Suzlon Energy Ltd. develops and manufactures technologically advanced, high-performance and cost-efficient wind turbines. It offers end-to-end wind energy solutions, including wind resource mapping, site identification, site development and installation, and finally operations & maintenance services.

Industry – Electric Equipments- Gensets/Turbines

The global wind energy industry with annual installations of 15,016 MW delivered 32% annual growth in 2006 after growing healthily at 41% in 2005. Cumulative installed capacity has registered a CAGR of 23% during 2002-06 at 74,036 MW; it is expected to reach 128,000 MW by 2011. Annual installations are expected to grow by 21% CAGR to reach 24,359 MW by 2011. The US, China, and India are emerging as fast-growing markets for wind energy whilst Europe, which still leads the global market (65% of total), is expected to grow by 15- 20% p.a.

Company

Suzlon is one of the fastest growing Wind Energy companies in the world. A leading Wind Turbine generator (WTG) manufacturer in India, Suzlon is Asia's strongest growing fully integrated wind-power company and ranks amongst the top five in the world. Suzlon has a subsidiary in Germany for technology development, an R&D facility in the Netherlands for rotor blade molding and tooling, and Wind Turbine and rotor blade manufacturing facilities in India. With its strong technological capabilities overseas and low cost vertically integrated manufacturing base in India, Suzlon has an edge over competitors. Suzlon has recently acquired REpower, a German based wind turbine manufacturer which will give it an entry in the European market (world’s largest wind turbine market) and access to REpower’s technological know-how. Through this acquisition Suzlon has increased its geographical reach and addressable market considerably.

Key Investment Arguments

Suzlon has a market cap of Rs. 36988.67cr, average daily volume of 213862 shares and net sales of Rs. 5380.4cr in FY07.

Its business has given a return on net worth of ~32% in FY07. Its Operating profit and Net profit margins are at 22.2% and 19.7% resp. in FY07.

Suzlon has achieved a 5-year CAGR of 59.3% in sales, 57.3% in EBITDA and 56.9% in net profits. Growth has accelerated over the last three years. 3 year CAGR for Sales, EBITDA and PAT is at 89%, 103% and 94% respectively. EPS growth has come down primarily due to the high base effect of substantial increases in share capital over the last five years.

Suzlon trades at a PE multiple of 34.9, Price to Book ratio of 10.0 and Price to Sales ratio of 6.9. Valuations seem to be cheap considering the high growth enjoyed by the company and its future growth potential.

Debt-equity ratio of 0.18 for FY06 is very low for a manufacturing company and even then most of the debt is short term in nature.

Suzlon’s strong business model in terms of in-house technology and superior design capabilities has led to a consistent increase in its market share. It is one of the top five suppliers of wind turbines in the world.

A bulk of Suzlon’s product requirements are manufactured at its Indian facilities, providing it a significant cost advantage.

Suzlon’s global market share continued to increase in FY06, rising to 7.7% vs. 6.1% in FY05. It is also increasing its focus on Europe where the realization rates are considerably higher than that in US, India and China. Hence, increasing average realizations are expected to improve the operating margins of the company.

Suzlon has a robust order backlog of 9480 cr which is almost double than its FY07 net sales of Rs. 5380cr.

Suzlon is developing one of the largest wind-farms of its kind in the world. The farm which is being developed in Maharashtra has a planned capacity of over 1,000 MW out of which 550MW has already been installed.

Key Concerns

Increase in Fixed overheads due to commencement of new installations in US and China can lead to a decline in operating margins as seen in FY07 over FY06.]

Also, Suzlon derives 50% of its revenues from exports. It is expected that revenues from international markets will constitute 80% of its revenues in FY08. Its order book shows US as its biggest trade partner with a 61% share. An appreciating rupee particularly against the dollar can hurt the margins of the company.

Latest Developments

Suzlon has recently acquired control over REpower, a German wind turbine maker through deferred investment plan. It has got an option to buy out Areva’s (30%) and Portugal based Martifer’s stake (24.2%) in the company over the next two years. This option actually allows Suzlon to control 60% of equity in Repower by holding only 7.8% of its equity resulting in relief from pressure of a huge cash outflow on its balance sheet. This will boost the return ratios of Suzlon significantly in the near term.

Suzlon is set to increase its current capacity to from 2700 MW to 4200MW. REpower is also expected to increase its capacity from 700MW to 1000MW by January 2008. The Suzlon-Repower combine is expected to sell wind turbines of over 3000MW in FY08 making it one of the top three suppliers of wind turbines in the
world.

Conclusion

On the basis of our research, we feel that this is a good stock to buy at the current market price . If everything goes well, the price is likely to appreciate to Rs. 1620.0, within a year or so, translating into a gain of about 20%.