SUEL expects near-term growth led by market share gains. Management focus shifting towards improving profitability. Management expects technology upgrades, hybrid wind-solar projects and international business to drive long term growth: We hosted Suzlon Energy Group CEO JP Chalasani and CFO Kirti Vagadia in Singapore over two days. Below we highlight key takeaways from the investor meetings.
Near-term growth to be led by strong industry growth and market share gains
Suzlon management expects industry installations to grow 30% during FY17 to 4.3GW with Andhra Pradesh-Telangana, Gujarat and Karnataka being the prime drivers. The company also expects to scale up and retain its market share at c40-45% (26% in FY16) over the next few years. While market share gains have helped improve operating leverage, management is now keen to retain profitability (Ebitda margins up to 15.7% in FY16 from -3.4% in FY15) with incremental market share gains targeted through wider customer acceptance rather than predatory pricing.
Technology, hybrid projects and international business to drive long term growth
With sustained investments in technology (larger engines and higher towers), SUEL expects to bring down average wind power cost by 2% p.a, thereby improving project IRRs as well as fight falling wind tariffs. The company expects multiple states to announce hybrid wind-solar policy over the next few quarters, which can start contributing to SUEL volumes by FY18. In addition, SUEL expects to diversify and lower geography concentration risk in India by steadily growing international market presence, albeit this time with an asset light strategy by using India as the manufacturing hub.
Management team strengthened
SUEL recently inducted J.P. Chalasani as Group CEO (ex-Reliance Power and Punj Lloyd) and Rakesh Sarin as CEO of international business (ex-Wärtsilä) with a view to supporting its long term outlook led by strong domestic focus, re-entry into international markets and consistent technology upgrades.
Retain Buy rating and DCF-based TP of R25
SUEL has cut its net debt by c50% from its peak and recovered margins during FY16. We expect SUEL to turn profitable during FY17 as well as regain market leadership. We forecast SUEL to post a healthy 28% Ebitda CAGR over FY16-19. Our target price of Rs 25 (unchanged, DCF model used to better value the company during an earnings recovery phase) implies an FY18 EV/Ebitda of 11.9x, while it is currently trading at 9.3x (adjusted for dilution). We believe our target EV/Ebitda is justified given SUEL’s strong 41% Ebitda CAGR outlook over the next two years. Our target price implies 55.3% upside from the current market price; accordingly, we maintain our Buy rating on the stock. A slower-than-expected ramp-up in SUEL’s market share over the next two years is a key downside risk to our outlook.