Suzlon Energy

 

 

Suzlon Energy's stock has significantly underperformed the indices in the last one year, as well as the recent past. After the announcement of a poor March quarter result on Saturday, its stock fell by about nine per cent.

The company reported a significant decline in revenues, along with a loss of Rs 983 crore in 2009-10 (Rs 188 crore for the March quarter). More important, in terms of volumes, the company could manage sales of 1,460 Mw in 2009-10 due to delays and postponing of projects, which significantly lowered its earlier guidance of 1,900-2,100 Mw.

Low visibility

Suzlon's woes seem far from over. Among key concerns is the decline in its order book (pending orders) to 1,126 Mw in May 2010, compared to 1,463 Mw at the end of 2008-09. Out of the current order book, about 900 Mw of orders are to be delivered in the current year. Should the flow of new orders remain weak (a good probability), it would mean lower revenue visibility for the company. To sustain its order book, Suzlon needs 50 per cent order inflow growth in 2010-11, according to Inderjeetsingh Bhatia, an analyst at Macquarie Research. However, with demand from its key markets – the US and Europe (which account for 32 per cent of revenue) – expected to remain poor, the flow of new orders is unlikely to be strong.

Profitability pressure

Lower order intake will make it difficult for the company to come out of the red in the current year, considering it will continue to incur high interest expenses. For 2009-10, Suzlon reported a consolidated earnings before interest, taxes, depreciation and amortisation (Ebitda) of Rs 943 crore, which was not enough to cover its interest expenses of Rs 1,195 crore.

For 2010-11, too, its interest expenses are likely to remain at elevated levels even after considering the proposed Rs 1,300crore rights issue that will help lower the company's debt from Rs 10,608 crore in 2009-10. Further, on the back of increasing competition along with the under utilisation of its capacities, margins are expected to remain under pressure. The company's consolidated operating margins dropped to 4.6 per cent in 2009-10 from 10.8 per cent last year.

Outlook

While concerns over high debt and a weak demand outlook persist, expectations of subdued earnings in the current year have led analysts to cut their share price estimates for Suzlon to about Rs 45-55.

Although investors could do better in the long run, considering that analysts expect Suzlon's performance to improve in 2011-12 and 2012-13 when the company is expected to report earnings per share of Rs 3 and Rs 6 respectively, its medium-term prospects continue to be bleak.