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Suzlon Energy Ltd.
Understanding promoters’
pledge and client funding
„Promoters’ pledge of 65% of holding misunderstood; Buy
A 13% correction in Suzlon stock this week is an opportunity to Buy, in our
opinion, as we believe the market’s concerns about the promoters’ pledge of 65%
of their equity is exaggerated – ~75% of the pledge is held as a secondary
security for Suzlon’s capex / working capital loans and has no MTM risk, while
only 17% ownership, pledged to further the business of Suzlon’s promoters’, may
technically face MTM risk, but it is well covered by 35% unpledged equity. Also
visibility of funding at its #1 client, Caparo, improved with the raising of
US$112mn, enough to fund ~50% of its order on Suzlon. We reiterate our Buy on
Suzlon on a structural turnaround. Risks to our non-consensus Buy call are
delivery push-back due to macro, currency and execution.
Visibility improved on Caparo order with funding & sites
Caparo raised US$78.5mn (Rs3.5bn) of mezzanine funding with a likely addition
of US$33.5mn (Rs1.5bn), totaling US$112mn over and above the US$80mn
(GBP50mn) raised in the IPO. This will enable it to fund ~500MW (50%) of orders
placed with Suzlon. The execution of its 1GW order from Suzlon has started at a
Rajasthan site, with commissioning of five turbines (11MW) in 1QFY12 and 31MW
likely in July’11. Total revenue of Rs4.39/kWh, led by a 10% increase in feed-intariffs by Rajasthan, 4% additional incentive and Rs0.50/kWh of generation-based
incentives are core drivers of site selection. This validates our view of improved
regulation driving IPPs to enter the wind power market in India (read Suzlon).
Three catalysts to Buy Suzlon – A turnaround story
1. 25% CAGR till FY13E in the Indian wind markets on higher feed-in tariffs (offset rising interest cost/low wind sites) and new regulation-led entry of IPPs.
Its back-to-basics strategy has paid off - YTD orders up 4x in India to 2.1GW.
2. 28% PAT CAGR in REPower on shift in product-mix to high-margin offshore
wind and production of its largest-selling 2MW to low-cost countries, and
3. Recovery of Rs10bn (24% of debtors) in 2HFY12 (Edison), to fund growth as
the project is commissioned in 4QFY11 and is eligible for ITC incentives.
Price objective basis & risk
Suzlon Energy (XZULF)
Our PO of Rs75 is based on our sum-of-the-parts analysis. We valued Suzlon's
wind business at 14x 1-year forward earnings, at Rs71 per share, which is set at
a 20% discount to Indian capital goods majors and in line with European
comparables, which is above its historical average. This, we believe, is fair given
Suzlon's long-term growth led by BRIC countries, REpower and its return profile.
We value Suzlon's 26% stake in the gearbox business of Hansen at Rs4 per
share at BofAML's PO of GBp50.
Upside risk to our rating is de-leveraging by asset sales and a pick-up in USA
market, leading to new order wins. Downside risks: Headwinds for wind turbine
business on excess supply driving down ASPs and execution risk in the land
acquisition and grid connectivity in India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Suzlon Energy Ltd.
Understanding promoters’
pledge and client funding
„Promoters’ pledge of 65% of holding misunderstood; Buy
A 13% correction in Suzlon stock this week is an opportunity to Buy, in our
opinion, as we believe the market’s concerns about the promoters’ pledge of 65%
of their equity is exaggerated – ~75% of the pledge is held as a secondary
security for Suzlon’s capex / working capital loans and has no MTM risk, while
only 17% ownership, pledged to further the business of Suzlon’s promoters’, may
technically face MTM risk, but it is well covered by 35% unpledged equity. Also
visibility of funding at its #1 client, Caparo, improved with the raising of
US$112mn, enough to fund ~50% of its order on Suzlon. We reiterate our Buy on
Suzlon on a structural turnaround. Risks to our non-consensus Buy call are
delivery push-back due to macro, currency and execution.
Visibility improved on Caparo order with funding & sites
Caparo raised US$78.5mn (Rs3.5bn) of mezzanine funding with a likely addition
of US$33.5mn (Rs1.5bn), totaling US$112mn over and above the US$80mn
(GBP50mn) raised in the IPO. This will enable it to fund ~500MW (50%) of orders
placed with Suzlon. The execution of its 1GW order from Suzlon has started at a
Rajasthan site, with commissioning of five turbines (11MW) in 1QFY12 and 31MW
likely in July’11. Total revenue of Rs4.39/kWh, led by a 10% increase in feed-intariffs by Rajasthan, 4% additional incentive and Rs0.50/kWh of generation-based
incentives are core drivers of site selection. This validates our view of improved
regulation driving IPPs to enter the wind power market in India (read Suzlon).
Three catalysts to Buy Suzlon – A turnaround story
1. 25% CAGR till FY13E in the Indian wind markets on higher feed-in tariffs (offset rising interest cost/low wind sites) and new regulation-led entry of IPPs.
Its back-to-basics strategy has paid off - YTD orders up 4x in India to 2.1GW.
2. 28% PAT CAGR in REPower on shift in product-mix to high-margin offshore
wind and production of its largest-selling 2MW to low-cost countries, and
3. Recovery of Rs10bn (24% of debtors) in 2HFY12 (Edison), to fund growth as
the project is commissioned in 4QFY11 and is eligible for ITC incentives.
Price objective basis & risk
Suzlon Energy (XZULF)
Our PO of Rs75 is based on our sum-of-the-parts analysis. We valued Suzlon's
wind business at 14x 1-year forward earnings, at Rs71 per share, which is set at
a 20% discount to Indian capital goods majors and in line with European
comparables, which is above its historical average. This, we believe, is fair given
Suzlon's long-term growth led by BRIC countries, REpower and its return profile.
We value Suzlon's 26% stake in the gearbox business of Hansen at Rs4 per
share at BofAML's PO of GBp50.
Upside risk to our rating is de-leveraging by asset sales and a pick-up in USA
market, leading to new order wins. Downside risks: Headwinds for wind turbine
business on excess supply driving down ASPs and execution risk in the land
acquisition and grid connectivity in India.
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