Stock Review: Suzlon

 

The recovery in Suzlon's performance that began two quarters ago, is expected to continue in the current fiscal. This is reflected from the company's strong revenue guidance for FY12. However, rising finance charges due to higher interest rate regime and increasing competition especially from Chinese vendors may dent profitability.

Suzlon, the country's leading wind turbine supplier, reported a sharp improvement in its net profit at . 431 crore in the March 2011 quarter from a net loss of . 188 crore a year ago. This was boosted by an accounting adjustment of . 109 crore pertaining to its subsidiary REpower and forex gain of . 220 crore.

Its consolidated revenue rose 20% to . 7,400 crore. Since this included . 975 crore due to the REpower accounting adjustment, overall operating margin before depreciation escalated 500 basis points yoy. In absence of this adjustment, margin would have expanded by over 200 basis points. The company has guided for 44% increase in FY 12 revenue following the 60% jump in its order backlog of . 30,100 crore. Though this ensures revenue visibility, the challenges are aplenty. Suzlon carried a huge debt of over . 12,600 crore in FY10. This was to finance the acquisition of Belgium-based Hansen in FY07 and Germany's REpower in FY08. With rising interest rates, the company's interest outgo is likely to increase thereby putting pressure on its bottomline. As such, the company has asserted a 60% jump in its order book to . 30,100 crore which is about 1.2 times its FY12 revenue guidance. But whilst there is a revenue visibility, the same is not sans challenges, with rising interest rate posing a big threat to its leveraged balance sheet. The company's debt would further increase given it just raised fresh loan of $175 million through foreign currency convertible bonds. The proceeds will be used to buy the remaining 5% stake from REpower's minority shareholders. The impact of climate change on demand for wind energy and volatility in prices of fossil fuels are some of the long-term concerns. The company's stock has gained over 5% in the last three months compared with the 1% drop in the benchmark Sensex. Its future performance will largely depend upon how well the company tackles the cost pressures and increasing competition.