to improve
its balance sheet. It currently holds 26% stake in Hansen (Valued at Rs 10.6 bn)
in investments. 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 At consolidated level, we expect that company would post recovery in FY12E
driven by higher operating leverage and reduction in cost overheads. We build
volume growth of 25% in FY12E and EBITDA margin (consolidated) of 8.9% for
FY12E.
n At current price of Rs 44 stock is trading at 14x and 7.7x P/E and EV/EBITDA
FY12E earnings.
n Current order book position of the company is still far below its peak level of
3400 MW in FY08. 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.
n We maintain REDUCE rating on the stock with a SOTP based one year price target
of Rs 51.
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