Suzlon Energy- Outlook remains gloomy in overseas market:: Macquarie

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Suzlon Energy
Outlook remains gloomy in overseas
market
Event
􀂃 We assess business prospects for Suzlon on the backdrop of Vestas and
Hansen’s results. Our Alternative Energy analysts – Shai Hill and Kasper
Larsen– continue to flag weak wind market conditions in Europe and US.
􀂃 Suzlon reports its 2QFY11 results on Oct 30. While we do not expect good
results, the silver lining would be strong order inflow in India. We retain our
Underperform rating on the stock with a target price of Rs58.
Impact
􀂃 Gloomy wind market conditions in Europe: Vestas and Hansen in their
earnings release point to a bad state of European wind industry. Fierce
competition and delivery postponement by clients create huge uncertainty.
⇒ Pricing pressure continues as competition intensifies: In its 3QCY10
results, Vestas noted huge uncertainty and fierce competition in wind
turbine markets. Vestas’ issuing volume guidance with no revenue
guidance indicates severe pricing pressure. It is worth noting that average
realisation/MW in Vestas’ contracts signed in CY10 YTD has dropped to
€0.91mn (down 10% from CY09 level).
⇒ Postponement of delivery schedule continues: Hansen cut its revenue
forecast for FY11 to 10% drop against earlier guidance of 5-10% growth
on back of continued postponement of deliveries by customers.
⇒ Suzlon Wind and its crown jewel – RePower - to get affected too: We
believe that worry signals issued by wind turbine makers in Europe, would
have an impact on Suzlon Wind and RePower’s financials. Recall that
RePower reported a 30% decline in revenues and minimal margin of
0.7% in its 1QFY11 results.
􀂃 Strong order inflow in India compensates for dry order inflow overseas:
YTD FY11, Suzlon has announced 960MW orders of which 860MW are from
India. These orders provide some visibility on Indian revenues in FY12.
However, we will prefer to wait for similar order inflow momentum in 2HFY11.
⇒ Suzlon Wind’s breakeven is still some years away: Suzlon Wind
needs sales of c2,400MW to break even at the PAT level, given its high
overhead costs. Unless there is a huge Indian order inflow over 2HFY11,
we do not expect the break-even in next 1-2years.
Earnings and target price revision
􀂃 No change.
Price catalyst
􀂃 12-month price target: Rs42.00 based on a Sum of Parts methodology.
􀂃 Catalyst: weak order inflow in 2HFY11
Action and recommendation
􀂃 We remain cautious on the stock: We think that weak wind market
conditions in Europe and other markets would weigh heavily on Suzlon’s
global prospects and its key subsidiary RePower. While the increasing
proportion of Indian orders in order book is good, we would prefer for a
meaningful pick-up in order inflow and order book before turning positive on
the stock. We retain our Underperform rating with a target price of Rs42.