Suzlon Energy

The recent market decline has provided an attractive entry opportunity to the Suzlon Energy stock. An investment can be considered in the stock with a time horizon of 2-3 years. At the current market price, the stock trades at about 24 times its expected per-share earnings for FY09.

A strong order book, ongoing capacity expansion, and infusion of IPO funds into subsidiary Hansen Transmissions provide considerable visibility to the company’s earnings over the next few years.

Strong growth in volumes in the quarter ended December 2007 alleviates fears arising from a decline in profits. Suzlon Energy’s numbers threw a negative surprise this quarter; but this was attributable to one-off expenses such as relocation cost of projects and taxes incurred in certain hedging transactions.

Suzlon is now a fully vertically integrated energy equipment provider — a status that very few global players, such as Gamesa have managed to achieve. Apart from better management of costs, vertical integration is the key to handling supply disruptions — a major concern for many players in the wind energy equipment business.

The capacity expansion plan also appears to be on track and is expected to be in place by mid-FY09. The leverage on Suzlon’s balance sheet may receive some relief with the successful IPO from subsidiary Hansen, which had massive capex plans hitherto nurtured by the parent.

Removal of uncertainties surrounding the acquisition of REpower also strengthens Suzlon’s prospects for increasing its share in the promising European market.

Of the Rs 17,080-crore order book (December 2007), exports account for close to 85 per cent. Increasing exports and manufacturing units in other countries may result in a gradual compression in the high profit margins so far enjoyed by the company.

However, while Suzlon may not be able to achieve operating profit margins of over 20 per cent enjoyed earlier, we expect the company to maintain OPMs in the 12-17 per cent range due to backward integration. This would still remain superior to some international players.

A key risk to demand for wind turbines may arise from the deadline of December 2008 for the production tax credit, an incentive extended to wind energy projects in the US, which has not been reviewed so far. It is expected that this may still be passed in legislation in some other form. Initiatives by the European Union to encourage clean energy sources may also open up alternative markets in case of a slowdown in offtake in the US.