The government has cleared the way for offshore wind energy development in waters up to a distance of 200 nautical miles within the Exclusive Economic Zones (EEZ) of the country.
The ministry of new & renewable energy (MNRE) has been authorised as the nodal ministry for use of offshore areas and the National Institute of Wind Energy (NIWE) as the nodal agency for development of offshore wind energy and to allocate offshore wind energy blocks, coordination and allied functions with related ministries and agencies.
Reports suggest MNRE expects Gujarat alone to offer a c. 100 GW of offshore wind potential. Cost of offshore wind development is c. 2.5xtimes that of on-shore. However, the plant load factor (PLF) of 45-60% is almost twice that of on-shore (25-30%). With offshore wind still a small share of total installations, it could take time for tariffs to come on a par with on-shore tariffs.
Our market research suggests early projects could take 3-5 years to become operational. Hence, material ordering prospects will likely emerge only over the medium to long term as technology becomes competitive.
Nonetheless, NIWE’s recent assessment of onshore wind energy potential at 302 GW (at hub height of 100 meters) implies significant long-term opportunities for Indian wind players.
As part of Senvion divestment deal, Suzlon has access to Senvion’s offshore technology (6.1MW turbine) for the Indian markets. Senvion is the third largest company by offshore wind installations in EU (c.7% cumulative EU offshore installation).
Reports suggest Suzlon is already conducting techno-commercial feasibility study for an offshore project in the bay of Kutch (Gujarat). Offshore technology access should allow Suzlon to tap business potential in this segment making it one of the key sector beneficiaries. Retain buy rating with unchanged target price of Rs 30. We use a DCF (discounted cash flow) model as we believe it better values the company during an earnings ramp-up phase.
Our fair value of Rs 30 implies a FY17e EV/ EBITDA of 14.4x. A slower-than-expected ramp-up in SUEL’s market share over next three years is a key downside risk.