Suzlon Energy likely to trip on interest payment and FCCBs despite new orders

Suzlon Energy, India's biggest wind turbine maker, has received an order for 57 units of S97 wind turbines. This 120 MW capacity order has been received by its North American subsidiary, Suzlon Wind Energy Corp., for wind installations be based in the US. As per our estimates, the total value of this order is about Rs 700 cr. According to the filings made by Suzlon with the stock exchange, the procurement and manufacturing work for this order has already commenced. Other work like road and foundation construction will commence in Q1 FY13. The delivery will take place in Q2FY13, and the commissioning will take place in Q3FY13.

The company received various orders from its international customers in Dec 2011. This includes a 166 MW order for wind installations worth Rs 935 cr. There were also 3 overseas orders received for wind turbines of a total capacity of 190.5 MW.

The wind turbines business brings in major chunk of Suzlon Energy's revenues. In FY11, it brought in 98% of the revenues. For the half year ended Sep 2011, the company reported a healthy 53% rise in its revenues, which was largely due to the high growth rate in its wind turbines business. Its EBITDA margins remained at 9.3% for the same period. However, the company's margins have not been stable for many years. Going by the current EBITDA margins, we assume that these 2 orders will contribute about Rs 160 cr to its EBITDA when completed. The company has given a full year guidance of 32% rise in its revenues, which is little doubtful. Even in the past, the company has missed the guidance.

Suzlon Energy is witnessing good momentum in its order book due to the orders from PSUs, large corporates and SMEs. Its order book as of Oct 2011 was about 32000 cr, and has seen a growth rate of 20% over the same period last year. In the half year itself, it has received orders worth about Rs 9000 cr. Going ahead, the company can see more order inflows from firms in the non-power sector, which is a good sign for its growth.

Given these positives however, one must look at the company's debt, which stands at about Rs 13,356 cr as of its half yearly statement. Its debt-to-equity ratio currently stands at 2.04, which is fairly uncomfortable. It has outstanding Foreign Currency Convertible Bonds (FCCB) of 3203 cr, of which about US$ 389 million (approximately Rs 2023 cr) are due in 2012. These FCCBs have a very steep conversion price compared to its current market price of Rs 17. Hence, we believe that these FCCBs would not go for conversion but would be repaid instead. This will put additional stress on its already weak balance sheet, which contain about Rs 2256 cr of cash.

The company’s strategic acquisition of REpower also does not seem to be doing well at the moment. The REpower acquisition was done at a cost of US$1.6 billion (about Rs 7314 cr) for a 75% stake. It recently acquired the remaining stake, and now controls 100% in REpower. The EBITDA margins in REpower have taken a beating due to the adverse currency movement, and with the currency rates remaining high, we don’t think it will make a good profit even in the 2nd half of this fiscal.

As per its half yearly statement, Suzlon Energy paid a half yearly interest of Rs 371 cr (Standalone) compared to Rs 288 cr in the same period a year ago. On a consolidated basis, the interest outgo comes to a whopping Rs 655 cr, which is a heavy concern according to us. While on a standalone basis, the company reported a profit of 118 cr, on a consolidated basis its net profit decreased to Rs 108 cr, which indicates that it is losing streak on its other businesses. Investors should not ignore that Suzlon Energy had posted losses in 2 successive years, i.e. FY10 and FY11. Beside the high debt burden, its promoters have recently pledged an additional 1.68% of stake, which takes the total promoter pledge to about 70%. In 2011 alone, its shares tanked 67%. Hence, at these levels, we would advise investors to avoid this company for sure.