Suzlon Energy Rating: Outperformer, Q1FY19 registered a weak performance

By: | Published: August 28, 2018 1:29 AM

Suzlon has withdrawn its guidance for FY19 — revenue of Rs 120-130 bn with a margin of 14% while it has maintained its guidance for long term debt reduction of 30-40% by end of FY19.

Suzlon executed 155MW of wind equipment in Q1FY19 (vs 324MW in Q1FY18).

Suzlon executed 155MW of wind equipment in Q1FY19 (vs 324MW in Q1FY18). Consequently, Suzlon reported Ebitda of mere Rs 0.8 bn (est of Rs 1 bn) in Q1FY19, a decline of 84% y-o-y led by negative operating leverage. As a result, Suzlon adjusted loss in Q1FY19 was Rs 3.2 bn (vs est of loss of Rs 2.5 bn). Reported loss came in at Rs 5.7 bn on account of MTM losses on foreign currency loans. Ebitda margin for Q1FY19 was mere 6% led by lower execution of 155MW during the quarter. Suzlon order book was 1,134MW. In addition, it has 700MW of orders where PPA has been signed but is awaiting approval from regulator. As a result, total order backlog is 1.9GW. The total order wins by Suzlon so far in the auctions is 1.4GW. Note that 20% of auction winners (~1.5GW) have not awarded the equipment yet.

Suzlon withdrew its FY19 guidance of Rs 130-140 bn of revenue and Ebitda margin of 14% in light of continued delays in transmission access for the SECI I-IV auction capacities. The delay in transmission access has created uncertainty on execution and resultant revenue for FY19. Moreover, the delay in regulatory approval for 700MW feed-in tariff PPAs (now likely by Oct, 2018) has further delayed execution of these orders as well.

Key positives: Maintained guidance of debt reduction by 30-40%.
Key negatives: Withdrawal of guidance for FY19.
Impact on financials: Downgrade our earnings estimates for FY19e/FY20e to a loss of Rs 4 bn/PAT of Rs 4.2 bn in view of high uncertainty in FY19 earnings.

Valuations & view

Due to a strong order backlog of 1.9GW, strong auction pipeline of >10GW and strong competitive positioning, we expect Suzlon to garner reasonable market share in upcoming auctions leading to a sharp rise in execution in FY20 and FY21. Moreover, we expect asset monetisation will help Suzlon reduce its long term debt by 30-40% before end of FY19. Considering the impending asset monetisation, sharp correction in the stock price and the progress on getting regulatory approvals for transmission access and tariffs, we believe Suzlon’s stock is cheap at 9x FY20e earnings. As a result, we reiterate Outperformer with a revised target of Rs 12/share (15xFY20).

Key highlights:

Guidance for FY19 withdrawn: Suzlon has withdrawn its guidance for FY19 — revenue of Rs 120-130 bn with a margin of 14% while it has maintained its guidance for long term debt reduction of 30-40% by end of FY19. Note that current firm order book value is Rs 67 bn and O&M revenue is likely to be Rs 18 bn in FY19. Suzlon is working on various ways of monetising the asset to reduce the debt. It may conclude a deal in next two quarters.

Market share gain in FY18: Suzlon has gained market share for fourth consecutive year. Post financial restructuring, Suzlon’s execution has improved dramatically. Its market share in FY18 stood at 36%, gain of 349bps. It has regained its pole position in the Indian market.

-IDFC Securities

 

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