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Suzlon Energy Ltd.
Power into profits post 7 Qtrs;
Raise PO; contrarian Buy
„First rec profit after seven Qtr losses; PO raised; Buy
Suzlon turned the corner in a quarter where losses at Vestas doubled, with its first
rec PAT at Rs1.6bn in 4Q11 (vs loss Rs2bn in 4Q10). This was led by a) rebound
in profitable India volume +15%YoY, b) a strong 4Q at REpower (sales +68%YoY
and 3.2x EBIT) and c) improved turbine availability (>97%) and cost cutting.
Backlog doubled on +134%YoY inflows and net debt cut to 1.36x vs peak 1.7x in
1Q11. We up our PO to Rs75 (Rs70) on roll-forward. Reiterate our Buy on Suzlon,
on a structural turnaround. Risks to our non-consensus Buy call are delivery pushback, currency and execution.
India MW +15% & REpower sales +68%; On track for FY12 profits
Suzlon’s back-to-basics strategy to survive weakness in US market has paid off,
with FY11 inflows +134%yoy, led by 2.7x growth in India orders. While its
International volume fell 73%YoY, Suzlon’s domestic MW grew 15%YoY in 4Q.
REpower had strong 4Q11 on good execution and consolidation of China and
Portugal JVs (sales +68%YoY) led EBIT 3.2x. Profit turnaround was slower paced
vs MLe as SUEL lost ~160MW (33% of 4Q) to 1Q. Reported PAT was 4.3bn.
Balance sheet improved QoQ (4Q net debt / equity 1.36x v/s 1.5x). Co guided for
FY12 sales at Rs240-260bn vs MLe of Rs235bn and EBIT margin 7-8% vs MLe of
7.8% margin inline with BoFAMLe.
Three catalysts to Buy Suzlon – A turnaround story
„ 25% CAGR till FY13E in the Indian wind markets on higher feed-in tariffs (offset rising interest cost/low wind sites) and new regulation leading to entry of
IPPs. Its back-to-basics strategy has paid-off, with FY11 orders up 2.7x in
India to 2.3GW.
„ 33% PAT CAGR in REPower on shift in a) product-mix to high margin
offshore wind and b) production of its largest selling 2MW turbine to low cost
(India/China) and
„ Recovery of Rs10bn (24% of debtors) in 2HFY12 (Edison), to fund growth.
Raised PO; turnaround visible; Buy
Focus on India, REpower = Turnaround
We reiterate our Buy rating as we believe that its 4Q is indeed showing early
signs of bottoming-out led by a) its strategy of focusing on its roots (India), where
markets are rebounding led by feed-in tariffs, b) fixing its weaknesses in big
markets like China, and c) focus on high-margin offshore markets and costcutting at REpower uuntil there is a revival in global markets. This strategic
transformation should realign the product mix in profitable markets and lead to a
turnaround in FY12E after two years of losses. B(R)IC markets account for 80%
of FY12E sales. We raise our PO to Rs75 (from Rs70) on a roll-forward of EPS.
Risks are a stretched balance sheet, oversupplied global wind markets increasing
the pressure on pricing and dependence on India, which faces execution
challenges such as land acquisition and grid connection.
India: Back on growth path led by regulation/feed-in tariffs
We recently raised our India wind-turbine generator (WTG) new installation in
FY12E by 17% on a) the entry of IPPs on the introduction of generation-based
incentives and renewable energy (RE) certificates, which will take its markets into
a new orbit and also make it sustainable vs volatile tax-driven buyers, and b)
higher feed-in tariffs with flexible models. Suzlon is well positioned to benefit from
exponential growth in the world’s 3rd largest wind market (India) with a 48%
share, new products (S95, S97 turbines) with variable speed drives for low wind
speeds and its ‘end-to-end’ model. Suzlon's 70%YoY growth in India volumes in
FY11A validates our view.
Fixing China with new products, pricing & global strategy
Suzlon has indigenized its China turbines to cut costs, launched new products
with +15% generation, cut price ~20% to narrow the gap vs local ASPs and has
made China its global export hub with cheap funding to turnaround its operations.
REpower: Profitable growth led by high margin offshore
REpower, its 95% unit, is the only EU player with historically high BTB (Chart 11).
Catalysts: improving pricing power led by a shift in production to low-cost
countries such as India and a scale-up in its high margin offshore business from
2011 onwards led by its new 6.15MW turbine and financial closure at clients like
C-power & RWE (Chart 12 & 13).
Deleveraging led by sell-down in debtors and asset sale
Apart from an improvement in its business, we see three catalysts for Suzlon to
fix its stretched balance sheet. 1) Recovery of ~Rs10bn (24% of FY11E
consolidated debt) from one US client in 2HFY12E, 2) sale of a 26% stake in
HSN worth Rs7bn, and c) sale of its plants to REpower, which plans to shift
production to low-cost nations such as India to improve cost-competitiveness and
gain share.
Not all is well but 28% stock UPF & turn is worth playing
Oversupply in global markets, delay in implementing the US renewable portfolio
standard (RPS) and weak power prices are concerns. Suzlon still faces balancesheet risks given its excessive leverage and sticky debtors (esp. from a large US
client). It still has one more year of loan-repayment moratorium. If markets do not
rebound, the firm may have to restructure its debt again. In FY13E, it has
US$569mn CB redemption, if not converted. We believe the stock’s
underperformance of 28% over the past year captures the negatives. However, it
does not reflect structural bottoming-out in its business from 4QFY11 onwards, in
our view. The strong oil price will also help to boost interest in renewable.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Suzlon Energy Ltd.
Power into profits post 7 Qtrs;
Raise PO; contrarian Buy
„First rec profit after seven Qtr losses; PO raised; Buy
Suzlon turned the corner in a quarter where losses at Vestas doubled, with its first
rec PAT at Rs1.6bn in 4Q11 (vs loss Rs2bn in 4Q10). This was led by a) rebound
in profitable India volume +15%YoY, b) a strong 4Q at REpower (sales +68%YoY
and 3.2x EBIT) and c) improved turbine availability (>97%) and cost cutting.
Backlog doubled on +134%YoY inflows and net debt cut to 1.36x vs peak 1.7x in
1Q11. We up our PO to Rs75 (Rs70) on roll-forward. Reiterate our Buy on Suzlon,
on a structural turnaround. Risks to our non-consensus Buy call are delivery pushback, currency and execution.
India MW +15% & REpower sales +68%; On track for FY12 profits
with FY11 inflows +134%yoy, led by 2.7x growth in India orders. While its
International volume fell 73%YoY, Suzlon’s domestic MW grew 15%YoY in 4Q.
REpower had strong 4Q11 on good execution and consolidation of China and
Portugal JVs (sales +68%YoY) led EBIT 3.2x. Profit turnaround was slower paced
vs MLe as SUEL lost ~160MW (33% of 4Q) to 1Q. Reported PAT was 4.3bn.
Balance sheet improved QoQ (4Q net debt / equity 1.36x v/s 1.5x). Co guided for
FY12 sales at Rs240-260bn vs MLe of Rs235bn and EBIT margin 7-8% vs MLe of
7.8% margin inline with BoFAMLe.
Three catalysts to Buy Suzlon – A turnaround story
„ 25% CAGR till FY13E in the Indian wind markets on higher feed-in tariffs (offset rising interest cost/low wind sites) and new regulation leading to entry of
IPPs. Its back-to-basics strategy has paid-off, with FY11 orders up 2.7x in
India to 2.3GW.
„ 33% PAT CAGR in REPower on shift in a) product-mix to high margin
offshore wind and b) production of its largest selling 2MW turbine to low cost
(India/China) and
„ Recovery of Rs10bn (24% of debtors) in 2HFY12 (Edison), to fund growth.
Raised PO; turnaround visible; Buy
Focus on India, REpower = Turnaround
We reiterate our Buy rating as we believe that its 4Q is indeed showing early
signs of bottoming-out led by a) its strategy of focusing on its roots (India), where
markets are rebounding led by feed-in tariffs, b) fixing its weaknesses in big
markets like China, and c) focus on high-margin offshore markets and costcutting at REpower uuntil there is a revival in global markets. This strategic
transformation should realign the product mix in profitable markets and lead to a
turnaround in FY12E after two years of losses. B(R)IC markets account for 80%
of FY12E sales. We raise our PO to Rs75 (from Rs70) on a roll-forward of EPS.
Risks are a stretched balance sheet, oversupplied global wind markets increasing
the pressure on pricing and dependence on India, which faces execution
challenges such as land acquisition and grid connection.
India: Back on growth path led by regulation/feed-in tariffs
We recently raised our India wind-turbine generator (WTG) new installation in
FY12E by 17% on a) the entry of IPPs on the introduction of generation-based
incentives and renewable energy (RE) certificates, which will take its markets into
a new orbit and also make it sustainable vs volatile tax-driven buyers, and b)
higher feed-in tariffs with flexible models. Suzlon is well positioned to benefit from
exponential growth in the world’s 3rd largest wind market (India) with a 48%
share, new products (S95, S97 turbines) with variable speed drives for low wind
speeds and its ‘end-to-end’ model. Suzlon's 70%YoY growth in India volumes in
FY11A validates our view.
Fixing China with new products, pricing & global strategy
Suzlon has indigenized its China turbines to cut costs, launched new products
with +15% generation, cut price ~20% to narrow the gap vs local ASPs and has
made China its global export hub with cheap funding to turnaround its operations.
REpower: Profitable growth led by high margin offshore
REpower, its 95% unit, is the only EU player with historically high BTB (Chart 11).
Catalysts: improving pricing power led by a shift in production to low-cost
countries such as India and a scale-up in its high margin offshore business from
2011 onwards led by its new 6.15MW turbine and financial closure at clients like
C-power & RWE (Chart 12 & 13).
Deleveraging led by sell-down in debtors and asset sale
Apart from an improvement in its business, we see three catalysts for Suzlon to
fix its stretched balance sheet. 1) Recovery of ~Rs10bn (24% of FY11E
consolidated debt) from one US client in 2HFY12E, 2) sale of a 26% stake in
HSN worth Rs7bn, and c) sale of its plants to REpower, which plans to shift
production to low-cost nations such as India to improve cost-competitiveness and
gain share.
Not all is well but 28% stock UPF & turn is worth playing
Oversupply in global markets, delay in implementing the US renewable portfolio
standard (RPS) and weak power prices are concerns. Suzlon still faces balancesheet risks given its excessive leverage and sticky debtors (esp. from a large US
client). It still has one more year of loan-repayment moratorium. If markets do not
rebound, the firm may have to restructure its debt again. In FY13E, it has
US$569mn CB redemption, if not converted. We believe the stock’s
underperformance of 28% over the past year captures the negatives. However, it
does not reflect structural bottoming-out in its business from 4QFY11 onwards, in
our view. The strong oil price will also help to boost interest in renewable.
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