Tuesday, August 02, 2016

Suzlon Energy Ltd: Buy
CMP: Rs.17.15
Introduction: The Suzlon Group is one of the leading renewable energy solutions providers in the world with an international presence across 19 countries. The company has recently forayed into the solar space. Suzlon Ltd remains involved with the engineering, procurement and construction (EPC) work

(i) Suzlon Energy Ltd's consolidated net loss narrowed down to Rs.270.55 crore for the quarter ended March 31, on higher sales and lower expenses. The company had posted a consolidated net loss after share in minority interest of Rs.1,212.06 crore in the year-ago period. For the entire 2015-16 fiscal, the company posted a net profit of Rs.482.59 crore, against a net loss of Rs.9,157.69 crore in the previous financial year. Its FY16 revenue moved up by 69 per cent to Rs 8,259 crore. The company's annual sales volume was of 1,131 MW, had Y-o-Y growth of 149% and its FY16 order book stood at 1,243 MW valued at Rs.7,989 crore. The Consolidated Net Debt (excluding FCCB) during FY16 was at Rs.8,452 crore, down from Rs 14,570 crores in FY'15.

Tulsi R Tanti, Chairman and Managing Director, Suzlon, said, "We are back to profit, our commissioning increased by more than 100% and we are confident of maintaining the growth with strong focus on execution. The Indian market is expected to increase by 30% in FY17, and Suzlon will continue to outpace the industry."

"Globally, the demand for renewables is growing with a record 64 GW installation and an investment of USD 329 billion during calendar year 2015. The demand for clean, sustainable and affordable power will continue especially in emerging markets," Tanti said.

(ii) Suzlon has its research and development centres in Germany, Denmark, the Netherlands and India and has recently opened a Blade Science Center in Vejle in Denmark. The Pune-headquartered group has installations of around 15.5 giga watt (GW) spread across 17 countries, of which India accounts for the lion’s share of about 9.5 GW.

(iii) Renewable sector, currently a beneficiary of several indirect tax exemptions, may be a big loser if goods and service tax (GST) is implemented since the bill proposes to revoke most of these exemptions, according to Bridge to India. Bridge to India, a renewable analyst house, feels if GST is implemented, input cost or tariff will rise by anything between 12-20% in the sector and this would wipe out the pricing gains of the past two years. Costs would rise because at present there is no import duty or indirect tax is applicable on solar modules but under the new regime, GST of 17-20% would be payable thus increasing costs.

However, the Ministry of New and Renewable Energy (MNRE) is in dialogue with the Department of Revenue to ensure that renewable power equipment is exempted from GST. MNRE is believed to be pushing for a waiver from GST arguing that a sudden increase in cost would lead to disruption in the sector and delay implementation of policy targets.

Bridge to India is of the opinion that the solar sector has a strong case for an exemption. The government has put strong focus on the sector to achieve a diversified set of policy goals including energy access, energy security and climate change mitigation.

(iv) On July 26, 2016, the World Bank forecasted that Brent and WTI will average $43 per barrel in 2016, up from the previous estimates of $41 per barrel for the same period. Crude oil prices will trade higher due to crude oil supply outages and higher crude oil demand in 2Q16. Crude Oil prices is directly proportional to the Wind Energy.

(v) Hong Kong based CLP Group (formerly China Light & Power),the largest overseas investor in power in India, has forayed into the Indian solar energy market by acquiring 49% stake in Suzlon Energy 100 mw project in Telangana (enterprise value at around Rs.760 crore.) the two companies said in a joint statement, couple of months back.

While the two companies will develop the project at Veltoor in Telangana in a joint venture, under special purpose vehicle namely SE Solar, CLP India will have the option to acquire the balance 51% stake later.

This news has already given a big boost to the domestic solar power industry, underscoring global interest even in secondary market brownfield or even greenfield growth opportunities. An estimated 10,000 MW of solar and wind projects are believed to be on the block, seeking equity investments to the tune of Rs 20,000 crore, according to sector experts.

The project already has power-purchase agreements signed at Rs.5 and 59 paise per unit -- a significant advantage, considering tariff costs in renewable energy have been going southwards in the last few months. Experts say such deals are just the beginning and more will follow, as consolidation in the renewable energy space gathers steam.

But Investors have been rather nonchalant about Suzlon Energy Ltd’s announcement that it has divested 49% stake in a venture for Rs.73.5 crore. According to Pawan Parakh, an analyst at HDFC Securities Ltd, the sale amount indicates a project cost of Rs.750 crore, implying a per MW value of Rs.7.5 crore, a premium to the estimated cost of Rs.6 crore per MW.

It is Suzlon’s first project in the solar energy space. The transaction can set a benchmark for the rest of the solar power projects the firm won and plans to dispose of after execution. The entry into solar by Suzlon is partly to convince the market that it is spreading the risks.

(vi) Nomura maintains a buy rating on Suzlon Energy with a 12-month target price of Rs.24. The global brokerage firm remains positive on the stock especially from a long-term perspective.

(vii) Suzlon Energy has very recently acquired five small solar companies for an undisclosed sum to implement various renewable energy projects across the country.

(viii) Tushar Pendharkar, head of research at Right Investment Advisory Services, says Suzlon is on the right path. "In my view, company is on track and could get the maximum benefit out of the government’s ambitious plans for renewable energy. There is still enough room for business growth and we believe that the demand for wind turbines is still at a very nascent stage in India,” said Pendharkar.

“For diversification, the company has also entered into solar EPC (engineering, procurement and construction), which I believe could be a good move, considering the government is focusing more on solar rather than wind.”

(viii) According to a report published by the Morgan Stanley analysts, the industrial manufacturing is likely experience a positive impact due to the implementation of the GST. In this context, the shares of Suzlon Energy Ltd' looks attractive.

Conclusion: Analysts expect the recovery in service revenue and further reduction in interest costs to drive Suzlon back into profit in the current fiscal year. Struggling to repay Rs.9,500 crore of loans, Suzlon was given a two-year moratorium on principal and interest payments and additional working capital as part of a debt recast in 2013. The company is using its engineering and project execution skills to duplicate its wind energy business model, where it developed projects and took over all execution risks and then sold stakes to investors.

Therefore, buy the shares of Suzlon Energy Ltd at Rs.17.15, for a target of Rs.21, with a SL of Rs.14. If GST gets passed, with a surprise positive incentives from the GOI, the stock could even touch Rs.24 in the short term.
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