Suzlon's move to integrate backwards, expand capacities and tap high growth markets will help post robust growth rates in the coming years.
Globally, coal and gas continue to dominate as the prime source (or fuel) for generating power. That coal and gas fired power plants account for nearly 65 per cent of total power generation capacity is only proof of the pudding.
However, the rising cost, limited supply and environmental concerns with regards these resources are forcing the world to look at alternative ways to generate electricity and provide a long-term solution.
Little wonder that the emphasis on alternative sources like wind, solar, etc for power generation is increasing globally as well in the Indian markets.
A key beneficiary of this trend is Suzlon Energy, which combined with Germany-based REpower, is considered to be the third-largest wind power solutions provider globally.
The company has a fully integrated business, which provides consultancy, site development, design, manufacturing and maintenance services, in the wind-power space.
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Since globally wind power is a big market, the company has been continuously spreading its reach and manufacturing facilities, and as a result it is now present across different markets including fast growing ones like US, Europe and China.
Along with REpower (a 66 per cent subsidiary of Suzlon), the company commands a global market share of 13.9 per cent in CY 2007 as compared to 7.7 per cent (stand alone) in CY06. The company also maintained its leadership in India with around 58 per cent market share.
High growth & potential
The growing presence in other markets and favourable industry trend is also reflected in the company’s strong revenue growth; consolidated turnover (including acquisitions) grew at a CAGR of 91.6 per cent from Rs 1,942 crore in FY05 to Rs 13,679 crore in FY08.
Although the company may not grow at the same pace going forward, considering the huge opportunity in the global and domestic wind power markets and Suzlon’s reach and position, growth rates should still be significant.
The global wind power capacities have grown at a CAGR of 24 per cent over the last five years to 94,005 mw in CY07. The trend is expected to continue and the industry is expected to grow at 22 per cent annually till 2011. This growth will primarily come from markets like China, India, Europe and the US.
According to National Development and Reform Commission of China, wind power generation capacity in China is expected to increase to 100,000 mw by 2020, as compared to about 4,000 mw in 2007. The potential in India is also huge. The potential of wind power is pegged at 45,000 mw as compared to the current installed capacity of about 8,000 mw.
| SUZLON GROUP | |||
| Hansen | REpower | Suzlon | |
| Sales (Rs cr) | 2213 | 4337.3 | 6926 |
| PAT (Rs cr) | 411 | 134.7 | 1265 |
| Sales growth (2009-10E) | 40-50% | 40-50% | 40% |
| Product | Gear boxes | Wind turbine | WTG |
| Capacity March 2008 | 3600 mw | 1250 mw | 2700 mw |
| Expansion | 11000 mw | 450 mw | 3000 Mw |
| Expansion by | FY11 | CY08 | FY09 |
| Total | 14600 mw | 1650 mw | 5700 mw |
| Markets | Europe, India, US | UK, Germany, France | US, India, China |
| Suzlon's stake | 71.3 | 66 | NA |
| Global market share | 2nd largest | 3.20% | 8% |
| Note:Hansen's financials for FY07, Repower financials for the CY07. WTG wind turbine generator, market share as on December 2006 For Hansen, the capacity figures in mw indicate the total output of WTG that will be fitted with these gear-boxes | |||
Expanding reach
Considering these opportunities, the company has taken many proactive organic and inorganic steps to strengthen its supply chain and improve its technological capabilities.
Suzlon is increasing its equipment manufacturing capacities from 2,700 mw currently to 5,700 mw, which will be fully ramped up by March 2009.
Besides, the company's earlier acquisition REpower will be leveraged in many ways including widening the product portfolio, improving technological capabilities and enhancing presence in various global markets (especially Europe and China).
In addition to this, Suzlon has formed a JV with REpower for R&D, which would further facilitate access to superior technology. Also, as REpower is expanding its capacities from 1,250 mw to 1,700 mw by December 2008, it will lead to higher volumes for the combined entity.
Backward integration
In order to tackle issues pertaining to timely supply of components and keep a tab on input costs, Suzlon acquired Hansen Transmissions (with 71.3 per cent stake), a manufacture of gear boxes, which is a key component used in wind turbine generators (WTG).
Here also, Hansen is increasing its capacities significantly from 3,600 mw to 14,600 mw; new facilities in India and China are expected to be commissioned by September 08 and September 09, respectively.
Besides, Suzlon is also establishing forging and foundry capacities in India. Overall, the company believes that its in-house component manufacturing and forging and foundry capacities will help in lowering WTG manufacturing costs and reduce execution time.
Stable margins
As far as margins are concerned, even if commodity prices continue to rise, the impact for Suzlon is likely to be relatively lower vis-à-vis its competitors, thanks to the backward integration initiatives.
Also, as about 60 per cent of its contracts have built-in escalation clause, the company should be able to pass on the same to that extent.
During Q1FY09, while the company increased its prices by 3-4 per cent, due to the rupee’s depreciation (against US dollar) the realisations were also good. The sales realisation in the wind business for Q1FY09 has improved to Rs 6.17 crore per mw compared to Rs 4.73 crore per mw in Q1FY08. Overall, analysts estimate the company’s EBDITA margins to improve slightly from its current levels of 14.1 per cent.
| POWERING AHEAD | |||
| Rs crore | FY08 | FY09E | FY10E |
| Revenue | 13679.4 | 19800.0 | 26700.0 |
| Growth (%) | - | ||
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Investment rationale
Suzlon’s share price has corrected by 47 per cent from its 52 week high of Rs 460 made in early January 2008 to Rs 241 currently.
This is also partly due to the concerns regarding the slowdown in US (a key market), some pressure on margins and cancellation of a few orders (partly due to equipment related faults experienced by a few customers).
But, given the company’s association with Repower, it should help sort out the technological issues, which were seen in the recent past. That apart, the company is confident about the future and says that global and domestic demand continues to be strong.
Its strong order book of 3,039.5 megawatts or Rs 16,491 crore (1.2 times FY08 revenue) provides good visibility. Overall, considering that the outlook is robust driven by growing investments in wind power and significant capacity additions by Suzlon across the value chain, the company should reap the benefits in the long-run.
The stock is available at reasonable valuations of 14 times its estimated FY10 consolidated earnings. While analysts have valued Suzlon at about Rs 350-370 per share on the basis of the sum of parts, the stock is capable of delivering, at least, 25 per cent in a year’s time.