Stock Review: Suzlon Energy

 

CAPITAL goods companies have shown a mixed performance during June 2010, with a reasonable topline growth but a decline in profits. The aggregate performance is largely impacted by the poor show of wind energy major Suzlon Energy. While the sales growth has further accelerated over the March 2010 quarter, net profit has marginally declined from a respectable double-digit growth by similar comparison.

   However, the outlook looks promising, considering the fact that the first quarter results are normally subdued for the companies. This is because the companies in the sector have largely project-based revenue and they book a higher part of revenues in later quarters. The recent moderation in raw material prices is also expected to support profitability.

   During the June quarter, sales for the sector grew 11% whereas profits fell 4% compared to the year ago. Though the results look below expectations, they are skewed due to the poor performance of Suzlon Energy, which has registered a sharp dip in its key markets and recorded heavy losses therein. The wind energy company alone eroded more than one-fourth of the aggregate profits of the sector, thus significantly affecting the aggregate performance.

   Excluding Suzlon's numbers, sales grew 17% and net profit 13%. The relatively-low profit growth implies pressure on margins due to increase in raw material prices. During the quarter, input costs rose 3 percentage points relative to sales. Other costs such as staff and depreciation increased 15-20%, thereby pulling down profits further.

   The top performers in the sector have been BHEL, Cummins India, Thermax and Exide industries. They have recorded profit growth in the range of 40-50%. Cummins and Thermax also recorded sales growth of more than 40%. The under-performers for the sector, apart from Suzlon Energy, are ABB and Siemens, both of which saw their profits fall to nearly half from the year-ago levels.

   The outlook for the sector looks reasonably certain with the pick-up in overall industrial activity and continued investment in power sector. The gradual softening in raw material prices also offers some comfort to the capital goods players since input costs account for more than half of the total costs. While there is no decline in order backlog for the top corporates, the challenge lies in execution of existing projects, which are held up or moving slowly due to either issues related to financial closure or regulatory or other co-ordination issues. It may be noted that BHEL and L&T, which together account for one-third of sectoral revenue, have a combined order backlog of more than Rs 2,50,000 crore. This offers some solace to investors in terms of future revenue visibility.