With access to Rs 4,000-crore funds, meeting near-term liabilities looks achievable. Demand sustenance remains a key monitorable.
Suzlon Energy’s share price has fallen a little over 40 per cent in the past 10-odd days. It scaled its lifetime low of Rs 21.10 on Monday, adding further to a gradual decline from mid-2009.
There are several reasons for this fall. The most recent pertains to the Street’s worries over the promoter group selling part of their holdings. “Every time the promoters sell stake in their company, the stock goes through the process of correction. At this point of time, when the company (Suzlon) is in the news for several reasons, the market is not digesting the news and anticipating any uncertainty that could come their way. High debt in the company could be another worry,” says S P Tulsian of sptulsian.com.
In an email response, a company spokesperson says, “The promoter stake sale was aimed to generate funds to drive promoter entities which support Suzlon’s business in India, such as with land and power evacuation facilities, to support rapid growth in our home market.” Nevertheless, things don’t seem as bad from a long-term perspective, as some analysts believe most of the adverse news is largely reflecting in the stock. “In my view, things are improving (for Suzlon) if you have a little longer term view on the company,” says Tulsian.
| TURNING AROUND | |||
| in Ra crore | FY11 | FY12E | FY13E |
| Suzlon volumes (Mw) | 2,372 | 3,115 | 3,676 |
| Revenue | 18,090 | 23,146 | 26,648 |
| Ebitda (%) | 4.3 | 10.5 | 11.3 |
| Ebit/sales | 1.0 | 7.8 | 8.7 |
| Interest cost | 1,136 | 1,361 | 1,400 |
| Net profit | -1,103 | 528 | 763 |
| EPS (Ra ) | -5.8 | 1.9 | 4.3 |
| PE (x) | -3.8 | 11.6 | 5.1 |
| Net debt-equity (x) | 1.3 | 1.4 | 1.6 |
| Total loans | 12,264 | 13,879 | 13,717 |
| P/BV (x) | 0.6 | 0.6 | 0.6 |
| E: Estimates Source: BofA Merrill Lynch Global Research | |||
DEBT CONCERNS, BUT FUNDS AVAILABLE, TOO
Apart from the sale of shares by promoters, the markets are also concerned about Suzlon’s high debt and repayment of its FCCB (foreign currency convertible bonds), due in the next year. Further, market participants believe the provisions regarding the mark-to-market (MTM, writing down assets to refllect current values) on FCCB payments could be higher and the amount of the provision which was treated as contingent liability at Rs 762 crore (in its September quarter results) could actually materialise, leading to negative impact on future profits.
On the flip side, some analysts believe there is a reasonable amount of funds at Suzlon’s disposal. Along with the Rs 830 crore raised from the Hansen stake sale, access to cash to the tune of Rs 1,700 crore after the consolidation with REpower (Suzlon’s subsidiary), likely realisation of about Rs 1,000 crore receivables from its long-due debtor and about Rs 400-500 crore internal accrual (cash profit) expected over the next four quarters, the company would have access to funds worth Rs 4,000 crore. These should prove sufficient to meet its FCCB redemption of about Rs 2,000 crore, assuming these are not converted into equity, as well as any MTM liabilities.
OPERATING LEVERAGE INCREASES
Apart from looking to repay its FCCB, the company is also working to reduce its other debt, currently Rs 9,000 crore. “We are focusing closely on reducing our debt profile. We expect to reduce our net debt to equity ratio from the current 1.65 to 1.4 in this fiscal and to 1:1 in the next. We have taken a major step in this direction with the sale of our stake in Hansen Transmissions and looking ahead, we will divest other non-core assets,” says the company spokesperson.
The availability of funds through various sources should allow the company to rely less on working capital loans, and keep a tab on interest costs. Additionally, benefits from operating leverage in the form of higher capacity utilisation should improve profitability and cash generation. However, this will be achievable only if the demand scenario continues to be strong, particularly in the European and the US markets, which has been the case so far.
For the September quarter, Suzlon’s consolidated volumes were up 21 per cent year-on-year at 715 Mw, helping revenue rise 34 per cent to Rs 5,131 crore. Operating profit margins improved over 500 basis points to 9.3 per cent. And, even as interest costs jumped 34 per cent, the company reported a turnaround, with a profit of Rs 48 crore against a loss of Rs 369 crore in the year-ago quarter.
More important, order inflows at REpower grew a strong 57 per cent year-on-year in the September quarter. Suzlon’s consolidated order book grew 35.3 per cent to Rs 32,456 crore, almost two times its 2010-11 revenue and provides good visibility. In the past two days itself, REpower (152 Mw) and Suzlon (23 Mw) have bagged equipment orders worth 175 Mw.
OUTLOOK
Meanwhile, brokerages are expecting decent growth in revenue in the current and next financial years, with profit growth likely to be stronger, led by improvement in margins. A Bank of America-Merrill Lynch report says Suzlon is likely to report a net profit of Rs 528 crore in the current year and Rs 763 crore in 2012-13. At the current market capitalisation of Rs 3,910 crore (share price of Rs 22), it translates to a price-to-earnings multiple of just five times, reasonable in the given risk-reward equation. Unless the demand side plays havoc, the prospects appear to be improving.
