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India saves the day…
Volume growth marred by lower realizations/REpower accounting loss:
Suzlon Energy (SEL) reported 2Q11 loss of `3.7bn on flat sales of `38.2bn.
Volumes grew 27.6% YoY to 361MW, but a 21.2% decline in realizations and
higher costs led to net loss. India sales accounted for 80% and 89% of
quarterly order inflow. After reporting EBITDA loss of `4bn in 1Q11, it posted
positive EBITDA as RM/sales declined 330bps and other expenses dropped
6.8% YoY. While REpower reported `1.1bn profit, Suzlon’s books showed a
`32mn loss on difference in revenue recognition policy (`53mn) and notional
forex loss on translation of COGS (`1.2bn).
Order book improving slowly; international orders still sometime away:
SEL witnessed order booking of 453MW in 2Q11 as OB went up 30%
sequentially to 1,551MW (`82.9bn). Domestic ordering continues to grow
(c.900MW in 1H11) as government’s fiscal and regulatory incentives continue
to provide momentum to renewables. Though international order booking is
still muted (100MW in 1H11), management is confident of receiving few
international orders (Brazil and Africa) in the coming months.
Revising profitability for FY12E: We more or less maintain our earnings for
FY11E while we increase our FY12E EPS to `1.0 (from `0.4), as we build in
better realizations in India business and marginally tweak employee costs. For
Suzlon wind, we cut our EBITDA loss estimate to `732mn vs earlier stated
`2.7bn loss. Despite marginal improvement in FY11E EBITDA, our net profit
estimate is maintained as we increase our tax assumption and interest costs.
Maintain HOLD: While industry order inflow is recovering, Suzlon hasn’t
proved its mettle in international orders and continues its emerging market
focus. Strong European competition (from Vestas) on 15% Euro depreciation
and higher volumes in India/China may not arrest losses as overall volumes
may remain below break-even level of 1,800MW. In absence of positive
earnings and no foreseeable recovery, we continue to value Suzlon on 1.5x
FY12E BV of `69bn, at `60/share (`55). Maintain HOLD. Risk to our rating
would be higher order inflows from international markets.
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