Although recent order momentum signals a turnaround for Suzlon Energy in the next fiscal, its Q3 EPS of Rs -1.43 missed our estimate of Rs -0.07 on underperformance by German subsidiary REpower and notional FX losses (Rs -0.23/share). REpower’s underperformance was partly flagged when it reduced its FY11 Ebit guidance by 37% on December 22. Suzlon?s Ebita (sans REpower) was 12% below our estimates. However, there are signs of recovery in recent order wins from Caparo, Vedanta and Martifer.
We cut our FY11-12 shipment forecasts for REpower by 21%. However, this is more than offset by 34% increase in Suzlon?s FY12 shipment to 2.1 GW.
The company?s recent order wins are enough to achieve 45% of our shipment forecast and support a 28% YoY growth in sales in FY12.
More than 85% of Suzlon?s net debt is offset by the market value of its investments in REpower and Hansen ? solvency is not an issue, but liquidity is. Repayment of $ 390 million of convertible debt (FCCB) in mid-2012 is likely to be preceded by the sale of stake in Hansen as well as equity issuance.
We factor in a 50% conversion of FCCB maturing in 2012 at a steep discount. However, the company may pursue other avenues like fresh equity issuance or sale of a strategic stake. Order book momentum and a potential turnaround in FY12 suggest the worst may be over for Suzlon. A 44% increase in our FY12 OP (operating profit) estimate merits a higher price to book value multiple of 1.40x (1.13x earlier) and a neutral rating. However, as we inch closer to the debt repayment deadline in mid-2012, the company?s re-rating is likely to be postponed until it conveys a transparent plan to reduce its debt, or announces successful issuance of fresh equity.
Suzlon lagged local index by 40% over the last 12 months and we believe that the shares are underowned. As a result, any outperformance on order flow, profitability and, particularly, debt reduction may provide substantial outperformance.