SUZLON ENERGY LTD

SUZLON ENERGY LTD

Asia’s largest and the world’s third largest wind turbine manufacturer in terms of market share, Suzlon provides end-to-end wind energy solutions. In 2006, Suzlon acquired Hansen Transmission (a global gear box player) for 465 million euros. Currently, it holds around 26.06% stake in it. In May ’07, Suzlon acquired Re-Power, a leading manufacturer of onshore and offshore wind turbines for 1.3 billion euros. The total capacity of the Group is around 5,000 MW.

Problem

Global meltdown:

Due to the global economic crisis, new installations declined between 25-50%, mainly in

the US and the European market (the US and Europe accounted for more than 50% in sales). In FY09, the combined order book from EU and USA was more than 60% of Suzlon’s total order book, which declined to 27% of the total order book in Q2FY11.

High debt burden due to acquisition of RE-Power:

In May ’07, Suzlon acquired RE-Power system AG (90%) for total consideration of 1.3 billion euros. Although the acquisition gave footprints to Suzlon to enter into the highly lucrative European market, the acquisition weighed heavily on the balance sheet. The total debt increased from r5,167 crore in FY07 to r12,667 crore in FY10, resulting into higher interest burden in a downturn environment.

Cracking of blades:

In 2008, the media reported the appearance of a common crack in the in-service S88 V2 turbines at c.5m from the hub fairing. These faults were observed in 172 blades. Suzlon announced a retrofit for 1,251 blades, a majority of which were sold in the US. Suzlon was forced to provide 450 crore towards the retrofit programme. The cracking of blades dented the image of Suzlon, which resulted in a decline in sales and volume of the company.

Signs Of A Turnaround

Increase in order book:

The order book fell by more than 50% at the end of FY10, both in domestic and international markets from 3357 MW to 1126 MW due to lack of orders and subdued demand from USA, Europe and other major wind markets. But in FY11 (YTD), Suzlon witnessed huge order inflows of 1043 MW, mainly from India (90%) and China (10%). After a

decline for the past 8-10 quarters, Suzlon is witnessing an uptick in its order book. The current order book of Suzlon stands at 1550 MW.

The company management expects the domestic market to reach 2,000 MW and 3,000 MW in 2010-11 and 2011-12, respectively and is quite confident of maintaining its leadership

Improving global scenario and focus on emerging markets:

The global wind industry, which saw a growth of 29% CAGR in new installations up to CY09, witnessed a decline in CY10 due to lower installations in US and Europe. But despite weakness in the developed  markets, key emerging markets like China, India Brazil, South Africa and Chile among others are showing promising growth, aided by favourable government policies.

 

Restructuring of debt:

Suzlon’s debt increased from  r5,167 crore in FY07 to r12,667 crore in FY10 due to the acquisition of RE-Power and higher working capital. Suzlon has taken significant steps to lower its debt. It has refinanced its debt with rupee loan of  r10,694 crore with a holiday of two years in principal repayment. Recently, the company successfully raised r1,188 crore through a rights issue. Suzlon’s net debt/equity declined from 1.9 to 1.48 as on 30th Sept ’10.

The increase in order inflow will help Suzlon to improve its capacity utilization and margins, going forward. Suzlon is available at EV/Capacity of 3.16 r/MW as compared to its international peers, Gamesa 4.35 r/MW and Vestas 2.77 r/ MW. 

With a discerning eye for finer details, an investor can actually spot companies that have the potential to outperform themselves in the long run and thus stay ahead of the race, despite a slack in business due to several factors, affecting the fundamentals.

Thanks & Regards 

Dev Purohit