Stock Review: SUZLON ENERGY

The sale of its 26.06 per cent stake in Netherlands-based Hansen comes as a positive development for Suzlon Energy, saddled with worry over high debt in the books. Not surprisingly, its stock jumped three per cent on Monday.

The deal could fetch AERotor Holding BV (the Netherlands-based wholly owned subsidiary of Suzlon) about `830 crore ($187 million). The stock's rise could be partly attributed to the deal's value, significantly higher compared to analysts' earlier estimate of `450 crore. The premium is 96 per cent over the closing price of Hansen at 33.75 pence per share on July 22. Analysts believe this could be due to Suzlon's 26.06 per cent voting rights in Hansen, typically enough to block special resolutions.

Nevertheless, along with the funds from the Hansen stake sale, access to funds worth `1,700 crore after the expected consolidation of REpower (another wholly owned subsidiary) with Suzlon and expected realisation of about 1,000 crore receivables from adebtor could help alleviate its debt concerns.

Tulsi Tanti, founder, chairman and managing director of the Suzlon Group, said, "This (the deal) is in line with our strategy to optimise and strengthen our balance sheet."

DELEVERAGE ROOM

Through the three sources of funds (see table), the company will have access to `3,500 crore, which with estimated cash flow from operating activities of `1,000 crore in 2011-12 will enhance cash availability to `4,500 crore. This will provide good liquidity to meet obligations.

"At this point, the biggest challenge for Suzlon is to raise funds for the potential redemption of legacy FCCBs (foreign currency convertible bonds) of $480 million ( `2,100 crore, conversion price ranging `76-98 per share), due in FY13/14," says Shilpa Krishnan, analyst at JP Morgan in her recent note on the company. About `1,770 crore are due for redemption in the next financial year.

Also, about 70 per cent of the total net debt of `10,200 crore (as of this March) is on account of higher working capital and capex. Sufficient liquidity and better working capital management could mean lesser reliance on bank funds for incremental sales. This will have a positive ruboff on profits, as it will not only keep a tab on debt levels but also interest cost.

PROFITABILITY

Meanwhile, after two consecutive years of reporting losses, analysts are expecting the company to report about `500 crore in profits in the current financial year and `900 crore in 2012-13. Notably, this turnaround is not just about the financial restructuring. Though still not comforting, the order book has also seen some improvement of late, leading to better revenue visibility.

This financial year, the company is expected to sell about 3,400 Mw of wind power equipment, 45 per cent higher as compared to last year's sales of 2,372 Mw. This and better realisation should translate into higher revenue growth of about 30 per cent annually over 2011-13 — Suzlon has reported a decline of 13 per cent in consolidated revenues in 201011. Higher sales mean the company will also be able to absorb its fixed cost, resulting in higher profits at the net level.

On the whole, this improvement in financials should rub-off well on Suzlon's stock, which at `54.5 trades at 10 times its estimated earnings and seven times its enterprise value, based on estimated numbers of 2012-13. At current levels, valuations look reasonable.