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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.
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.
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.
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