Stock Review: Suzlon Energy

 

Suzlon Energy is turning out to be one interesting turnaround story. After a couple of loss-making years, it appears to be gearing up its businesses, as reflected by its financial performance in 2011 so far. First it made an impressive turnaround in its financials in March '11 quarter, improvising upon its operating margins by more than 500 basis points y-o-y. The June '11 quarter also saw the company post impressive double-digit operating margins.

Suzlon registered more than 80% y-o-y growth in revenues in June '11 quarter while its net profit was impressive at . 60 crore against a loss of over . 900 crore in the June 2010 quarter. The raw material cost, as a percentage to sales, also declined by nearly 1000 basis points from 74% in June '10 to 64% in June '11, indicating the cost efficiencies being put in place. The company has also succeeded in keeping its wage costs in check, helping it considerably improve its operating margins.

Suzlon has maintained its guidance of achieving . 24,000-26,000 of sales in FY12, backed by its order book of over . 29,000 crore. Its acquisition of REpower can be construed to have played a major role in the turnaround. Nearly 62% of its current order book is from REpower. Suzlon is now in the final stages of acquiring the remaining 5% stake in the company from minority shareholders at an approximate cost of . 398 crore.

Even as a turnaround in visible, Suzlon's stock currently trades around . 34-36 on the bourses, i.e. its near 52-week low level. Over the past one-year, this counter has returned a negative 27% against the Sensex's negative 12%. Apart from the its weak financials in the past, a major concern that is holding back investors is Suzlon's huge debt which includes the foreign currency convertible bonds (FCCB) loan due for repayment next fiscal. The management, however, is optimistic about meeting its loan obligation, intending to fund it through operating cash flows, receipts from the stake sale in Hansen Transmissions (where it holds 26%) and also the expected recovery from one of its large US-based debtor by the second half of this fiscal. The company has a cash balance of over . 3,000 crore on its books as at the end of March '11 while its total debt stood at over . 12,500 crore.