SUEL expects industry installations to grow by c17% during FY17 to c4GW after strong growth of 48% in FY16. The company also expects to improve its market share further from current 26% and aims to take it to c40% over next few years.
While the Madhya Pradesh market could witness potential weakness during FY17 (affected by tariff cut and limited demand needed to meet RPO obligation), SUEL expects other states like Andhra Pradesh, Karnataka and Gujarat to act as key growth drivers.
SUEL managed to recover its clean EBITDA margins from -3.4% in FY15 to 15.7% in FY16. With domestic business now stabilising and a favourable policy environment in big markets such as the US, SUEL is once again looking to cater for international markets (the US, Canada and Mexico) using the product export route.
SUEL argued that the initial euphoria in solar bids has come off and recent bids at cRs 5.0/unit are at par with wind. This has helped business volumes in wind recover as well.
We expect SUEL to benefit from the Government’s strong focus on renewables. This coupled with its business restructuring and subsequent market positioning should allow the company to regain market leadership. We forecast SUEL’s EBITDA to grow at 28% CAGR over FY16-19. We continue to value SUEL using a DCF model as we think it better values the company during an earnings recovery phase. Our fair value target price of R25 implies FY17 EV/ EBITDA of 14.4x, while it is trading at 11.7x (adjusted for dilution).