Stock Review: Suzlon Energy

Suzlon Energy, gripped by the global financial crisis due to its presence across geographies, with higher footprint in developed markets, is still going through challenging times. Lack of demand visibility, oversupply, dwindling order inflows and profitability pressures persist. The US and Europe contributed a substantial 32 per cent to 2009-10 volumes, though down from an average 47.5 per cent in 2007-08 and 2008-09.

Consequently, the company's net loss of `1,195 crore in 2009-10 widened to `1,281 crore in the first half of the current financial year. In addition to poor revenue growth, high overhead costs and huge depreciation and interest cost have been taking a toll on the company's financial performance. High debt burden buoyed the share of depreciation and interest cost in total sales to 11 per cent in the September quarter. The company's debt to equity ratio stood at 1.9 times.

However, there is a silver lining. Suzlon is witnessing strong traction in emerging markets like India, China, Brazil, Mexico and South Africa. It sees huge opportunities in the Indian market due to the regulatory support and robust demand. The order book grew for the first time in eight quarters to 1,550 Mw, mainly due to the domestic market that reported an all-time high order book of 693 Mw.

The management expects the domestic market to reach 2,000 Mw and 3,000 Mw in 2010-11 and 2011-12, respectively, and is confident of maintaining its leadership (over 50 per cent market share). The financial year 2012 is expected to see revival in global environment, which leaves room for upsides, helped by improved performance of its subsidiary, REpower, and associate company, Hansen.

The company is also focused on reducing debt burden (down from `12,452 crore and `11,693 crore in 200809 and 2009-10, respectively, to `11,070 crore as of the September quarter), which has been the biggest overhang on the stock.

However, analysts expect the company to report a loss in 2010-11 and maintain a 'sell' recommendation in the medium term, as growth in emerging markets will be insufficient to propel the overall dwindling growth, led by subdued developed markets.

The worst seems to be ending with increasing focus on emerging markets