Suzlon Energy :Wind with chance of sun; initiate w/Buy Strategic corporate moves fuel turnaround story: Nomura Research

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Action: Initiate at Buy with TP of INR38; c.44% upside potential

Suzlon Energy (SUEL) is a potential turnaround story in the emerging wind

power sector in India, where it has traditionally been a market leader due to its

strong end-to-end EPC and O&M capability. From a position of strength,

SUEL has gone through multiple crises over the past five years including debt

default. However, it has since taken corrective steps to substantially repair its

balance sheet by selling off its German offshore wind arm, Senvion (formerly

REpower), for €1bn and issuing fresh equity worth INR18bn to Dilip Shanghvi

& Associates (DSA) – a promoter for Sun Pharma (SUNP IN).

 After the financial restructuring and Senvion sell-off, SUEL is now an India

pure play set to refocus on new order wins and execution, and well placed

to win back 50% market share in the domestic wind equipment market.

 Re-introduction of wind power incentives and supportive policy aimed at

meeting the government’s ambitious wind energy target of 60GW by 2022

should help to drive demand for wind equipment, in our view.

 Strong operating/financial leverage from under-utilised manufacturing

facilities and debt reduction is likely to drive normalisation of margins and

strong earnings growth for SUEL in the years ahead, as per our estimates.

Catalysts: Improving financials and PAT breakeven by early FY17F

Valuation: Trading at 11.5x FY17F EV/EBITDA

SUEL is trading at 11.5x FY17F EV/EBITDA, which we believe does not

reflect the company’s strong growth prospects over FY15-20F. On our

estimates, not only is SUEL likely to recover 50% market share by FY17F thus

aiding its PAT breakeven by then, but it also has the potential to grow its

EBITDA by ~50% over FY17-20F thus justifying a premium valuation over its

regional peers (Fig 33). Accordingly, we value SUEL at 15x FY17F

EV/EBITDA to arrive at our TP of INR38/share, which implies c.44% upside.