Suzlon: Order book blues

The cancellation of a repeat order is a bit of a setback for the company.

The decision by US-based Edison Mission Energy to cancel a part of an order for turbines cannot be good news for Suzlon Energy. While no reasons have been specified, it could hurt future order flows for the world's fifth largest wind energy player.

While customers may not cancel orders that are being executed currently because many of the contracts may have expensive penalty clauses built into them, it is possible that they could opt for other suppliers in the future.

However, there appear to have been no other complaints from buyers after the problem with the blades was first detected last year""some of the blades had cracked"" and at this point Suzlon's order book remains strong at 3139 mw.

The company had recalled around 1251 blades to be strengthened and had provided a sum of Rs 120 crore to repair the cracked blades.

With EME deciding not to pick up 150 turbines or half the quantity it had ordered, Suzlon will need to find an alternative customer failing which it would have executed a smaller quantum of orders in CY09. How given that demand conditions are strong, the company should find takers.

Earlier this month, Suzlon bought out Areva's 30 per cent stake in RePower, at an estimated price of euro 420-450 million, taking its stake to 63.5 per cent. Suzlon still needs to buy out Martifer, a shareholder which holds 23 per cent, by May 2009 which would take it stake above 75 per cent which it needs to get full control over RePower.

The management has talked about selling a part of its holding in RePower with a view to cashing in on the higher price of the RePower stock.

The Suzlon stock fell sharply in intra-day trades but recovered to close at Rs 269. While the stock has corrected significantly, even at this price the stock trades at 24 times estimated FY09 earnings and is a tad expensive.