Lower sales volume and pressure on margins remain near-term concerns for Suzlon.
In the hope that Suzlon Energy is turning around for the better and partly due to the revival in markets, its share price zoomed by over 300 per cent, from the low of Rs 33 in March 2009 till early June. Since then, though the stock underperformed the broader markets, it took a beating last week after the company posted weaker than expected quarterly results. For June 2009 quarter, the company reported a consolidated net loss led by a significant decline in sales volumes and erosion in operating margins.
Its share price fell 13 per cent post results; it is down by 40 per cent in the last two months. The subdued financial performance is also a reason why analysts believe that the turnaround seems to be a distant reality and the company could continue to face the challenges for one-two quarters.
Demand worries
The disappointment is a result of a whopping 64 per cent year-on-year (y-o-y) decline in sales volumes to 123 mw in Suzlon’s wind business for June 2009 quarter. Moreover, the company’s order book fell by 51 per cent y-o-y to 1,501 mw, which indicates weak revenue prospects. The decline is due to a slowdown in the domestic market as a result of elections and the impact of credit crisis on overseas business.
Last June, the company had an order book of 3,040 mw, while for 2008-09 Suzlon sold equipment worth 2,790 mw. For 2009-10, the company has guided sales volumes of 2,400-2,600 mw on the expectations that demand will pick up in the second half of the year. However, considering June quarter results and the lower order book analysts expect the revenues to decline by 10-15 per cent or at best remain flat in 2009-10.
Cascading effect
The impact of lower volumes as well as capacity utilisation was seen on the company’s operating margins as costs could not be fully absorbed. The company’s consolidated operating margins nose-dived from 17.27 per cent in June 2008 quarter to just 0.3 per cent. The performance is nearly the same across subsidiaries. Among its key subsidiaries, Hansen Transmissions, which manufactures gear boxes, has expanded capacities in India and China. However, given the marginal growth in sales and high overheads, operating margins have fallen by almost 1,700 basis points. In other words, the operating performance is critical for Suzlon, which is likely to improve only if demand recovers and capacity utilisation levels rise visibly. Due to this, analysts are not expecting operating margins to improve any time soon and have pegged them to be visibly lower in 2009-10 as compared to 10.8 per cent in 2008-09.
Debt woes
The lower volumes and consequent decline in margins has obviously led to lower profits. However, for Suzlon, the problems compounded due to higher depreciation and interest cost resulting in a consolidated loss of Rs 453 crore in the June 2009 quarter. With recently commissioned capacities, the consolidated depreciation rose by almost 65 per cent. Also, its interest cost jumped by 118.4 per cent due to the high debt. The company’s consolidated debt currently stands at Rs 13,829 crore, which is mainly on account of its acquisition of Martifer’s stake in REpower, and expansion of capacities through debt funding. Analysts say high debt in the balance sheet remains the biggest concern. As per Enam Securities, “the debt covenant requires Suzlon to maintain a net debt-to-EBITDA of 4 times (test date September 2009).” However, given that the operating performance is yet to improve, it could prove to be a hindrance. To deal with the situation though the company has raised about Rs 1,000 crore through the issue of GDR and FCCB, analysts believe that these are not enough and the company may have to raise additional funds. Alternatively, “Suzlon would look to sell its 61 per cent stake in Hansen (currently valued at $1 billion) to meet the covenants,” says an Enam report.
| WEAK BLADES | ||||||
| in Rs crore | Sales | OPM (%) | Net profit | |||
| Q1FY09 | Q1FY10 | Q1FY09 | Q1FY10 | Q1FY09 | Q1FY10 | |
| Suzlon | 2,087 | 1,164 | 14.5 | -14.8 | -66 | -420 |
| SE Forge | NA | 17.0 | NA | -33.8 | NA | -26.0 |
| REPower | 255.0 | 2,066.0 | 15.6 | 6.3 | 17.0 | 21.0 |
| Hansen | 911.0 | 925.0 | 22.5 | 5.3 | 68.0 | -39.0 |
| Consolidated | 3,118.0 | 4,153.0 | 17.3 | 0.3 | 9.0 | -453.0 |
| All figures are actuals | ||||||
Conclusion
For now, considering that the poor performance in June 2009 quarter could get repeated in the next quarter or so, analysts expect the revenue growth to be lower or flat in the year 2009-10. However, profits are expected to be lower and hence, analysts have cut their EPS estimates by about 30-40 per cent for 2009-10 to about Rs 5.5 per share. This translates into a PE multiple of 16 times at current market price of Rs 87. Analysts have also cut their target price for the stock to about Rs 80-90 per share. “Our target price of Rs 79 is based on 9 times the estimated 2010-11 enterprise value (EV) to EBITDA, which is a 20 per cent premium to the global average and, 10 per cent holding company discount for Hansen and REpower. Although the long-term average EV/EBITDA multiple has been around 12 times, we do not expect the stock to re-rate again to those levels due to the moderate growth projections over next few years,” wrote Inderjeetsingh Bhatia of Macquarie Research. Investors can consider the stock at lower levels with a long-term view as the improvement in the fundamentals is seen in 2010-11, when the company’s EPS is expected improve by over 50 per cent to at about Rs 9 per share translating into a PE of 9.8 times.
