Stock Review: SUZLON Energy

SUZLON Energy's performance in the December 2010 quarter was disappointing. However, a good pipeline of projects bagged by the company recently might start driving revenues, and thereby profits, from FY 2012 onwards.

   On a consolidated basis, the company reported revenues of 4,433 crore during the quarter, down by 21% year-on-year (YoY) due to a slowdown in its subsidiary RE Power. The revenues of the subsidiary, accounting for 43% of the consolidated top-line, were down 23% to 1,903 crore on account of slow execution. This also impacted the operating margins, which shrank by almost 80 basis points to 4.1%. Currency conversion losses of 63 crore further burdened the bottomline. The company, therefore, reported a loss of 253 crore as against a profit of 14.1 crore in the same quarter last year.

   Another concern is the 2,200 crore of foreign currency convertible bonds, which are set to mature in two tranches in June 2012 and October 2012. The conversion prices for these bonds have been brought down to 97.3. However, considering that the conversion price is more than twice its current stock price of 45.6, the conversion of this debt appears difficult.

   Even after diluting its equity by 14% so far in the current fiscal, the company's debt-equity ratio of 1.5 at December end is not different from that at March 2010. This was mainly due to its heavy losses in the ninemonth period. With the debt burden of 12,000 crore in its books as on September 2010, the company will feel the pressure of rising interest rates as well as principal repayments.

   There were some positives in the result. Its wind power business, which contributes almost 57% to the company's topline, rose by 2.3% YoY. Operating margins in this segment improved by 800 basis points to 5% during the December quarter. Similarly, the company bagged additional orders aggregating 1,448MW from domestic market and Brazil. This took the company's order book to its highest ever at 33,500 crore. Many of these orders are expected to start generating revenues by FY 2012. For instance, half of its 1,000 MW order signed in January with Caparo Group is expected to be commissioned by March 2012 and the remaining by March 2013. Its 218MW turnkey project in Brazil with the Martifer Group is scheduled to complete by June 2012.

   The company will benefit from the increased order flow from both the emerging and developed markets. But, given the economic woes in the European region, it might take some time for the renewable energy demand to pick up.

   Within emerging markets, the company will benefit from the change in regulations. For instance, the Brazilian government's push for diversification in energy generating assets is leading to higher demand for windmills. The changes in Indian government's incentive policies that allow higher revenues from renewable energy certificates and generation based incentives in lieu of accelerated depreciation, are set to make wind power generation more lucrative. With Suzlon commanding a 50% market share within India, these changes augur well for its future.