Suzlon Energy Early signs of turnaround ::Macquire Research

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Suzlon Energy
Early signs of turnaround
Event
 Suzlon reported strong operating performance in its 1QFY12 results. We view
strong India performance and balance sheet improvement positively. However,
we remain worried over the medium-term outlook in India due to potential
regulatory changes and increased price competition. We increase our target
price to Rs50 (from Rs42) and upgrade Suzlon to Neutral from Underperform.
Impact
 1QFY12 – strong operating performance: Suzlon Wind (parent business)
delivered 437MW (double YoY) and consolidated revenues increased 81%
YoY. Flat other expenses despite doubling of volumes led to a sharp
improvement in margins to 9.7% in Suzlon Wind.
 Raising our FY12 numbers, we are at lower end of management
guidance: We expect total sales of ~2,000MW leading to Rs120bn in
revenues with a 9.2% margin in Suzlon Wind. In RePower, we expect
Rs113bn in sales with a 7.5% margin. Our consolidated numbers are at
the lower end of the company guidance.
 Balance sheet improvement exercise good in medium to long term:
Principal repayment of US$650mn in CY12 can be easily met with a cash
balance in RePower (after the squeeze out) and proceeds from the 26% stake
sale in Hansen.
 We remain worried on order inflow outlook: Order inflow in 1QFY12 was
weak at 237MW (down 50% YoY). Order inflow has remained weak for two
consecutive quarters. The existing order book (2,030MW in Suzlon Wind and
2,710MW in RePower) provides revenue visibility for FY12; growth in FY13
and beyond is contingent on incremental order inflows.
 Viability of feed-in tariff from cash-strapped SEBs questionable: High
feed-in tariffs for wind power at Rs3.5-4/kWh is putting the burden on cashstrapped SEBs (Tamil Nadu which has 40% of India’s wind capacity).
 Uncertainty on demand due to new direct tax code: Suzlon is banking
on IPP orders to counter a potential slump from retail demand (30% of
total demand) due to tax uncertainty in new direct tax code.
 Global pricing to remain under pressure: Our global alternative team
expects a pricing decline up to 25% in the next two years. However, we
think pricing pressure for Suzlon may be limited given its presence in high
growth India geography and the off-shore market.
Earnings and target price revision
 Increasing our EPS from Rs0.9 to Rs2.9 due to higher margin and lower
interest cost assumptions. Target price revised upwards to Rs50 (from Rs42).
Price catalyst
 12-month price target: Rs50.00 based on an EV/EBITDA methodology.
 Catalyst: improvement in order inflows and stabilisation of margins
Action and recommendation
 Order inflow critical for growth outlook, upgrade to Neutral: We are
impressed with Suzlon’s operating performance especially on margins, and
we remain skeptical on order inflow which is critical for the growth outlook
beyond FY12. We revise our target price to Rs50 based on 8x FY13E
EV/EBITDA (from Rs42 earlier) and upgrade the stock to Neutral.