Suzlon: Cost squeezes margins

Growth will be powered by the firm's consolidated order book position of Rs 16,328 crore

Suzlon leveraged strong growth conditions in its overseas operations in the September 2007 quarter, but a rising costs structure put pressure on its margins.

Thanks to its hedging strategy, the rising rupee on a y-o-y basis had a minimal impact on the company's performance in the last quarter.

The consolidated operating profit grew 63 per cent y-o-y to Rs 587 crore in the last quarter, while its income from operations expanded 74.5 per cent to Rs 3641.29 crore.

However, the second quarter results of FY08 are not strictly comparable with the corresponding period of the previous year as its financial results are being consolidated Repower Systems with a three-month lag. Suzlon had earlier acquired a 33.85 per cent stake in the Germany-based company.

Nevertheless, Suzlon's consolidated operating profit margin declined 110 basis points y-o-y to 16.1 per cent in Q2 FY 08.

Pressure on margins was due to adjusted raw material costs as a percentage of income from operations rising 90 basis points y-o-y to 64.6 per cent in the last quarter. The company had to grapple with higher metal costs on a y-o-y basis in the last quarter.

However, Suzlon's senior management did highlight that their contracts with customers include price revision clauses and they had judiciously hiked prices.

In addition, margin pressure was caused by a Rs 43 crore expenditure, incurred during the quarter, related to disruptions of wind turbine generators in parts of Maharashtra like Dhule and Sangli.

Meanwhile, Suzlon's total sales amounted to 683 MW in Q2 FY08 compared with 388 MW the previous year. Nearly 140 MW of sales in the September 2007 quarter related to orders in transit, implying the company had received the orders in Q1 FY08 but the profit stream was realised only in Q2 FY08.

Nevertheless, its exports amounted to 445 MW in Q2 FY08, out of the adjusted fresh sales of 543 MW in the last quarter.

The stock jumped 9.8 per cent to Rs 1741 on Tuesday, as the company plans to list its Belgium-based subsidiary Hansen Transmissions on the London Stock Exchange, shortly. In addition, the company announced a stock split, which is expected to improve liquidity in the stock.

Over the next few quarters, Suzlon's growth would be powered by its consolidated order book position of Rs 16, 328 crore as on October 20, 2007.

Also, the company has scaled up its integrated turbine manufacturing facility from the original target of 1,500 MW to 3,000 MW, in a bid to leverage strong global demand conditions.

This will result in Suzlon's global manufacturing capacity reaching 5,700 MW on completion of these expansion plans.

The stock trades at 44 times estimated FY 08 earnings (excluding the forthcoming listing of Hansen), given its high growth potential.

GAIL: Uncertainty on subsidy sharing

GAIL reported an improved performance in the September 2007 quarter as several divisions contributed on a y-o-y basis like petrochemicals, transmission services and LPG and liquid hydrocarbons.

In addition, analysts highlight a low base effect in the September 2006 quarter as its operations were affected by flooding in several parts of western India.

As a result, GAIL's operating profit grew 49.1 per cent y-o-y to Rs 878.3 crore in the last quarter, while its net sales improved 22.2 per cent to Rs 4528.9 crore.

Its operating profit margin also improved 350 basis points y-o-y to 19.4 per cent in Q2 FY 08. In the June 2007 quarter too, its operating profit margin expanded 160 basis points y-o-y to 24.5 per cent.

Operating profit margin growth in the last quarter was also aided by a lower subsidy burden shared by the company on a y-o-y basis.

For instance, the company has highlighted that it has provisionally provided Rs 260 crore in Q2 FY08 according to the subsidy sharing formula as compared to Rs 421 crore in the corresponding period the previous year.

Meanwhile, in Q2 FY 08, the company's natural gas transmission was 82.21 MMSCMD (million standard cubic feet per day of gas), up 17 per cent y-o-y and this growth was partially due to a low base effect in the corresponding period of the previous year.

Enhanced volumes transported helped segment profit of the natural gas division expand 20 per cent y-o-y to Rs 395.48 crore in the last quarter.

In the petrochemical division, its production was 97,000 tonnes in Q2 FY08, a growth of 33 per cent y-o-y.

Analysts also highlight marginally higher profit margins on a y-o-y basis for its repertoire of polymers and allied products. Segment profit of this division expanded 83.4 per cent y-o-y to Rs 319.53 crore in the September 2007 quarter.

Analysts expect only modest growth in the company's transmission and petrochemical business over the next few quarters. Also, there remains the continued uncertainty with regard to Gail's subsidy sharing burden.

At Rs 408 , the stock trades at nearly 14 times estimated FY08 earnings and leaves little room for further upside.