Suzlon IPO

Suzlon Energy is leveraging on the current euphoria for players involved in the power capex cycle. The issue size is between Rs 1,250 crore and Rs1,500 crore, based on a price band of Rs 425-Rs 510. Based on Suzlon's consolidated earnings per share for FY05, the issue is priced at avaluation of 30 to 36 times. Of course, other power equipment players too enjoy rich valuations. For instance, ABB gets a discounting of about 47times trailing earnings till March 2005 and in case of Siemens India it is41 times.
 
It's important to note here that when private equity investors Citicorp and ChrysCapital had picked up a stake in the company last year (in April and August respectively), the acquisition was at a valuation of about 4-4.5times 12-month earnings till March 2004. In share price terms, Citicorp and ChrysCapital's acquisition price worked out to Rs 24 on an average, andbased on the lower end of the price band of Rs 425, Suzlon's valuation has gone up about 1600 per cent in the past 12-18 months. Earnings, in fact,have risen at a much lower rate of 150 per cent in the year ended March2005.
 
 Merchant bankers to the issue point out that Citicorp and ChrysCapitalinvested in Suzlon while the company was still in its investment phase and were partly responsible for the growth that has occurred since last fiscal.Moreover, although they invested only last year, they had committed capital even earlier. On the other hand, two other foreign investors bought Suzlonshares at an average Rs 385.6 a share this year. While that gives some comfort, the fact that the company's valuations have increased sharply inthe past 12 to 18 months is a cause for concern. Assuming that the highgrowth in the past two years continues, the stock would look reasonablypriced on forward PE multiple basis.
 
 Suzlon is one of the largest players in the domestic wind turbinegenerators segment, with a 42 per cent market share. A key growth impetusfor Suzlon has been rising cost of inputs such as coal in conventionalpower generating equipment and the resulting need for user industries toevaluate alternative energy sources. Riding piggyback on this, thecompany's revenues grew 126 per cent and profit before tax and exceptional items grew 227 per cent to Rs 397.3 crore in FY05. Profit growth hasexceeded income growth thanks to efficiencies realised in the southern partof the country from the setting up of a factory in Pondicherry. Operatingprofit margin grew 723 basis points to 24.14 per cent in the previousfinancial year.
 
 An energy consultant BTM Consult ApS has estimated that installed windpower capacity in the country is set to grow at a compound annual growthrate of 23 per cent from CY05 levels to 8300 mw by CY09. The company plansto use part of the resources (about 50-60 per cent) raised via its floatfor expanding its manufacturing facilities, capitalisation of subsidiaries,redemption of preference shares allotted to private equity investors andsetting up a corporate learning centre.
 
 A key concern, going forward, remains the government policy on fiscal andtax benefits to promote alternate energy sources. For instance, in FY03,the company's net sales had halved on a y-o-y basis to Rs 269.7 crore, oneof the main reasons being the uncertainty relating to announcements of new depreciation rates. The company's profit before tax and exceptional itemshad fallen 81.7 per cent to Rs 22.7 crore. Senior company management highlighted that alternative energy sources are now cost-effective thanksto advances in technology and the importance of fiscal and tax benefits has been declining.

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