Even as the country’s top research houses, HSBC and Citigroup, downgraded the Suzlon stock, the markets didn’t react in any major way. Over the past two days, the stock is down just 10p to Rs 17.90.
Both research houses have lowered their target price and expect the company to report a loss in the current financial year. While HSBC Global Research halved its target price to Rs 10 (on June 12) and reiterated its underweight recommendation, Citigroup Global Markets lowered it to Rs 15 (on June 11) from Rs 29, while downgrading the stock to ‘sell’ from ‘neutral’ earlier. While analysts’ concerns stem from high leverage, weak demand and rising competition, the company spokesperson said Suzlon will meet its obligation and demand isn’t an issue.
The key concern
The company had a net debt of Rs 11,129 crore as on March 31, including foreign currency convertible bonds (FCCBs) worth Rs 3,600 crore, of which FCCB of Rs 2,000 crore is due in June and another Rs 1,100 crore in October 2012. To deal with the situation, Suzlon is in an advance stage to raise $300 million from banks. However, the HSBC analysts note: "Even with the $300 million bank financing, meeting the FY13 repayment obligation of $700 million could be tricky for Suzlon. Nor do we see Suzlon generating enough cash to meet its FY14 repayment obligation of $250 million. The situation would be even worse if there are any scheduled repayments for the $300 million refinancing in FY14”.
| IMPROVING OUTLOOK | ||||
| FY13E | FY14E | |||
| HSBC | Citigroup | HSBC | Citigroup | |
| Revenue (Rs cr) | 26,319 | 26,087 | 26,743 | 30,836 |
| Ebitda (%) | 8.4 | 8.7 | 8.5 | 9.5 |
| Interest cost (Rs cr) | 1,536 | 1,607 | 1,080 | 1,650 |
| Net profit (Rs cr) | -202 | -226 | 296 | 229 |
| Source: HSBC, Citigroup | ||||
In response to Business Standard’s query, Suzlon’s spokesperson said the company would meet its obligations by refinancing the debt. He added: “Majority of our debt is in the books of Indian entity, where we are paying an interest rate of about 14-15 per cent, which is in sharp contrast to two-three per cent interest rates in Europe and the US. If we can spread our leverage or debt to other regions we could save a significant part of our interest cost”.
Revenue visibility
While debt remains a concern, the analysts also expect weakness in demand in two of its major markets, namely the US and Europe. HSBC expects the global wind installations to decline eight per cent in 2013 on the back of a steep fall in US demand. Citi too said:"A global wind turbine generator (WTG) slowdown, over capacity and India regulatory environment turning unfavourable does not help Suzlon’s case.”
Part of this was visible in the March quarter results, wherein the company reported a 7.9 per cent decline in consolidated revenues. Citi in its report said the biggest disappointment was Suzlon’s WTG sales of 418 Mw (year-on-year decline of 15 per cent), which was 280 Mw below expectations. Of this, 100 Mw was due to delay in castings on account of a strike in SE Forge and 180 Mw because of deliveries postponed to the June 2012 quarter.
Hence, analysts believe the company may not be able to achieve the revenue target of Rs 27,000-28,000 crore on a consolidated basis, which is about 28-33 per cent higher than in FY12. Also, to achieve these revenues, the company will have to deliver volumes of about 4,500 Mw (assuming realisation of Rs 6.2 crore per Mw), which is again a very high target considering the FY12 volumes of about 3,300 Mw.
The company, however, dismissed these concerns. “We are confident to achieve the guided revenue on the back of a strong order book. Unlike analysts, we do not see concerns on the demand side. We believe there is good demand from the Europe and the US," said the company spokesperson.
Nevertheless, in light of their concerns and due to increasing competitive intensity, analysts have lowered their estimates, both in terms of volumes and realisation. This, along with the continued pressure on account of interest costs, has led them to project a loss in the current financial year. HSBC, in its report said: “For FY13, we forecast a net loss of Rs 200 crore, compared to consensus net profit of Rs 300 crore and our previous forecast for Rs 400 crore net profit”. Citi, too, is expecting the company to report Rs 226.5-crore loss in FY13.
While initial reaction suggest the Street is unperturbed, it is perhaps awaiting the ongoing refinancing deal to complete which would give an indication of terms (interest rate, tenure, etc) and more clarity on future debt repayments from Suzlon.
