Suzlon Energy: Soothing breezes

POUND WISE

Tax benefits and backward integration to trigger growth.

A combination of government mandate and tax benefits is likely to fan strong growth in wind power generation in India in the coming years, especially in the private sector.

Although wind energy is expensive, necessity is the mother of invention. Monetary (tax sops) and non-monetary (environmental) benefits are generating growing corporate interest in the sector. Thus, about 15 per cent of the incremental energy capacity in future is expected to be wind energy, even as currently it accounts for just about one per cent of the total.

Suzlon Energy, one of the top five global players in the field, is likely to garner a huge chunk of this business. Its clients, in turn, would benefit from carbon credits. Moreover, the company's backward integration into gear boxes will help it in more ways than one.

The total capacity of wind energy production till now in the country is at 5,000 MW, of which 4,000 MW has come up in the past 10 years. Again of this, 2,000 MW capacity has been set up by Suzlon, according to Chairman and Managing Director Tulsi Tanti.

Suzlon, the leader in wind power generation in India with over 50 per cent market share, operates in seven states, installing wind power projects primarily for the private sector.

State sops
State governments in the country have been encouraging the use of wind power in the private sector.

For instance, the Maharashtra government has put guidelines for setting up a total of 750 MW wind power capacity by December 2007, of which 600 MW has already been installed.

Tax benefits are available from most states to companies that set up their own wind energy farms for captive consumption. Moreover, mandates from various state electricity regulatory commissions also promote the use of wind power.

In the air
Apart from the balance 150 MW expected to come up in Maharashtra, Tanti expects clearance for more projects in June this year. "Of the 600 MW completed till now, about 500 MW has been installed by Suzlon, and it eyes a major share in upcoming projects too," adds Tanti.

An estimated 4,000 MW wind energy capacity is expected in the state in the coming years. Of the current wind energy capacity of 5200 MW in the country, about 1,500 MW has been set up by Suzlon.

Analysts say that in the FY08-12 Five Year Plan, the government will focus on growth in unconventional energy sources and wind energy in particular.

The proceeds from Suzlon's IPO last year were used in its domestic and overseas projects.

To fund further growth plans, the company will raise about Rs 5,000 crore in FY07, of which about Rs 2,250 crore ($500 million) will come via the FCCB route.

The sum will also be used to repay the debt involved in the acquisition of Hansen Transmissions. Suzlon acquired the Belgium-based company for ¤465 million (Rs 2542 crore) in March 2006.

With the acquisition of Hansen, Suzlon expects to benefit from the former's gear box technology. A report by leading broking firm CLSA says that this backward integration could help the company in controlling costs, facing component shortage and improving quality, as gear boxes are a key component in its business. 
 

INTEGRATION BENEFITS
Component	% of total cost	Source in FY05	Source in FY08	% cost savings
Blade	20	95% in-house	100% in-house	-
Generator	38,967	Domestic purchase	40-50% in-house	38872
Tower	20	Domestic purchase	40-50% in-house	38871
Gear box	15-20	Imported	Domestic purchase + Hansen supply	-
Source: CLSA

This has been the missing link till now, according to Satyam Agarwal, senior analyst, Motilal Oswal Securities.

"Our major clients include Bajaj Auto, Tata Power, Birla Group, Godrej, Alembic, MSPL and Bannari Amman," says Tanti.

Completion of a project requires about three-four years and Suzlon is currently working at about 30 sites. Public sector oil majors like ONGC, Bharat Petroleum, Hindustan Petroleum and GAIL have also evinced interest in setting up wind energy projects.

Foreign markets
In FY06 Suzlon's overseas business contributed only 10 per cent of its total revenues, but Tanti expects it to rise to 40 per cent in FY07. The company has installed 600 MW capacity in China and an equal number in the US.

Agarwal of Motilal Oswal feels that after it has established itself in markets such as the US and Australia, the company has been able to create a brand image for itself.

The company has footprint in countries like China, New Zealand, France and Italy. Suzlon is growing faster in the international markets than the industry average, according to Agarwal.

Windy issues
Apart from tax and other benefits, a major drawback for wind energy is that its cost per kilowatt hour is about Rs 3.3-3.5, which is almost on par with the conventional sources at about Rs 3-3.5.

Moreover, setting up a 1,000-MW project requires about Rs 5,000 crore investment, which is again at par with the conventional sources.

Thus, Tanti does not see any state electricity board investing in a big way in wind energy, with no direct cost benefit. Besides, the company faces competition from foreign players such as Enercon, Vestas, GE and Gamesa, as well as from Chennai-based NEG-Micon.

Financials/valuations
According to the CLSA report, Suzlon trades at about 21x on FY08E earnings. On a trailing 12-month basis, the stock is valued at 34x. Its stock price has appreciated by about 82 per cent from its 52-week low in October 2005. 
 

FINANCIALS
Rs crore	FY06	FY05	Change (%)
Net sales	3,788.46	1917.50	97.57
Operating profit	921.77	440.08	109.46
OPM %	24.33	22.95	-
Net profit	821.19	361.46	127.19
EPS (Rs)	29.99	14.21	-
Trailing 12-month P/E	-	-	34x

For FY06 the company has posted over 97 per cent growth in net sales to Rs 3,788 crore, while its net profit has increased by about 127 per cent to Rs 821 crore.