Stock Review: Suzlon

SUZLON Energy continues to face tough times, as evident from a sharp decline in consolidated sales for the quarter ended June 30, 2010, despite the optimism shown over the past few quarters. The company also recorded its first losses at EBITDA level, another indication that its operations are under pressure.

   On a standalone basis, sales figure is barely a third of its March 2010 quarter performance, even though it shows a sharp growth on year-on-year basis due to the base effect. The company's outlook remains bleak as there is still no sign of a pick up in orders.

   The company's revenues declined 42% during the June quarter. This happens to be its fourth successive quarter of decline. The extent of volume erosion over the past few quarters is evident from the fact that the June quarter revenue is only a little over one-third of the average quarterly sales achieved in FY09. Raw material costs recorded a significant decline, almost as much as the sales. Despite this, the company recorded operating losses on account of forex losses and higher costs. Profitability took a severe hit due to dwindling sales and a high fixed-cost component in the cost structure. The company reported a net loss of over 900 crore, its sixth in the past eight quarters and nearly equal to FY10 full-year loss.

   The company has been taking various measures to reduce its fixed-cost burden over the past few quarters. It sold a part of its stake in subsidiary Hansen in November 2009 for 1,700 crore. The company had also come out with a rights issue in June 2010 to clear some of its debt. The company managed to raise around 1,200 crore through the offer, but had to undergo equity dilution of around 12%. It may have to take further measures such as selling the remaining equity in Hansen, or explore options to sell some stake in its major subsidiary, REpower, to reduce the burden on its balance-sheet.

   While there was some optimism arising out of governmental support to green energy sources in the company's key markets, the outlook has turned bleak now with the crisis in European economy and resultant focus of various governments on tightening their belts. The Indian market seems to be doing reasonably well for the company. But its contribution to the company's aggregate sales is less than one-fourth and is not enough to compensate for the subdued business environment in the company's major markets.