Downgrade Suzlon Energy on FCCB conversions

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Published: April 17, 2015 12:11:02 AM

We downgrade Suzlon Energy to 'hold' (earlier overweight) and set a fair value target price of Rs 32.

We downgrade Suzlon Energy to ‘hold’ (earlier overweight) and set a fair value target price of Rs 32. Our fair value target price implies an FY17e EV/ebitda of 13.4x. A delayed cash inflow from the asset divestment is a key downside risk to our investment thesis, while a faster-than-expected capacity utilisation ramp-up is a key upside risk.

Suzlon appears to be on track to complete the divestment of Senvion for R7,200 crore and infuse fresh equity of R1800 crore by bringing in a strategic investor (Dilip Sanghvi Family and Associates – DSA). This should cut down the company’s consolidated net debt by 50% by Q1FY16e. Suzlon will also have access to additional working capital.

We expect Accelerated Depreciation policy-led wind installations to contribute 24% of the market size over next three years and help it grow at a 25% CAGR.

We believe Suzlon, with the largest established wind installations in India, an improved balance sheet, and a competitive product portfolio, is well placed to regain lost market share. We forecast the company (i.e. ex Senvion) to report a 60% CAGR in volumes during FY15-18e and to turn profitable by FY17e.

However, large FCCB conversions could hurt near term stock performance. With FCCBs deep in the money, their potential conversion over the next two years (35% of FY15e equity) will likely keep pressure on the stock price.

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