Strong execution and operating leverage led to beats at all levels. However, the significant jump in inventory and receivables was a cause for concern (though management claims this is to support higher execution in 2HFY17).
WTG sales at 353 MW (+56% y-y) are significantly ahead of our estimate of 240 MW, leading to beats at the key numbers. Inventory and receivables are up R4.0 billion and R10.5 billion, sequentially, leading to overall working capital days rising to 86 days (on trailing 12 month sales) against 61 days at end of 1QFY17.
Management claims the increase in inventory by R4.0 billion is to support expected strong uptick in execution in 2HFY17. Gross margins strong at 47% but EBITDA margin at 21%, much stronger than our estimate.
Sales at R27.5 billion (+57% y-y), were ahead of our R19.5 billion forecast. EBITDA at R5.9 billion (+101% y-y), was ahead of our R2.8 billion forecast.
PBT (before exceptional items) at R2.1 billion, was ahead of our estimate of R0.9 billion loss. Increased execution and order inflows are long-term positives for the stock.
What do the results mean?
Execution stronger than expected: Overall 1HFY17 execution came in at 557 MW, up ~29% y-y. Management highlighted that 1H of a typical financial year accounts for 30-35% of annual sales and expects a strong pick-up in execution in 2HFY17.
Order inflows improved to
283 MW from 166 MW at 1QFY17 but due to increased execution order backlog fell to 1,136 MW from 1,243 MW at end-1QFY17.
Net debt up by R4.0 billion q/q: Non-working capital net debt fell from R69.6 billion to R66.5 billion in 2QFY17 but was more than offset by a sharp rise in working capital debt to R31.9 billion from Rs 24.8 billion at end-1QFY17.
We value Suzlon using a DCF methodology (Ke at 13.5%, g at 5%) to arrive at a TP of R24. Key risks: Withdrawal of key incentives like GBI; the working capital cycle is long and could delay FCF generation at times; and land acquisition, grid infrastructure and state discoms’ health are key bottlenecks for rapid growth of wind business in India.