Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Suzlon Energy Ltd
▼ Neutral
Previous: Overweight
SUZL.BO, SUEL IN
Risk scores over reward: Downgrade to Neutral
• Suzlon has rallied 25% from its recent low, led by easing of balance
sheet concerns and healthy order inflows. Recent global data points on
falling wind turbine prices, competitive intensity in domestic market, and
rising raw material prices lead us to more conservative margin
assumptions. Consequently, our gross profit/MW cut of ~7% (to
Rs19.4MM/MW) for FY12E results in a major cut of 37.5% in consol.
PAT. While the cut appears steep, it only demonstrates that profits are still
very sensitivity to minor disappointments, as leverage and fixed costs are
still high. Thus, the risk-return at current price levels does not appear as
attractive, in our view. We downgrade to Neutral with revised Mar-12
SOP PT of Rs60 (vs. Rs64 earlier) and recommend booking profits.
• The stock appears to have found a base support, though, as concerns
are abating: Recent FCCB issue (US$175MM) is already in-the-money
(strike price Rs54) and is EPS dilutive by ~8.2%. The endgame is to meet
debt repayment commitments of ~Rs37B in FY13 and a further ~Rs12B
in FY14 (incl. redemption premium): this would put to rest balance sheet
concerns. The next step hereon is to squeeze out Repower 5% minority
shareholders and then access REpower cash (~Rs17.3B). Further, op. cash
flows need to come in as expected, and sticky receivable from Edison
Mission of USA (US$204M) needs to be realized.
• Operationally, things appear on track: Our thesis of a shift in revenue
mix towards domestic, and a consequent improvement in OPM, is
playing out well: The co had an OB of 2,578MW, incl. 1,624MW
domestic (500MW deliverable in FY13) and 954MW international. Our
execution estimates for five quarters (incl. the Mar-q that went by) is
1,946MW for domestic and 945MW for international. We are quite
confident of ~850MW of short-gestation domestic orders coming in.
• Our SOP-based PT of Rs60 includes- (a) Rs19 for Suzlon wind business
at 13.5x FY12E EPS, a ~25% discount to Vestas; (b) Rs38 for REpower
and Rs3 for stake in Hansen, both at a 20% discount to CMP. Continuous
order flows justifying stronger visibility into FY13 is an upside risk to our
PT, and operational disappointment is a key downside.
Risk-return no longer attractive:
Downgrade to Neutral
Suzlon has rallied 25% from its recent low, led by easing of balance sheet concerns
and healthy order inflows. However, risks to growth and profitability have also
intensified over the past few months, as highlighted in the instances below:
1. Global data points on falling wind turbine prices: In a recent report our
regional utilities analyst Boris Kan highlighted that the downward trend in
Chinese wind turbine prices is expected to continue and has been seen even
in wind turbines of case of larger wind turbines (2MW), which were
generally perceived to be immune to price cuts in the past.
2. Competitive intensity in the domestic wind market has intensified: Over
the past few months there has been regular newsflow on plans by Gamesa
and Siemens to step up their presence in India. Vestas, GE and Enercon are
existing players in the market. In November-10 Dongfang Electric of
China signed a contract with KSK Energy Llimited (Indian IPP) to
supply 166 units of 1.5 MW direct-drive wind turbines. This is the first
instance of Chinese competition in the Indian wind equipment space.
3. Rising raw material prices
The above reasons have led us to factor in conservative margin assumptions.
Consequently, our gross profit/MW cut of ~7% (to Rs19.4mn/MW) for FY12E
results in a major cut of 37.5% in consol. PAT (see Table 1). While the cut appears
steep, it only demonstrates that profits are still extremely sensitivity to minor
disappointments, as leverage and fixed costs are still high.
Revised sum-of-the-parts valuation
Given high sensitivity to wind turbine pricing and gross profit realization, the riskreturn at current price levels does not appear as attractive, in our view. We
downgrade Suzlon to Neutral with a reduced Mar-12 SOP PT of Rs60 (vs. Rs64
earlier) and recommend booking profits.
Our PT includes (a) Rs19 for Suzlon wind business at 13.5x FY12E EPS, at a ~25%
discount to Vestas’ fiscalized FY12E P/E multiple, (b) Rs38 for Repower, and Rs3
for the stake in Hansen, both at a 20% discount to CMP (see the table below).
Table 3: Suzlon: Sum-of-the-parts valuation
a) Valuation of Wind business
Wind business - FY12 EPS 1.4
Assigned multiple @ 25% discount to Vestas 13.5
Value for wind business/share 18.9
b) Valuation of Repower
No of shares held (mn) 9.2
Stock price (Euros) 147.4
Repower - value (Rs/share) 48.1
Less holding company discount@ 20% 9.6
Attributable value for Repower (Rs/share) 38.5
c) Valuation of Hansen
No of shares held (mn) 174.6
Stock price (GBP) 0.5
Hansen - value (Rs/share) 3.5
Less holding company discount@ 20% 0.7
Attributable value for Hansen (Rs/share) 2.8
Total 60.2
Source: J.P. Morgan estimates, Bloomberg.
On a consolidated basis Suzlon is trading at a premium to Vestas on FY12E P/E and
EV/EBITDA (see Table 4 above).
Recent events have eased balance sheet concerns
In March, Suzlon’s promoters sold a ~2.25% stake in the company to raise around
Rs1.9B. This was offered as a loan to the company (@8-9% interest p.a.), to fund the
subsequent increase in stake in REpower to 95%. On 4 April Suzlon announced its
intention to initiate the process of buying out minority shareholders of REpower in
order to make it a wholly owned subsidiary. As the company had crossed the
threshold shareholding of 95% in REpower, it was eligible to do so under German
law.
Following this announcement Suzlon raised US$175MM through the FCCB route,
primarily to fund the buyout. The FCCB issue was at a strike price of Rs54 and is
already in the money. The implied dilution of ~8.2% is already factored into our fully
diluted earning estimates.
The endgame of the entire exercise is to meet debt repayment commitments of
~Rs37B in FY13 (incl. redemption premium of ~Rs8.1B in FY13 which would flow
as a one-time cash loss in P&L) and a further ~Rs12B in FY14: this would put to rest
balance sheet concerns. Squeezing out minority shareholders in REpower would give
Suzlon access to Repower’s cash of ~Rs17.3B, which would bridge a large part of
the funding requirement in FY13. However, operating cash flows need to come in as
expected, at least to fund the interest commitment in FY12 and generate excess cash
in FY13 to repay debt.
The sale of the remaining stake in Hansen (valued at Rs5.87B at CMP) and recovery
of sticky receivables from Edison Mission of USA (US$204M) are other potential
sources to fund debt repayment commitments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Suzlon Energy Ltd
▼ Neutral
Previous: Overweight
SUZL.BO, SUEL IN
Risk scores over reward: Downgrade to Neutral
• Suzlon has rallied 25% from its recent low, led by easing of balance
sheet concerns and healthy order inflows. Recent global data points on
falling wind turbine prices, competitive intensity in domestic market, and
rising raw material prices lead us to more conservative margin
assumptions. Consequently, our gross profit/MW cut of ~7% (to
Rs19.4MM/MW) for FY12E results in a major cut of 37.5% in consol.
PAT. While the cut appears steep, it only demonstrates that profits are still
very sensitivity to minor disappointments, as leverage and fixed costs are
still high. Thus, the risk-return at current price levels does not appear as
attractive, in our view. We downgrade to Neutral with revised Mar-12
SOP PT of Rs60 (vs. Rs64 earlier) and recommend booking profits.
• The stock appears to have found a base support, though, as concerns
are abating: Recent FCCB issue (US$175MM) is already in-the-money
(strike price Rs54) and is EPS dilutive by ~8.2%. The endgame is to meet
debt repayment commitments of ~Rs37B in FY13 and a further ~Rs12B
in FY14 (incl. redemption premium): this would put to rest balance sheet
concerns. The next step hereon is to squeeze out Repower 5% minority
shareholders and then access REpower cash (~Rs17.3B). Further, op. cash
flows need to come in as expected, and sticky receivable from Edison
Mission of USA (US$204M) needs to be realized.
• Operationally, things appear on track: Our thesis of a shift in revenue
mix towards domestic, and a consequent improvement in OPM, is
playing out well: The co had an OB of 2,578MW, incl. 1,624MW
domestic (500MW deliverable in FY13) and 954MW international. Our
execution estimates for five quarters (incl. the Mar-q that went by) is
1,946MW for domestic and 945MW for international. We are quite
confident of ~850MW of short-gestation domestic orders coming in.
• Our SOP-based PT of Rs60 includes- (a) Rs19 for Suzlon wind business
at 13.5x FY12E EPS, a ~25% discount to Vestas; (b) Rs38 for REpower
and Rs3 for stake in Hansen, both at a 20% discount to CMP. Continuous
order flows justifying stronger visibility into FY13 is an upside risk to our
PT, and operational disappointment is a key downside.
Risk-return no longer attractive:
Downgrade to Neutral
Suzlon has rallied 25% from its recent low, led by easing of balance sheet concerns
and healthy order inflows. However, risks to growth and profitability have also
intensified over the past few months, as highlighted in the instances below:
1. Global data points on falling wind turbine prices: In a recent report our
regional utilities analyst Boris Kan highlighted that the downward trend in
Chinese wind turbine prices is expected to continue and has been seen even
in wind turbines of case of larger wind turbines (2MW), which were
generally perceived to be immune to price cuts in the past.
2. Competitive intensity in the domestic wind market has intensified: Over
the past few months there has been regular newsflow on plans by Gamesa
and Siemens to step up their presence in India. Vestas, GE and Enercon are
existing players in the market. In November-10 Dongfang Electric of
China signed a contract with KSK Energy Llimited (Indian IPP) to
supply 166 units of 1.5 MW direct-drive wind turbines. This is the first
instance of Chinese competition in the Indian wind equipment space.
3. Rising raw material prices
The above reasons have led us to factor in conservative margin assumptions.
Consequently, our gross profit/MW cut of ~7% (to Rs19.4mn/MW) for FY12E
results in a major cut of 37.5% in consol. PAT (see Table 1). While the cut appears
steep, it only demonstrates that profits are still extremely sensitivity to minor
disappointments, as leverage and fixed costs are still high.
Revised sum-of-the-parts valuation
Given high sensitivity to wind turbine pricing and gross profit realization, the riskreturn at current price levels does not appear as attractive, in our view. We
downgrade Suzlon to Neutral with a reduced Mar-12 SOP PT of Rs60 (vs. Rs64
earlier) and recommend booking profits.
Our PT includes (a) Rs19 for Suzlon wind business at 13.5x FY12E EPS, at a ~25%
discount to Vestas’ fiscalized FY12E P/E multiple, (b) Rs38 for Repower, and Rs3
for the stake in Hansen, both at a 20% discount to CMP (see the table below).
Table 3: Suzlon: Sum-of-the-parts valuation
a) Valuation of Wind business
Wind business - FY12 EPS 1.4
Assigned multiple @ 25% discount to Vestas 13.5
Value for wind business/share 18.9
b) Valuation of Repower
No of shares held (mn) 9.2
Stock price (Euros) 147.4
Repower - value (Rs/share) 48.1
Less holding company discount@ 20% 9.6
Attributable value for Repower (Rs/share) 38.5
c) Valuation of Hansen
No of shares held (mn) 174.6
Stock price (GBP) 0.5
Hansen - value (Rs/share) 3.5
Less holding company discount@ 20% 0.7
Attributable value for Hansen (Rs/share) 2.8
Total 60.2
Source: J.P. Morgan estimates, Bloomberg.
On a consolidated basis Suzlon is trading at a premium to Vestas on FY12E P/E and
EV/EBITDA (see Table 4 above).
Recent events have eased balance sheet concerns
In March, Suzlon’s promoters sold a ~2.25% stake in the company to raise around
Rs1.9B. This was offered as a loan to the company (@8-9% interest p.a.), to fund the
subsequent increase in stake in REpower to 95%. On 4 April Suzlon announced its
intention to initiate the process of buying out minority shareholders of REpower in
order to make it a wholly owned subsidiary. As the company had crossed the
threshold shareholding of 95% in REpower, it was eligible to do so under German
law.
Following this announcement Suzlon raised US$175MM through the FCCB route,
primarily to fund the buyout. The FCCB issue was at a strike price of Rs54 and is
already in the money. The implied dilution of ~8.2% is already factored into our fully
diluted earning estimates.
The endgame of the entire exercise is to meet debt repayment commitments of
~Rs37B in FY13 (incl. redemption premium of ~Rs8.1B in FY13 which would flow
as a one-time cash loss in P&L) and a further ~Rs12B in FY14: this would put to rest
balance sheet concerns. Squeezing out minority shareholders in REpower would give
Suzlon access to Repower’s cash of ~Rs17.3B, which would bridge a large part of
the funding requirement in FY13. However, operating cash flows need to come in as
expected, at least to fund the interest commitment in FY12 and generate excess cash
in FY13 to repay debt.
The sale of the remaining stake in Hansen (valued at Rs5.87B at CMP) and recovery
of sticky receivables from Edison Mission of USA (US$204M) are other potential
sources to fund debt repayment commitments.
No comments:
Post a Comment