Suzlon Ltd: Some Discussions
Suman Mukhopadyay
It is a well known fact that Suzlon Ltd is suffering from two key issues: (i) FCCB issue of $ 56.9 Cr--in the current year (FY13), the company needs to repay holders of its foreign currency convertible bonds $36 Cr in June and $20.9 Cr in October;
But how much are they of any concern given the current fundamentals of the company. Let us examine a bit of the story:
(i) Suzlon Ltd is India's largest wind turbine manufacturer and hence comes under the blue chip umbrella in the sector. Thus it should get premium valuations, as compared to its peers.
(ii) It is expected to garner about $4 Cr by selling its non-core assets, by May, 2012, after completion of due diligence and requisite approvals. So, this looks, penny as compared to the $56.9 Cr of FCCB issue. However, according to Financial Times Deutschland, Alstom has been given exclusive access to financial data of REpower which may be sold to the company for 1.5 billion euros ($2 billion). Now $2 billion is equivalent to $200 Cr, while the FCCB part is only $52.9 Cr (after taking into considering $4 Cr of non core asset sale). So, it shows that Suzlon Ltd need not have to sell the entire stake in REpower also it would not be prudent for Suzlon Ltd to consider complete exit in REpower, because it is the biggest growth driver for the company. Now the art lies how Suzlon Ltd's managements convinces any strategic investor to take a minority stake in the company. Therefore, as such we see FCCB is not that a major issue as it is make out to be by our media guys. Also, according to a brokerage report: The repayment options has been considered by management to be Rs.1.24 bn (Rs.1 billion= 100 Cr) from operating cash flow, Rs.4.96 bn from sales of assets, Rs.9.93 bn receivables (Edison in US) and Rs.4.96 bn cash in hand. The consolidated Debt however, on the books is Rs.137 bn.
(iii) The company has an order back log of around Rs.390 billion (1 Billion= 100 Cr) as of now. This when translated into crores comes as Rs.39, 000 Cr. Now the total FCCB issue to be solved after the non-core asset sale is only $52.9 Cr--so does it pose too much problem for the company?
(iv) Now if the order book position for FY13 is around Rs.39, 000 Cr, then at a market cap of only Rs.4167.92 Cr does it look too expensive, if the orders are executed at the correct time? Moreover, Suzlon Group reported 1,490 MW of highest ever order inflow in Q3FY12 among the geographies like India, North America, Europe and Brazil that improves visibility for FY13E. Further, management is hopeful to receive ~Rs.250 bn (~Rs.25, 000 Cr) new orders in next 12 months, according to a brokerage firm. So, does the CMP of Rs.24-25 (Face Value: Rs.2) justify its actual valuations?
(v) Around 2-3 months back there were media reports that, Suzlon Ltd along with Bharat Light & Power Pvt Ltd, and another company called Greenshore Energy, have shown interest in putting up large-scale (huge projects, of around 500 MW each) wind farms in the seas near Tamil Nadu. The advantages of offshore wind farms is that they produce more power at a given location as compared to onshore plants--it is because of the perennial winds, the machines operate throughout the year. Further, since the sea surface is flat, the energy output for a given wind velocity is higher. A business daily quoting their sources have said, that the three companies have requested Tamil Nadu to help in securing the necessary approvals from the Union Government. So, if once implemented will it not give massive valuations to the company?
(vii) According to a brokerage house: Suzlon Ltd's REpower asset is one best wind power assets in the world as of now. Moreover, looking at their order-book to the trailing sales, we find that its order book is closer to 2.5 to 3 years, which is the highest in the industry. Across the world, companies like Vestas, Gamessa, Suzlon and other players do not have order book more than a year, precisely they have less than a year may be. Moreover, with domestic demand in India in the Wind Turbine business growing rapidly, Suzlon's balance sheet is likely also improve going forward. So, does it sound too much fearful, considering the debts on the books? I do not think so.
At end let us see what the UBS says regarding Suzlon Energy Ltd: Suzlon has been one of the best performing stocks in our capital goods coverage universe (up 74% YTD) largely due to improved order book. In Q 3FY12, Suzlon’s order book increased to 5.8 GW (up 22% q-o-q). In rupees, the order book is Rs.37,200 crore (versus Rs.32,300 crore in Q2FY12). Despite its recent out-performance and the FCCB overhang, we believe the risk reward is favourable.We think:
1) large new orders address the issue of survival to some extent; and
2) the company should be able to manage the repayment of FCCBs.
These are the two main reasons for our upgrade. The FCCB repayments remain an overhang as the due dates for repayment approach. The repayment of the FCCBs (near-term) is to be done in two tranches for the total value of ~Rs.3,000 crore—one in June 2012 and another in October 2012. Funding of the FCCB repayments remains a major concern for investors. In the recent conference call, the company had highlighted some of the sources through which it plans to fund these repayments: 1) From its current cash surplus, $100m ($10 Cr) can be fully utilised for this after factoring in the day-to-day requirement. The company highlighted that it has recently been sanctioned Rs.1,100 crore as incremental working capital facilities. It also plans to sell some assets for a total of $100m. It expects to generate FCF of US$250-300m in the next 9-12 months from faster execution of orders forming part of the order book. The company believes that a major chunk of its current order book will be executed in FY13. This has led to it expecting ~40% top-line growth (versus UBS estimate of 25%).It is in talks with Edison Wind for speedier release of the receivables of ~$200m/R1000 crore due to Suzlon.
Suzlon Ltd however, lowered FY12 revenue and EBIT margin guidance slightly to Rs.21,000-22,000 crore(from Rs.24,000-26,000 crore) and 5-6% (200bps decline), respectively, on lower-than-expected volumes in 9M FY12. The company expects 40% top-line growth for FY13.
We upgrade our rating to buy as we believe that the current risk reward profile is favourable. Our DCF-based price target is R.45.
At end let us see what the UBS says regarding Suzlon Energy Ltd: Suzlon has been one of the best performing stocks in our capital goods coverage universe (up 74% YTD) largely due to improved order book. In Q 3FY12, Suzlon’s order book increased to 5.8 GW (up 22% q-o-q). In rupees, the order book is Rs.37,200 crore (versus Rs.32,300 crore in Q2FY12). Despite its recent out-performance and the FCCB overhang, we believe the risk reward is favourable.We think:
1) large new orders address the issue of survival to some extent; and
2) the company should be able to manage the repayment of FCCBs.
These are the two main reasons for our upgrade. The FCCB repayments remain an overhang as the due dates for repayment approach. The repayment of the FCCBs (near-term) is to be done in two tranches for the total value of ~Rs.3,000 crore—one in June 2012 and another in October 2012. Funding of the FCCB repayments remains a major concern for investors. In the recent conference call, the company had highlighted some of the sources through which it plans to fund these repayments: 1) From its current cash surplus, $100m ($10 Cr) can be fully utilised for this after factoring in the day-to-day requirement. The company highlighted that it has recently been sanctioned Rs.1,100 crore as incremental working capital facilities. It also plans to sell some assets for a total of $100m. It expects to generate FCF of US$250-300m in the next 9-12 months from faster execution of orders forming part of the order book. The company believes that a major chunk of its current order book will be executed in FY13. This has led to it expecting ~40% top-line growth (versus UBS estimate of 25%).It is in talks with Edison Wind for speedier release of the receivables of ~$200m/R1000 crore due to Suzlon.
Suzlon Ltd however, lowered FY12 revenue and EBIT margin guidance slightly to Rs.21,000-22,000 crore(from Rs.24,000-26,000 crore) and 5-6% (200bps decline), respectively, on lower-than-expected volumes in 9M FY12. The company expects 40% top-line growth for FY13.
We upgrade our rating to buy as we believe that the current risk reward profile is favourable. Our DCF-based price target is R.45.
Therefore considering all these things, I find that the shares of Suzlon Ltd are capable of moving near its book value of Rs.38.11 in the near future. Prudent investors should take delivery of the shares and keep holding for some time for some decent gains going forward.
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