Suzlon Energy: Air pressure

Rising input costs put pressure on Suzlon's operating margins

Suzlon Energy's March 2006 quarter results indicate that there has not been any slowdown in its installations, though operating margins have taken a hit.

Income from operations has grown 59.1 per cent y-o-y to Rs 1548.71 crore in the March 2006 quarter, but operating profit has grown at a comparatively slower pace of 37.6 per cent to Rs 392.68 crore. Operating profit margins in the last quarter fell nearly 400 basis points y-o-y to 25.35 per cent.

The pressure on margins was owing to adjusted raw material costs as a percentage of net sales rising 163 basis points y-o-y to 59 per cent in Q4 FY06. The stock fell 7.2 per cent to Rs 1227 on Monday, along with the broad selloff witnessed on the street.

However, prior to Monday's fall, this stock had gained nearly 51.8 per cent over the past four months compared with 31.9 per cent gain in the Sensex.

Senior company management explained that this rise in raw material costs was largely due to an electrical tower sent to its American subsidiary, for fulfiling an order.

Going forward, opportunities for backward integration via its recent acquisition of Belgium-based Hansen Transmissions, a manufacturer of gear boxes used in building wind turbines, should help bring down raw material costs for Suzlon.

For the full year, Suzlon's income from operations went up 97.6 per cent to Rs 3788 crore, while operating profit improved 109.5 per cent to Rs 921.77 crore.

Meanwhile, the company's quarterly installations have shown a buoyant trend - they were pegged at 380 mw in Q4 FY06 compared with 250 mw a year earlier, highlighted senior company management.

The company's outstanding order book was Rs 3303.52 crore at the end of March 2006, compared with Rs 4232 crore at the end of December 2005.

The company's expanded capacity in other high growth markets such as the US and China is expected to start coming on-stream from October 2006.

Since its IPO in September 2005, the Suzlon stock has appreciated 140 per cent. However, at Rs 1,222, Suzlon trades at about 26 times estimated FY07 earnings, the valuations seem expensive.

MTNL: Making the right call

State-owned telecom major MTNL finally seems to be getting its act together, trying to rake in revenues from multiple sources.

Barely a month after it announced plans to spin off its real estate holdings into a separate company, last week the company was again in news for inviting competitive bids for its national long distance carriers for carrying its NLD traffic.

By replacing state owned BSNL which now charges about 65 paise per minute for carrying such calls, the company hopes to save nearly Rs 500 crore.

Though the numbers for the fourth quarter were distorted by a number of extraordinary items, revenues grew 13 per cent q-o-q riding on the 4.6 per cent growth in subscriber base to 5.74 million and an 8.8 per cent rise in average revenue per subscriber.

Adjusting for the key one-time revenue share of Rs 410 crore that the company had to pay to BSNL, earnings before interest, depreciation and tax would have been up 34 per cent on y-o-y basis. One major driver was the reduction in staff cost which was down 25 per cent to Rs 317 crore.

On the business side, in the eight months till March, MTNL has grown its GSM subscriber base by 67 per cent to 1.2 million. In broadband services, it has already captured a substantial market share with a subscriber base of 2 lakh.

Analysts estimate the sum of parts valuation of the stock at around Rs 250 per share. At the least, the stock builds in a cash per share of Rs 70 and the real estate valued at Rs 70 per share which means MTNL's core telecom business is available at Rs 60.

The GSM business alone could command that value assigning an enterprise value per subscriber of $500 for FY07 if the company keeps up the growth momentum.

Discounting this optimism, the stock has gained from Rs 140 levels early this year to over Rs 200 in the past few weeks.

Notwithstanding its spat with cousin BSNL, which has slapped a fine of Rs 900 crore on the company, the stock should do well purely based on its business credentials. On Monday, the stock fell 6 per cent to Rs 192.

With contributions from Amriteshwar Mathur and N Mahalakshmi