Suzlon had dismal Q4FY10 with a recorded loss of Rs 1.9 billion versus a profit after tax of Rs 2.5 bn in Q4FY09 as it missed its guidance by 22%. This was led by uneconomical operations resulted from dwindling backlog (-22%), client driven push back in sales -38%YoY, fall in WTG volume (ex-REpower) and 3.8x higher tax expense. FY10 ended with a loss of Rs 11.9 billion vs the recorded profit after tax (PAT) of Rs 10 bn in FY09. With little recovery in sight, Suzlon has fixed its debt repayment obligation by refinancing $2.3 billion debt/non-fund limits with two-year moratorium. We cut our earnings per share (EPS) to a loss in FY11E and 37% FY12E on continued weakness in US gas /power prices leading to delay in delivery, longer order conclusion cycle and cut our PO to Rs 59 (Rs 66). Maintain Underperform rating. Upside risk to our rating is a pick-up in global wind markets.

Suzlon (ex-REpower) had weak execution in Q4FY10 with -40% year-on-year (YoY) volume led by International volume (-64% YoY) on push-back of projects in US/China while domestic volume recovered on regulatory support. RE power profit of Rs 520 million (against Rs 890m in Q4FY09) was the only positive.

Business continuity remains our key concern for Suzlon and 23%YoY fall in FY10 order book (In our view, Suzlon?s backlog is not enough to address business continuity concern as the company has begun FY11E with backlog of 1.1 gw (new low in B-T-B of 0.5) against our volumes of 2,155 mw in FY11E ex-REpower. Realising this, Suzlon is proactively addressing the debt-to-equity ratio (D/E) situation by announcing rights issue to convert promoter debt into equity & fixed the debt repayment challenge with a two- year moratorium in its $2.3billion debt refinancing.

Suzlon Energy is the fifth largest wind manufacturer in the world with a 10% global 50% marketshare in India. Its global delivery model, market leadership in India and approach to globalisation are some of competitive advantages. The company maintains the competitive advantage by focusing on Europe, production being made in low-cost countries and focusing on sales in high-potential countries.

We rate Suzlon Underperform on weak wind markets ahead leading to lower outlook and development of secondary market for turbines in India, which could create potential risk to its volumes.

Longer term, we expect Suzlon to emerge as the third largest global wind turbine company by FY12 led by a) multiple expansion in markets, b) maintenance of its 50% marketshare in India c) access to ‘windy’ sites, the concept-to-commissioning model and control over component supply, and d) its global delivery model.

?BoA Merrill Lynch