Suzlon: Gone with the wind

Capex, rupee rise and higher input costs mar Suzlon numbers

The Suzlon stock fell over 6 per cent in Monday's trading as margins deteriorated in the December 2006 quarter. While analysts did expect some pressure on consolidated margin because of the Hansen acquisition, the fall in standalone margin was a surprise.

Its ongoing capex, rupee appreciation (Suzlon sells wind turbines both in India and abroad), unrealised revenues and higher raw material prices affected profitability.

Suzlon posted a top line growth of 31.8 per cent in its standalone numbers, but 54 per cent increase in staff expenses and 57 per cent rise in other expenditure resulted in 18.6 per cent increase in operating profit. As a result, standalone operating profit margin declined by 207 basis points to 18.6 per cent.

In its consolidated results, operating profit margin fell 373 per cent to 13.3 per cent, thanks mainly to the Hansen acquisition, which is included in the Q3 numbers. Margins at Hansen have been lower at 11 per cent, which has dented the overall margin.

The company bagged a 40 mw order from British Petroleum and a 50 me order from Tata Power. Its Australian subsidiary bagged an 88 mw contract from New Zealand-based Trustpower's subsidiary.

Suzlon installed 190 mw of wind power in the domestic market and 149 mw in international markets. It ended the quarter with an order book of Rs 7,716 crore, of which 80 per cent is exports.

The company is expanding capacity in both wind power (by 2700 mw) and Hansen's gearbox business (by 2600 mw). Hansen will also invest $220 million to set up a gearbox unit at Coimbatore.

The management is confident of delivering 20-21 per cent operating margin for the full year for the wind farm business, owing to higher orders and 6-7 per cent price hike. Margins at Hansen are also expected to rise to 14 per cent.

The Suzlon stock trades at 30 times estimated FY07 earnings and 21 times FY08 earnings, and the near-term upsides seem factored in the price.

Indian Hotels: Occupancy gains

Driven by high average room rates, Indian Hotels has turned in splendid numbers for the December quarter, with sales rising 25 per cent y-o-y. With the company managing to keep a check on costs, operating profit margin has expanded by 450 basis points to 37 per cent, and operating profit has risen 46.6 per cent y-o-y.

ARRs continue to rule high and for December quarter, Indian Hotel's ARR has been Rs 10,772, an increase of 32 per cent y-o-y.

The company has been able to bring in economies of scale: for instance, raw material cost to sales is down 50 basis points y-o-y at 7.8 per cent, while staff costs are down 180 basis points y-o-y.

With the demand for hotel rooms expected to exceed supply for the next couple of years, and the flow of foreign travellers to India also expected to continue at this pace, ARRs should remain at current levels.

According to industry estimates, demand for only 2,000 five-star hotel rooms will be met in 2009, with further capacity coming up later. Indian Hotels plans to add another 2,000 rooms to its existing capacity of 9,000 rooms.

Indian Hotels is also positioning itself as a top-end hotel in overseas markets and gaining presence in Europe and South Africa. Over the long term, this could prove to be a bigger source of revenues than it is today.

While the stock is not unduly expensive at the current price of Rs 158, the upsides appear to be priced in at a valuation of 18 times FY08.

Apollo Tyres: Smooth margin

Apollo Tyres' performance improved in the December 2006 quarter as stable raw material prices provided a much needed respite to margins.

Benign natural rubber prices at Rs 90 a kg, down 10 per cent over its high of Rs 106-107 in the September quarter, were a significant factor in lowering raw material costs. The adjusted raw material costs as a proportion to net sales fell by 250 basis points y-o-y in Q3 FY07.

Top line growth was robust at 26.7 per cent, of which 6 per cent was owing to volumes, and the rest because of several price hikes in the past year.

Automotive OEM demand seems to have driven volume growth as replacement demand in the first nine months was in single digits. Operating profit grew nearly 72 per cent, and operating profit margins improved by 285 basis points y-o-y to 10.8 per cent.

The company is still restructuring debt of its subsidiary, Dunlop South Africa, and has raised Rs 250 crore through a qualified institutional placement in Q3.

The news from South Africa is still not positive""for the first nine months of FY07, net profit margin stood at about 1 per cent owing to a highly leveraged balance sheet ($60-65 million debt).

Going forward, natural rubber prices have once again started going up, averaging at Rs 95 a kg. Though softening of crude oil prices may lead to lower cost of inputs such as nylon cord tyre and synthetic rubber, the margin of Q3 FY07 looks unsustainable in the next quarter given the current firmness in rubber costs.

The Apollo Tyres stock trades at 16.5 times FY07 earnings and 12 times FY08 earnings, and is unlikely to outperform till rubber prices remain firm.

With contributions from Kalpana Pathak and Venkatesh Rangan