Suzlon : Headwinds

Retrofitting blades will hurt the firm's profits.

The world's fifth largest wind turbine manufacturer is in a bit of a spot. The Rs 7,985 crore Suzlon Energy will have to incur a cost of Rs 100 crore for retrofitting blades. Essentially, about 1251 blades will need to be structurally reinforced and the firm may need to spend additionally on higher warranty provisions and increased raw material costs.

Moreover, there could be a slippage in volumes, later on, due to delays in execution. All this, say analysts, could shave off anywhere between 14-17 per cent from the company's earnings between FY08-10.

The stock has already seen a slight de-rating because of the challenges the company faces on the product delivery front and analysts have turned a tad cautious. A continued recall could impact the company's bargaining power in the market and repeat orders too.

Over the last eight weeks or so, the stock has corrected 40 per cent vis a vis a 20 per cent fall for the BSE Sensex. In Tuesday's trade, Suzlon lost 3 per cent closing at Rs 243.

Meanwhile, Suzlon's subsidiaries are doing well with Hansen stepping up volumes at the expanded Belgium plant and REpower on its way to concluding negotiations for 2.9 GW of power in Europe and Canada.

The firm's order book remains robust and Suzlon's global delivery model combined with a large addressable market should help it grows revenues at about 40 per cent and sustain operating margins at 13-14 per cent over the next couple of years. Net profits should grow at around 45 per cent.

The company has share of 6 per cent in the global market and is good growth story as it attempts to become the third largest player in the world.

However, any delays in expanding capacity and therefore ramping up production could hurt profitability. At the current price of Rs 243, the stock trades at just under 23 times FY09 earnings and should perform in line with the market.

Nestle : Coming up tops

The year 2007 has been a turnaround year for foods company Nestle. With a top line growth of 24 per cent plus to Rs 3504 crore, it has outdone the mediocre growth rates of around 11-14 per cent that it had posted in previous years.

While the operating profit margin saw just a small expansion of 60 basis points to 19.1 per cent, it was creditable because of the high costs of key inputs such as wheat.

The operating profit for CY07 rose nearly 30 per cent to Rs 671 crore because Nestle managed to keep a tight leash on costs, controlling other expenditure, for most of the year.

The current pace of growth should sustain since the company has the right mix of brands that cater for a consumer base which is spending more on quality food. About two-thirds of the growth should come from higher volumes.

Whether it is milk and nutrition, the largest contributor to revenues, or beverages where it commands the largest market share, or its fastest growing segment of prepared foods, Nestle has a variety of products to offer to consumers with higher disposable incomes.

Not surprisingly, domestic sales have driven growth rather than exports""in the September quarter for instance they grew at 31 per cent , while for the full year they grew at over 25 per cent.

Growth should be driven by both existing and recently launched products like Nescafe Mild and Polo Sugar Free. However, margins will depend on how well the company manages input costs. Nestle underperformed the Sensex in 2007 gaining 30 per cent versus the Sensex's 46 per cent.

However, since then, it has been doing better and on Tuesday, the stock was up 2 per cent at Rs 1,430. At this price, the stock trades at 24.8 times estimated CY 08 earnings, similar to the valuation commanded by Hindustan Unilever, and should outperform.