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SUZLON ENERGY LTD
PRICE: RS.18 RECOMMENDATION: REDUCE
TARGET PRICE: RS.20 FY13E P/E: 6.0X
q Depreciating INR trend likely to magnify FCCB liability of the company;
further renegotiation of FCCB conversion price seems unlikely. FCCB conversion
price stands at significantly higher level than the current market
price.
q Competition has been intensifying in wind energy space globally mainly
from Chinese players. Pricing pressure exists across the value chain; from
suppliers to project management companies.
q Order intake in Suzlon wind remains sluggish. Company's order book at
the end of 1HFY12 stands at 2042 MW (ex-RE Power) vis-à-vis our breakeven
level estimate of 1900 MW.
q We reduce our earnings estimate for FY13 to factor in margin pressure
on account of 1) higher raw material pressure 2) lower realizations 3)
higher finance charges for FY12.
q We expect further de-rating of the sector and the company due to 1)
slack in overall business activity in wind energy space globally 2) government
in European region likely to remain reluctant in providing subsidy
and tax incentives due to their already stretched fiscal deficits 3) higher
debt levels of the company.
q We continue to remain cautious on company's stock and maintain our
'Reduce' rating on with one year forward revised target price of Rs 20 (Rs
43 earlier).
Competition has been intensifying in wind energy space globally;
aggressive price cuts from Chinese players and regulatory
uncertainty in key European and US markets adds up to further
Industry woes
n Competition has been intensifying in wind energy space globally mainly driven
by lower prices quoted by Chinese turbine players.
n USA, which is considered as second largest wind market after Europe, has been
observing maximum pricing pressure. Pricing pressure exists across entire value
chain viz. from suppliers to project management companies.
n Business outlook in European region appears sluggish and fresh order bookings
remained elusive in 1HFY12. Government of various countries within EU is reluctant
in dealing with subsidy and tax incentives issues due to their stretched fiscal
deficits position.
n Suzlon claims that the introduction of REC's and other such incentives are likely
to provide thrust to the domestic wind market. However, we believe that this
would be achievable in longer term after things get materialized in terms of policies
and infrastructure.
n Domestic wind industry has been observing a lot of action from the internationals
players like Gamessa and GE trying to gain market share in India posing a threat
to Suzlon that currently enjoys dominant position locally.
High debt levels possess significant threat to free cash flow generation
over FY12E-FY13E; exposure to FCCB borrowings makes
company vulnerable to Forex fluctuations.
n Company at the end of Q2FY12 has a net debt of nearly Rs 100.5 bn. This includes
FCCB of USD 645 mn.
n Out of the total sum of USD 645 mn, $246 mn (nearly Rs 12.3 bn) of FCCB are
up for conversion in FY13. The details of these FCCB are stated below
FCCB
Obligation ($ mn) Conversion price (Rs/share) Coupon Rate (%)
35.6 76.86 7.5
211 97.26 7.5
Source: company, Kotak PCG-Research
n From current price of Rs 18 per share, it is difficult to assume that these bonds
will get converted into equity. Thus we believe that the company may have to
repay the obligation.
n Moreover, given company's already stretched balance sheet, it will be difficult
for the company to raise funds in near future. The problem gets worse in the
current situation where wind players have been one of the worst affected lot.
n Also, depreciating rupee trend would continue to have a magnifying effect on
the outstanding FCCB liability. Therefore, we believe that this leaves limited options
in the hands of the management to improve upon the financials and reduce
uncertainty among the investors.
n We believe that the current obligations would become manageable if company
receives the amount of Rs 10 bn from Edison which has been pending since past
several quarters now. Management has stated that the company would also consider
selling of certain non-core assets to meet the obligation.
n However, we strongly believe that the stock would continue to remain under
pressure as FCCB conversion date approaches.
Order backlog provides 18-20 months visibility; fresh order intake
for Suzlon wind remain weak
n Company's current order book stands close to 2042MW offering 18-20 months of
revenue visibility. The current order book includes 516 MW of international orders
and highest ever domestic order backlog of 1291MW. Average realization
of the order book stands at Rs 57 mn/MW.
n We opine that the current order book is still inadequate vis-à-vis capital goods
peers including BHEL and L&T, which boast of revenue visibility of 30-45 months.
n Company continues to expect meaningful demand in the domestic business
driven by increasing emphasis on green power generation by the regulator. The
central power regulator has made it mandatory for all power utilities to purchase
6% green power of the total installed capacity in a year.
n Company has bagged several orders in the domestic market in last few quarters.
Successful implementation of REC's (Renewable energy certificate) trading and
GBI (generation based incentive) has given the thrust to the domestic demand
Financials & Valuations
n In recent quarters, the stock has been sensitive to the INR movement and corporate
developments focused mainly on debt restructuring measures and balance
sheet repair.
n Going forward, the company needs to maintain momentum in terms of order
accretion in absence of which we expect that the stock could continue to remain
range bound.
n In our projections we build 19% CAGR in domestic wind business over FY11-13E.
We expect that the company is likely to benefit from its higher operating leverage
and report marginal profit in FY12-13 after several quarters of weaker performance.
n However we opine that liquidity related concerns regarding debt repayments
would make it vulnerable in current rising interest rate scenario. Weakening INR
is also likely to pose pressure on FCCB front.
n We cut our earning estimates for FY12 to build 1) slack in order booking over
FY12-13 2) higher raw material prices 3) intensifying competition in the industry
leading to pricing pressure 4) increasing interest rates leading to higher financial
charges.
Change in estimates
Change in Estimates FY13
(Rs mn) New Old Difference (%)
Revenue 258757 265489 -1.4
EBITDA 22787 24909 -7.9
PAT 5318.3 6973 -14.5
EPS (Rs) 2.9929 3.9 -14.3
Source: Kotak Securities - Private Client Research
n We expect further de-rating of the sector and the company due to 1) elusive
business activity in wind energy space globally 2) government in European region
likely to remain reluctant in providing subsidy and tax incentives due to their already
stretched fiscal deficits 3) higher debt levels of the company with probable
no enough source of further restructuring.
n We value company's stock on SOTP basis assign an EV/EBITDA multiple of 5.4x
(at 40% discount to L&T) for wind business on FY13E earnings and arrive at a
target price of Rs 20 (Rs 53 earlier) on company's stock.
Stock outlook and Recommendation
n At current price of Rs 18 stock is trading at 6 x and 5.7x P/E and EV/EBITDA
FY13E earnings respectively.
n Current order book position of the company is still far below its peak level of
3400 MW in FY08. We believe that company would under-perform the broader
market due to high debt levels and insufficient estimated free cash flow generation
over next two years.
n We maintain REDUCE rating on the stock with a SOTP based one year price target
of Rs 20 (Rs 43 earlier).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SUZLON ENERGY LTD
PRICE: RS.18 RECOMMENDATION: REDUCE
TARGET PRICE: RS.20 FY13E P/E: 6.0X
q Depreciating INR trend likely to magnify FCCB liability of the company;
further renegotiation of FCCB conversion price seems unlikely. FCCB conversion
price stands at significantly higher level than the current market
price.
q Competition has been intensifying in wind energy space globally mainly
from Chinese players. Pricing pressure exists across the value chain; from
suppliers to project management companies.
q Order intake in Suzlon wind remains sluggish. Company's order book at
the end of 1HFY12 stands at 2042 MW (ex-RE Power) vis-à-vis our breakeven
level estimate of 1900 MW.
q We reduce our earnings estimate for FY13 to factor in margin pressure
on account of 1) higher raw material pressure 2) lower realizations 3)
higher finance charges for FY12.
q We expect further de-rating of the sector and the company due to 1)
slack in overall business activity in wind energy space globally 2) government
in European region likely to remain reluctant in providing subsidy
and tax incentives due to their already stretched fiscal deficits 3) higher
debt levels of the company.
q We continue to remain cautious on company's stock and maintain our
'Reduce' rating on with one year forward revised target price of Rs 20 (Rs
43 earlier).
Competition has been intensifying in wind energy space globally;
aggressive price cuts from Chinese players and regulatory
uncertainty in key European and US markets adds up to further
Industry woes
n Competition has been intensifying in wind energy space globally mainly driven
by lower prices quoted by Chinese turbine players.
n USA, which is considered as second largest wind market after Europe, has been
observing maximum pricing pressure. Pricing pressure exists across entire value
chain viz. from suppliers to project management companies.
n Business outlook in European region appears sluggish and fresh order bookings
remained elusive in 1HFY12. Government of various countries within EU is reluctant
in dealing with subsidy and tax incentives issues due to their stretched fiscal
deficits position.
n Suzlon claims that the introduction of REC's and other such incentives are likely
to provide thrust to the domestic wind market. However, we believe that this
would be achievable in longer term after things get materialized in terms of policies
and infrastructure.
n Domestic wind industry has been observing a lot of action from the internationals
players like Gamessa and GE trying to gain market share in India posing a threat
to Suzlon that currently enjoys dominant position locally.
High debt levels possess significant threat to free cash flow generation
over FY12E-FY13E; exposure to FCCB borrowings makes
company vulnerable to Forex fluctuations.
n Company at the end of Q2FY12 has a net debt of nearly Rs 100.5 bn. This includes
FCCB of USD 645 mn.
n Out of the total sum of USD 645 mn, $246 mn (nearly Rs 12.3 bn) of FCCB are
up for conversion in FY13. The details of these FCCB are stated below
FCCB
Obligation ($ mn) Conversion price (Rs/share) Coupon Rate (%)
35.6 76.86 7.5
211 97.26 7.5
Source: company, Kotak PCG-Research
n From current price of Rs 18 per share, it is difficult to assume that these bonds
will get converted into equity. Thus we believe that the company may have to
repay the obligation.
n Moreover, given company's already stretched balance sheet, it will be difficult
for the company to raise funds in near future. The problem gets worse in the
current situation where wind players have been one of the worst affected lot.
n Also, depreciating rupee trend would continue to have a magnifying effect on
the outstanding FCCB liability. Therefore, we believe that this leaves limited options
in the hands of the management to improve upon the financials and reduce
uncertainty among the investors.
n We believe that the current obligations would become manageable if company
receives the amount of Rs 10 bn from Edison which has been pending since past
several quarters now. Management has stated that the company would also consider
selling of certain non-core assets to meet the obligation.
n However, we strongly believe that the stock would continue to remain under
pressure as FCCB conversion date approaches.
Order backlog provides 18-20 months visibility; fresh order intake
for Suzlon wind remain weak
n Company's current order book stands close to 2042MW offering 18-20 months of
revenue visibility. The current order book includes 516 MW of international orders
and highest ever domestic order backlog of 1291MW. Average realization
of the order book stands at Rs 57 mn/MW.
n We opine that the current order book is still inadequate vis-à-vis capital goods
peers including BHEL and L&T, which boast of revenue visibility of 30-45 months.
n Company continues to expect meaningful demand in the domestic business
driven by increasing emphasis on green power generation by the regulator. The
central power regulator has made it mandatory for all power utilities to purchase
6% green power of the total installed capacity in a year.
n Company has bagged several orders in the domestic market in last few quarters.
Successful implementation of REC's (Renewable energy certificate) trading and
GBI (generation based incentive) has given the thrust to the domestic demand
Financials & Valuations
n In recent quarters, the stock has been sensitive to the INR movement and corporate
developments focused mainly on debt restructuring measures and balance
sheet repair.
n Going forward, the company needs to maintain momentum in terms of order
accretion in absence of which we expect that the stock could continue to remain
range bound.
n In our projections we build 19% CAGR in domestic wind business over FY11-13E.
We expect that the company is likely to benefit from its higher operating leverage
and report marginal profit in FY12-13 after several quarters of weaker performance.
n However we opine that liquidity related concerns regarding debt repayments
would make it vulnerable in current rising interest rate scenario. Weakening INR
is also likely to pose pressure on FCCB front.
n We cut our earning estimates for FY12 to build 1) slack in order booking over
FY12-13 2) higher raw material prices 3) intensifying competition in the industry
leading to pricing pressure 4) increasing interest rates leading to higher financial
charges.
Change in estimates
Change in Estimates FY13
(Rs mn) New Old Difference (%)
Revenue 258757 265489 -1.4
EBITDA 22787 24909 -7.9
PAT 5318.3 6973 -14.5
EPS (Rs) 2.9929 3.9 -14.3
Source: Kotak Securities - Private Client Research
n We expect further de-rating of the sector and the company due to 1) elusive
business activity in wind energy space globally 2) government in European region
likely to remain reluctant in providing subsidy and tax incentives due to their already
stretched fiscal deficits 3) higher debt levels of the company with probable
no enough source of further restructuring.
n We value company's stock on SOTP basis assign an EV/EBITDA multiple of 5.4x
(at 40% discount to L&T) for wind business on FY13E earnings and arrive at a
target price of Rs 20 (Rs 53 earlier) on company's stock.
Stock outlook and Recommendation
n At current price of Rs 18 stock is trading at 6 x and 5.7x P/E and EV/EBITDA
FY13E earnings respectively.
n Current order book position of the company is still far below its peak level of
3400 MW in FY08. We believe that company would under-perform the broader
market due to high debt levels and insufficient estimated free cash flow generation
over next two years.
n We maintain REDUCE rating on the stock with a SOTP based one year price target
of Rs 20 (Rs 43 earlier).
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