Suzlon: Current booking

Suzlon to cash in on investor euphoria for power stocks

Suzlon Energy is leveraging on the current euphoria for players involved in the power capex cycle. The issue size is between Rs 1,250 crore and Rs 1,500 crore, based on a price band of Rs 425-Rs 510.

Based on Suzlon's consolidated earnings per share for FY05, the issue is priced at a valuation of 30 to 36 times. Of course, other power equipment players too enjoy rich valuations.

For instance, ABB gets a discounting of about 47 times trailing earnings till March 2005 and in case of Siemens India it is 41 times.

It's important to note here that when private equity investors Citicorp and ChrysCapital had picked up a stake in the company last year (in April and August respectively), the acquisition was at a valuation of about 4-4.5 times 12-month earnings till March 2004.

In share price terms, Citicorp and ChrysCapital's acquisition price worked out to Rs 24 on an average, and based on the lower end of the price band of Rs 425, Suzlon's valuation has gone up about 1600 per cent in the past 12-18 months. Earnings, in fact, have risen at a much lower rate of 150 per cent in the year ended March 2005.

Merchant bankers to the issue point out that Citicorp and ChrysCapital invested in Suzlon while the company was still in its investment phase and were partly responsible for the growth that has occurred since last fiscal. Moreover, although they invested only last year, they had committed capital even earlier. On the other hand, two other foreign investors bought Suzlon shares at an average Rs 385.6 a share this year.

While that gives some comfort, the fact that the company's valuations have increased sharply in the past 12 to 18 months is a cause for concern. Assuming that the high growth in the past two years continues, the stock would look reasonably priced on forward PE multiple basis.

Suzlon is one of the largest players in the domestic wind turbine generators segment, with a 42 per cent market share. A key growth impetus for Suzlon has been rising cost of inputs such as coal in conventional power generating equipment and the resulting need for user industries to evaluate alternative energy sources.

Riding piggyback on this, the company's revenues grew 126 per cent and profit before tax and exceptional items grew 227 per cent to Rs 397.3 crore in FY05.

Profit growth has exceeded income growth thanks to efficiencies realised in the southern part of the country from the setting up of a factory in Pondicherry. Operating profit margin grew 723 basis points to 24.14 per cent in the previous financial year.

An energy consultant BTM Consult ApS has estimated that installed wind power capacity in the country is set to grow at a compound annual growth rate of 23 per cent from CY05 levels to 8300 mw by CY09.

The company plans to use part of the resources (about 50-60 per cent) raised via its float for expanding its manufacturing facilities, capitalisation of subsidiaries, redemption of preference shares allotted to private equity investors and setting up a corporate learning centre.

A key concern, going forward, remains the government policy on fiscal and tax benefits to promote alternate energy sources. For instance, in FY03, the company's net sales had halved on a y-o-y basis to Rs 269.7 crore, one of the main reasons being the uncertainty relating to announcements of new depreciation rates.

The company's profit before tax and exceptional items had fallen 81.7 per cent to Rs 22.7 crore. Senior company management highlighted that alternative energy sources are now cost-effective thanks to advances in technology and the importance of fiscal and tax benefits has been declining.

PSL Ltd

PSL Ltd has listed its $40 million five-year zero-coupon convertible bond on the Singapore Stock Exchange. Investors can convert the bonds to a share at Rs 234.54, which is at a premium of about 17 per cent to the current stock price.

Given the small difference between the current and conversion prices, it's likely that bond holders would eventually become shareholders in the company, and benefit from the sharp improvement in the company's operating environment.

PSL manufactures specialised pipes such as spirally welded steel pipes. Like most other players in this segment, it has been able to grow aggressively thanks to the upturn in its key customer segment, namely the global oil and gas industry. Net sales grew 116.5 per cent to Rs 433.87 crore last quarter. In FY05, sales had grown 61.8 per cent.

Also, while steel prices have recently moved up, they continue to be lower on a y-o-y basis. This has helped revive profitability margins "" operating profit margin grew by 31 basis points to 7.47 per cent in the June quarter compared with a drop of 177 basis points in the previous financial year. Inputs such as steel typically account for about 70 percentage of net sales of the company.

For now, though, the company's growth opportunities appear to be fully reflected in the current price - what with the stock trading at a valuation of about 20 times estimated FY06 earnings.

With contributions from Amriteshwar Mathur and Mobis Philipose