Saturday, January 21, 2012
A BUY recommendation on Suzlon Energy at this point of time may raise the eyebrows of many of my readers.But I feels the risk reward ratio warrants a re-look on this wind power major in current situation.Suzlon was a shining star in Indian stock market till 2008.Then the company decided to take over a German Wind power company RE Power mainly to acquire the latest technology and designing capabilities owned by that company. There were many blade cracking issues at that time against Suzlon and the latest technology was inevitable to tide over these problems.As per the German laws technology transfer is not permitted if the company is not a 100 % Subsidiary. So suzlon forced to buyout the 100 % stake in RE Power which stretched the balance sheet of Suzlon with higher debt .On the other side ,company's business went through a tough time mainly because of the western recession which started in 2008.Whenever the recession starts cost of conventional energy sources like crude ,coal ..etc nose-dives and non conventional sources become less attractive. Such a situation created problems not only for Suzlon but all non conventional energy related firms.Suzlon posted losses in 2009-2011 period and even the existence of the company became a big question mark.Series of these incidents bring down the share price of this once considered blue chip from Rs.415 to just Rs.17/- ( after adjusted FV split) in this January. In order to tide over the difficult situation company even sold its acquired stake in Hansen transmission ..etc .
Now Suzlon is left with a debt of around Rs.11000 - 12000 Cr including the FCCB re payment liabilities.No doubt it is a real concern .But we should not ignore the positives as well and also the crash of its share price during this period due to these negatives.After a sharp crash in energy prices during the recessionary period , now it again started to move up with a vengeance .Coal and crude prices moved sharply even only with small signs of recovery in US economy .In 2007-08, the cost of one unit of power from wind energy was Rs. 5,compared to Rs. 2 to Rs. 2.75 for coal.Today, the cost of wind power has come down to between Rs. 3.25 and Rs. 3.5, while the price of power from coal has increased to Rs. 3 to Rs. 3.10.This situation is expected to continue in favor of wind power in coming years.This is one of the biggest positive for the entire industry and such a situation will surely increase the order flow to Suzlon which is considered as one of the word's low cost producer of wind turbines.Considering the policy paralysis in power sector ,no doubt India will face severe power shortage in coming years which may open up big opportunities for companies like Suzlon. The recently introduced wind turbine S9X which is designed for low wind area is receiving very good response from the customers. After many many years , now company is reporting good order flow on a consolidated basis and it crossed 5 GW for the first time after 2008 . This increases the visibility of cash flows and it is expected to post a profit of Rs 450- 500 Cr in current year and Rs.700 Cr in next year on a consolidated basis.This cash flow along with their plans to sell some non core assets and cash reserve of about Rs.1700 cr with RE power and about Rs.1000 Cr receivables from its debtors are expected to help the company to tide over the debt trap.Company management also expressed their confidence to reduce debt equity ratio in coming years.Regarding the selling of 2 % promoter stake in November ,Mr Tulsi R Tanti MD of Suzlon categorically cleared that the selling was a one-off event and will not repeat in future.Even after the selling still promoters are holding about 52 % stake in the company.Out of this 52 % stake about 94 % is pledged .But it is a point to note that 90 % of these shares are pledged as a secondary security and chances are very rare to come this shares in to market even if there is a fall in its share prices.All together I strongly feels that the worst is over for Suzlon and company will be able to repay its debt if something worst is not happening in Western economies again .Company's share price is expected to re-rate with the full year results and repayment of first installment which will happen in June of this year.An early improvement of European economies will surely help Suzlon a lot to capture the past glory.If the management can keep the promises of their decision to not sell the shares in open market again - at current market price of Rs.24 / - the risk reward ratio is positive for an investment.
Disc :I have vested interest in Suzlon