Suzlon Energy Ltd BUY - multibagger stocks · 2020. 4. 25. · Suzlon Energy Ltd (Suzlon) is one of the leading renewable energy solution providers in the world, with a presence in

Suzlon Energy Ltd BUY

- 1 - Saturday, 22ndt April, 2017

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

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Target Price ₹ 42.8 CMP ₹ 19.9 12xFY20EV/EBIDTA

Index Details While the strong business environment for renewable energy augurs well

for Suzlon, its debt woes keep the performance of the company from

flowering. However, we believe that this is all set to change given the

proposed monetization of its subsidiaries to repay debt partially. Suzlon is

looking to pare its debt by selling a stake in its two wholly owned

subsidiaries SE Forge Ltd and Suzlon Global Services Ltd. We estimate

that a 40% stake dilution (Rs 3350 crore) along with FCCB’s conversions

(Rs ~1650 cr) and generation of free cash flows would aid in lowering

debt to Rs 4392 cr Rs 12511 cr in Q3FY17.

This level of stake sale of 40% would essentially have no significant

bearing on PAT and a reduction in interest out go would more or less

compensate for minority interest write down.

We estimate that revenues would grow at a CAGR of 14.4% to Rs

16392.4 crore by FY20. While EBIDTA is expected to grow at a CAGR of

24.3% to Rs 2,312.3 crore over the same period. Net earnings (post

restructuring) are expected to grow at a CAGR of 27.4% to Rs 1272 crore

in FY20.

EBIDTA and PAT margins are expected to drop marginally as the reverse

auction process would force the bidders to drop/lower IRR’s. This in turn

would be partially passed on to the vendors (like Suzlon)

We initiate with a BUY rating for a target price of Rs 42.8 (

12xFY20EV/EBIDTA). This represents an upside of 115% over the next

30 months.

We are optimistic on the company prospects given that:

Sensex 29365

Nifty 9119

Industry Renewables

Scrip Details

MktCap (` cr) 10023.68

BVPS (`) -13.55

O/s Shares (Cr) 502.44

AvVol 5.20 cr

52 Week H/L 20.35/12.47

Div Yield (%) 0.0

FVPS (`) 2.0

Shareholding Pattern

Shareholders %

Promoters 21.0

Public 79.0

Total 100.0

Suzlon vs. Sensex

0

5

10

15

20

25

22000

23000

24000

25000

26000

27000

28000

29000

30000

31000

SENSEX Suzlon

Key Financials (` in Cr)

Y/E Mar Net

Sales EBITDA PAT

EPS

(`)

EPS

Growth (%)

RONW

(%)

ROCE

(%)

P/E

(x)

EV/EBITDA

(x)

2017E 12917.5 2248.3 601.1 1.2 24.7 NA 78.7 16.4 9.4 2018E 13499.8 1991.4 626.7 1.2 0.0 NA 53.4 16.4 10.4 2019E 15311.8 2217.4 4131 7.5 524.2* NA 39.8 2.6 7.1 2020E 16392.4 2312.3 1272 2.2 -71.1 310.9** 36.6 9.1 5.2

* Due to unexceptional income on sale of 40% stake in two subsidiaries ** Optically high number due to low denominator

- 2 - Saturday, 22nd

April, 2017


Suzlons’ overall revenues to grow at a CAGR of 14.4% over FY16-20 from Rs

9562.5 crore in FY16 to 16392.4 crore in FY20, mainly due to an increase in

volumes in the WTG business, an increase in its O&M assets and 21% CAGR

growth (in external revenues) of its forging business.

Stake sale in wholly owned subsidiaries will help raise cash to the extent of Rs

3350 crore. Further FCCB conversion and free cash flow generation would help

lower debt by Rs ~4842 crore by FY20

Healthy cash flow generation to cater to further debt reduction beyond the

forecast period.

Current bidding of 1GW opens doors for demand from non windy states. This

will lead to expansion of market for the wind energy.

Suzlon is looking to launch S128 WTG with generation capacity of 2.6MW in

India Also the company aims to foray into international markets with this product

but with a generation capacity of 3MW to boost its revenues by FY19. The

WTG’s will have a height of 120-140 meters, which can help to generate power

even in low windy sites, providing for higher PLF’s.

Suzlon has forayed into Solar power with an intention to develop hybrid farms,

i.e a combination of wind and solar which will help to increase the PLF in coming

years. However we have not factored in any revenues from the same & that

remains an upside risk to our target price.


April, 2017


Company Background

Suzlon Energy Ltd (Suzlon) is one of the leading renewable energy solution providers in

the world, with a presence in 19 countries across 6 continents. The company has one of

the largest in-house R&D set ups, with facilities in Germany, the Netherlands, Denmark

and India. Suzlon with over 10GW installations is currently the market leader in India

with ~ 35% share in India’s cumulative wind energy installations with strong presence

across all customer segments. Suzlon is custodian to the 4th highest installed power

capacity in India and the highest custodian in the renewables.

Business Verticals of Suzlon Energy Ltd

Source: Suzlon Energy Ltd, Ventura Research

*Our estimates of external revenues.

Suzlon Energy Ltd Total Revenue 9MFY17: 7719 cr

WTG sales

6270cr

Operation & Maintainence*

1214 cr

Fondry and Forging*

180 cr

Others

55 cr


April, 2017


Key Investment Highlights

India’s ambitious renewable energy targets provide for strong revenue

visibility

The Ministry of New and Renewable energy (MNRE) has an ambitious target of 175GW

of power generation by 2022 through the use of renewable energy. Of this 175GW,

100GW has been targeted from Solar power (60GW from grid & 40GW from Rooftop),

60GW from wind, 10GW from biomass and 5 GW from small hydro power.

The total installations in wind power till FY17 has been around 32 GW. This implies that

another potential 28GW would be generated over the next 5 years till FY2022. Suzlon,

being the largest incumbent player, is expected to be the biggest beneficiary.

India’s 2022 renewable energy target

15

60

40

60

Others Wind Utility Scale Solar Rooftop Solar Utility Scale

Renewables Target 2022 (In GW)

Source: Ministry of new and renewable energy, Ventura Research


April, 2017


Historically, the wind power installation between FY2003 and FY2016 has been growing

at a CAGR of 22.5%.

Long term growth story remains intact

As per MNRE, India’s renewable energy potential is about ~ 900 GW from commercially

exploitable sources with the share of wind pegged at 302 GW (at 100m mast height).The

industry is currently working at 120m mast height. With technological advancement and

increasing mast heights, this has the potential to be revised upwards. This implies that

the unmet demand would mean long term opportunities for players in the renewable

energy space.

Also, as per a draft of the third National Electric Plan (NEP3), released in Dec16,

renewables, nuclear and large hydro electric plants will account for 56.5% of India’s

installed power capacity within the 10 years to 2027. NEP3 projects that India will not

only achieve the 2022 target of 175GW from renewable sources but also it will reach

275GW in 2027. If the NEP3 target is met as per the projected timelines, total installed

renewable capacity in India will surpass coal based capacity sometime around 2024.

Several positive factors have come together to provide a conducive environment

for the growth of renewables.

Current bidding of 1GW in the reverse auction process opens doors for non

windy states

Historically demand from wind energy in India has come from windy states. In the recent

round of bidding held in Mar,2017, even though the projects are to be developed in

Wind Power installed capacity (MV)

1666 1908 2523 3635 53517093 8756 1024111806

141551735219051

2114123439

26911

32311

36911

42111

47611

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000Wind Power Installed capacity (MV)

*Estimated cumulative installed capacity

Source: Ministry of new and renewable energy, Ventura Research


April, 2017


windy states of Gujarat and Tamil Nadu, the winning bids were to non- windy states.

This implies that the appetite for renewable energy projects has expanded

notwithstanding the fact that benefits like accelerated depreciation (AD) & generation

based incentive (GBI) stand reduced/eliminated.

Renewable energy qualifies under mandatory CSR spend

Under the new Companies Act 2013, companies meeting certain requirements are

required to spend 2% of their average net profits on CSR activities. Renewable energy/

WTG qualifies under the mandatory CSR spend.

Renewable energy re-classified as White category

The government has re-classified renewable energy under the ‘White category’ from the

earlier ‘Green category’. This re-classification would mean ease of exemption from

environmental clearances from the Ministry and consent from State Pollution Control

Boards for setting up wind/solar plants. This would result in further impetus to the sector

from “ease of doing business”. This is in sharp contrast to the teething regulatory hurdles

faced by fossil fuel based power projects that are plagued by endless regulatory hurdles

and delays.

Incentives like RPO and RGO a big boost for renewable

Under RPO (Renewable Purchase Obligation), distribution companies are required to

purchase a certain amount of their energy from renewable sources. Further RPO is also

applicable for Open Access consumers and captive consumers who have generating

plant capacities above a threshold limit. India has set up an ambitious target of achieving

RPO’s of 17% by 2022.

The recent drops in tariffs of renewable energy have improved the viability of renewable

energy vis-à-vis traditional sources particularly coal.

Under the RGO (Renewable Generation obligation), new coal or lignite based thermal

plants will also have to procure or purchase renewable capacity.

AT&C losses not attributable to renewable power

The government has waived transmission charges and losses for renewable power. The

waiver of such charges makes it financially viable for project developers in a wind

resource rich states to target PPA’s in another states.

Signing of Paris climate treaty – A cherry on the cake

India is the world’s fourth largest carbon emitter with population count of 1.3 billion

people. The treaty signed in December 2015, requires the member countries to make


April, 2017


binding commitments to curb carbon dioxide emissions to prevent global average

temperatures from rising above 1.5 degrees Celsius as compared to pre industrial years.

As part of the initial commitments to the agreement, India also plans to reduce its

emission per unit of GDP by 33 to 35% from 2005 levels over a span of 15 years. This

would mean India will have to significantly move away from coal based power generation

to renewable energy sources.

Hybrid Solar-Wind Parks

The GOI is coming up with a new concept called hybrid parks wherein some states

which are rich in both wind as well as solar will have hybrid parks a combination of wind

and solar in a single place. These will help to produce power throughout the year and

facilitate savings of common costs. Suzlon has already forayed into solar, mainly to gain

expertise for developing hybrid projects in the future.

Suzlon’s high debt concerns to be addressed through stake sales

Suzlon’s 2007 acquisition of €1.4 billion Senvion Ltd (then called RE Power Systems

Ltd) was primarily done through debt. At that time, this acquisition made sense as

Suzlon was expanding slowly in various international markets. However, post the 2008

financial crisis Suzlon found itself in a debt trap as global industrial activity slowed down

and turbine sales plummeted. This led to a default on the repayment of its $209 million

convertible bonds leading to debt ballooning.

A subsequent restructuring of its FCCB’s of $576 million, via the sale of Senvion Ltd

(to Centrebridge Partners LLP) for €1 billion and infusion of Rs 1800 cr as fresh capital

by Dilip Sanghvi (for 23% stake)helped manage its cash flows and lower debt. Even

Suzlon’s Total debt woes are behind us

451

5162

9935

14870

12668 12241

1403415191

1705417811

11431

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Total debt

Rs in cr

Source Source: Suzlon Energy, Ventura Research


April, 2017


though as on 31st December, 2016, the total debt stands at Rs 12511 crore (including

FCCB’s), but the same has been managed through a back ended repayment profile.

Stake sale in subsidiaries- currency to lower debt further

We believe that further restructuring through asset/stake sale is essential to implement

an effective turnaround. In this direction, Suzlon has guided for a minority stake sale in

its 100% owned subsidiaries, Suzlon Global Services Ltd and SE Forge Ltd. We

estimate that Suzlon would divest 40% of its stake in both the ventures, which would

yield the company ~Rs 3350 cr. This would help to knock of the debt of the company

substantially. We have assigned multiples of 13xFY19EBIDTA and 10xFY19EBIDTA to

arrive at values for Suzlon Global Services Ltd and SE Forge Ltd, respectively.

Valuation of subsidiaries

Y/E March, Fig in ` Cr FY16 FY17E FY18E FY19E

Suzlon Global Services Ltd

EBDITA 258.0 350.0 425.0 500.0

EBDITA Margin % 28.5 34.6 38.3 39.8

Growth% - 35.7 21.4 17.6

EV/EBIDTA multiple 13.0

Enterprise Value 6500.0

Value of external debt 47.6 50.0 50.0 50.0

Value of Equity 6450.0

Assuming Suzlon sells 40% 2580.0

SE Forge Ltd

EBDITA 92.1 124.5 189.5 226.6

EBDITA Margin % 23.1 23.0 25.0 23.0

Growth% - 35.3 52.2 19.6

EV/EBIDTA multiple 10.0

Enterprise Value 2266.5

Value of external debt 341.8 341.8 341.8 341.8

Value of Equity 1924.7

Assuming Suzlon sells 40% 769.9

Total value of 40% stake in both

subsidiaries 3349.9

The proceeds of this stake sale would primarily be used to repay the high cost INR debt

which would sharply lower interest outgo. We believe that a 40% stake sale is

optimum to negate any impact of earnings distortion.


April, 2017


FCCB’s conversion to equity expected without hiccups

With the current share price ruling way above the FCCB conversion rate, we do not

foresee any major circumstances that would impede the conversion of debt to equity. In

our scenario 2, we have assumed conversion be completed as follows:

FCCB's repayment

schedule (in million $)Q3FY17 FY18 FY19

Maturiy

16th

July,2019

Opeining FCCB'S 248 248 148 48

Conversion into equity 0 100 100 48

Remaining FCCB's 248 148 48 0

No of equity shares 502 541 580 599

The above two will help Suzlon to reduce its debt from Rs 12511 crore in Q3FY17 to Rs

4392 crore in FY20. Further, ~27% of total debt will be towards working capital.

Suzlon’s debt given the expected restructuring

12511 12156 11774

8653

4392

0

2000

4000

6000

8000

10000

12000

14000

Q3FY17 FY17E FY18E FY19E FY20E

Total debt Rs in cr



April, 2017


Net Revenues to grow at a CAGR of 17% over FY16-19

We expect Suzlons’ overall revenues to grow at a CAGR of 14.4% over FY16-20 from

Rs 9562.5 crore in FY16 to 16392.4 crore in FY20, mainly due to an increase in volumes

in the WTG business, an increase in its O&M assets and 21% CAGR growth (in external

revenues) of its forging business. Suzlon has also forayed into solar power and has

signed 340MW PPA’s. Of this 330MW it has already divested a 49% stake in 210MW.

Also it has won additional bids for a 175MW solar project in Jharkhand for which the

PPA is yet to be signed.

Acclaimed global technology

Suzlon’s competence can be judged by the fact that in a survey conducted in Brazil for

top 5 wind farms, 3 of the wind farms where Suzlon was the equipment supplier made it

to the list.

Total Revenues to get a boost

21359

1891420403 19954

9563

12918 1350015312

16392

0

5000

10000

15000

20000

25000

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Net Revenues

Rs in crDe-growth due to Senvion

Source: Suzlon Energy, Ventura Research


April, 2017


WTG trend is encouraging given the strong order book

We expect Suzlon’s revenue from the WTG business to grow at a CAGR of 18.8% from

6785 crore(excluding 1 month revenues of Senvion) in FY16 to 13530 cr in FY20. We

draw comfort from the fact that India is set to add capacity of ~28GW over the next 5

years and Suzlon, being the market leader, will be the biggest beneficiary.

Revenue break in %

98 99 99 99 9785 84 84 83

15 16 16 17

0

20

40

60

80

100

120


Turbines O&M Forgings Others

(%)

Separate O&M numbers available only after FY16

Sour Source: Suzlon Energy, Ventura Research

WTG revenues set to rise at a CAGR of 18.8%

6785

10986 11316

1279213530

0

2000

4000

6000

8000

10000

12000

14000

16000

FY16 FY17 FY18 FY19 FY20

Rs in cr



April, 2017


Strong Order book

Suzlon’s order book, as on Dec 16, stands at 1231MV (7523 cr) thus providing good

revenue visibility in the near term.

Order book status as on Dec,16

1136MW

557MW

462 MW

1231 MW

Sep 16Order intake

Executed Dec 16


Wind installations set to rise

221 205 204 204 204 216

138 227 353 400 420 44535

256

462 440 450 477

60

443

720 7961006

1062

0

500

1000

1500

2000

2500

FY15 FY16 FY17 FY18 FY19 FY20

Q1 Q2 Q3 Q4

MW



April, 2017


Suzlon’s Operation and maintenance revenues to grow at a 12.2% CAGR in FY17-

20

Suzlon is currently servicing around 7,643 turbines which translates in to around 10,115

MV as on Q3FY17. It receives annuity revenues for the maintenance of its turbines.

Further, the contract has a built in escalation clause every year. We expect Suzlon to

grow its O&M revenues at a CAGR of 12.2% from 1619 crore in FY17 to Rs 2287 crore

in FY20.

Suzlon’s annual O&M charges averages to around 10 lacs per MW per annum (with an

annual escalation of 5%). There is, however, a moratorium of 2 years (on new

installations), after which the O&M income kicks in.

Suzlon has 10.1 GW capacity under its operation and maintenance in India. Further, it

has a 100% renewal track record in India for its O&M contracts. This helps the company

to have a steady cash flow generation.

Suzlon’s O&M revenues to grow at a CAGR of 12.2%

1214

16191775

2010

2287

0

500

1000

1500

2000

2500

9MFY17 FY17E FY18E FY19E FY20E

Rs in cr



April, 2017


Suzlon’s Forging revenues to grow at a 21% CAGR in FY17-20

We expect the forgings business to be a big driver to growth in overall revenues once

the activity in wind installations pickup. We expect the revenues to reach 240 crore in

FY17 and to grow at a CAGR of 21% from hereon to 504 crore in FY20.

No significant capex going forward and strong in house R&D

Suzlon’s average utilization rate is well below the installed capacity and hence we do not

expect any major capex. over the forecast period.

Further Suzlon has strong in house R&D facilities which gives it an edge over the peers

like Inox Wind which in source technology. In FY16, Suzlon’s R&D expenses stood at

0.8% of sales.

Suzlon’s Forging revenues to grow at 21% CAGR

180

241

337

438

504

0

100

200

300

400

500

600

9MFY17 FY17E FY18E FY19E FY20E

Rs in cr

Sour Source: Ventura Research

Suzlon’s Forging revenues to grow at 21% CAGR

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0

50

100

150

200

250

300


R&D expense As a % of sales

Rs in cr

% of sales



April, 2017


Pan India presence provides an edge over peers

Suzlon has manufacturing facilities in 8 states, which provides comfort to wind park

developers with respect to timely completion of projects and sustenance of O&M

services. Historically, certain players had set up operations and then wound up which

raised concerns for developers. This makes Suzlon a preferred vendor for most wind

farms.

New Product launch to boost product portfolio

Suzlon is looking to launch S128 WTG with generation capacity of 2.6MW in India Also

the company aims to foray into international markets with this product but with a

generation capacity of 3MW to boost its revenues by FY19. The WTG’s will have a

height of 120-140 meters, which can help to generate power even in low windy sites,

providing for higher PLF’s.

Suzlon has manufacturing facilities all over India

Blade Tower Nacelle

Andhra Pradesh *

Gujarat (Daman)

Karnataka

MP

Maharashtra *

Rajasthan

Tamil Nadu * (Puducherry)

*Contract Manufacturing



April, 2017


Although Suzlon already has a well established footprint in the International market from

its erstwhile operations we have not built in any revenues from oversees geographies &

that remains an upside risk to our estimates.

Suzlon’s S111-120 meter can be a game changer for the company

Suzlon’s new addition to its portfolio of 2.1 MV series is the S11-120m hybrid tower

wind turbine. The product has a higher swept area and hub height than previous

products and is designed to make wind power projects viable in low wind sites,

especially in emerging markets like India. This helps in accessing higher wind speed at

higher altitude and thus increases the wind turbine’s energy output, resulting in

increased ROI for the developer.

Suzlon’s S111-120m to generate greater PLF than its traditional line of products

S97-120m S111-90m S111-120m



April, 2017


Key Risks

Reduction of the benefit of accelerated depreciation (AD) would affect demand

the scenerio

AD is a tax benefit scheme that can be availed by anyone who sets up or invests in a

wind farm, irrespective of the power generated. About 80 per cent of the project cost

is paid back if the plant is commissioned before September, 30 of the financial year

concerned or 40 per cent of the cost if commissioned before March 31. A fair amount

of capital that was being invested into wind energy projects was to tap the benefit of

AD, especially the manufacturing sector in India, which utilizes the renewable energy

for their captive consumption so that they hedge their energy costs. However the

benefit of AD is being reduced to 40% from earlier 80% from March 2017 which can

affect the demand scenario of retail.

Withdrawal of Generation based incentive (GBI) reduces profitability and IRR

calculation

In order to increase the investor base of wind energy products, the MNRE had

announced a scheme for Generation based incentives of Rs 0.5 per kWh of electricity

fed into the grid from wind power projects. However the benefit of GBI is being

withdrawn from March 2017.


April, 2017


Financial Performance

Suzlon’s consolidated topline grew by 75.7% to Rs 3311.4 crore in Q3FY17 on account

of increase in sales volumes. The EBIDTA stood at Rs 716.3 crore v/s Rs 256.8 crore in

the same quarter of the previous year. The EBIDTA margin expanded by a healthy 800

bps to 21.6%. The company posted a PAT of Rs 274.3 crore as against a loss of Rs

121.8 crore.

Overall the consolidated revenue for FY16 stood at Rs 9,562.6 crore as against Rs

19,954.4 crore in FY15.The EBIDTA of the company stood at Rs 968.6 crore (EBIDTA

margin of 10.1%) as against EBIDTA of Rs 315.7 crore (EBIDTA margin of 1.6%). The

company registered a PAT of Rs 482.6 crore in FY16 as against a loss of Rs 9,157.7

crore in FY15. However, the annual figures are not exactly comparable due to the sale of

Suzlon’s German subsidiary, Senvion, in FY16.

Financial Performance (Rs in crores)

Description Q3FY17 Q3FY16 FY16 FY15

Profit & Loss Statement

Net Sales 3311.4 1884.6 9562.6 19954.4

Growth(%) 75.7% -52.1%

Total Expenditure 2595.1 1627.9 8594.0 19638.7

% of sales 78.4% 86.4% 89.9% 98.4%

EBDITA 716.3 256.8 968.6 315.7

EBDITA Margin % 21.6% 13.6% 10.1% 1.6%

Other Income 25.4 13.5 65.5 53.3

PBDIT 741.8 270.2 1034.1 369.0

Depreciation 109.4 97.6 403.3 808.8

Interest 339.1 285.8 1226.1 2064.7

Exceptional items 0.0 0.0 1064.1 -6311.7

PBT 293.2 -113.2 468.9 -8816.1

Margin % 8.9% -6.0% 4.9% -44.2%

Tax Provisions 1.1 0.2 -11.0 317.3

Reported PAT 292.2 -113.4 479.8 -9133.4

Minority Interest -1.6 -4.9 2.8 -24.3

Share of Associate -16.3 -3.5 0.0 0.0

PAT 274.3 -121.8 482.6 -9157.7

Margin % 8.28% -6.46% 5.05% -45.89%

Source: Source: Suzlon Energy Ltd, Ventura Research


April, 2017


Financial Outlook

We expect Suzlon’s consolidated revenues to grow from 9,562.6 crore in FY16 to Rs

16,392.4 crore in FY20 at a CAGR of 14.4%. The external forging sales is expected to

grow from Rs 232.9 crore in FY16 to Rs 503.6 crore in FY20, registering a whopping

CAGR of 21.2%. The EBIDTA of the company is expected to grow from Rs 968.6 crore

in FY16 to Rs 2,312.3 crore in FY20, registering a CAGR of 24.3%.The margins are

expected to increase from 10.1% in FY16 to 14.1% in FY20. Although Suzlon’s EBIDTA

margins for 9MFY17 stand at 18%, we expect the same to come down gradually as

reverse bidding auctions are expected to be adopted by many states. This would

intensify the tariff bidding process and lead to an overall decrease in IRR’s of developers

and, in turn, margins of their vendors.

With respect to the bottom-line, we have assumed two scenarios for Suzlon:

Status quo: Suzlon does not pare its existing debt. Also the $248 mn FCCB’s will

be converted into equity only at the time of maturity i.e on 16th July 2019. Over

here, the debt has been reduced as per the repayment schedule drawn by the

company.

We expect the consolidated PAT of the company to increase from Rs 482.6 crore in

FY16 to Rs 1,154.2 crore in FY20 registering a CAGR of 24.4%. However in this case,

status quo would be maintained leading to no scaling down of the gargantuan debt.

Favoured Scenerio: Suzlon trims its debt by divesting 40% in its two subsidiaries

Suzlon Global Services Ltd and SE Forge Ltd. Also we have assumed the

conversion of $248 mn of FCCB’s into equity, to take place in the following way:

$100mn by FY18, $100 mn in FY19 and the remaining $48 mn will be converted at

the time of maturity.

Currently, Suzlon holds 100% stake in SE Forge Ltd and SE Global Services Ltd.

SE Forge carries out the foundry and forgings business while SE Global Services

Ltd carries out the O&M for India’s turbine business. The management has

indicated to divest stake in these two subsidiaries in order to reduce debt. We

have assumed that the company will retain a majority portion with itself while it

will find a strategic buyer for the remaining 40% stake. We have assumed the two

subsidiaries should fetch around Rs 3,350 cr.

We expect the consolidated PAT of the company to increase from Rs 482.6 crore in

FY16 to Rs1,272.4 crore registering a CAGR of 27.4% in scenario 2.


April, 2017


Status Qou Scenerio

Favoured Scenerio

Revenue, EBIDTA & PAT margins

9563

12918 13500

1531216392

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FY16 FY17E FY18E FY19E FY20E

Revenues EBIDTA margins PAT margins

Rs in cr

(%)

Source: S Source: Suzlon Energy Ventura Research

Interest coverage ratio and Total debt

11136.0

12155.7 12421.7

10954.2

7647.9

0

1

2

3

0

2000

4000

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12000

14000


Debt Interest coverage ratio

Rs in cr(%)

Source: S Source: Suzlon Energy Ventura Research

Revenue, EBIDTA & PAT margins

9563

1291813500

1531216392

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20

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Revenues EBITDA Margin PAT Margin

Rs in cr (%)

Source: S Source:Suzlon Energy Ventura Research

Interest coverage ratio and Total debt

11136.0

12155.7 11773.8

8652.6

4392.1

0

1

2

3

4

0

2000

4000

6000

8000

10000

12000

14000


Debt Interest coverage ratio

Rs in cr (%

Source: S Source:Suzlon Energy Ventura Research


April, 2017


Valuation

We initiate coverage on Suzlon with a buy, with a price objective of Rs 42.8 (12x FY20

EV/EBIDTA) which represents a potential upside of 115% over the CMP of Rs 19.9.

Our optimism stems from the following:

Rosy outlook for the renewable energy sector in India in which Suzlon is the

dominant player in wind, with ~35% market share. Revenue visibility over a

decade should ensure re-rating of the valuation multiple going forward.

Strong revenue growth on the cards, given the MNRE targets for renewable

energy. Order book continues to remain healthy.

Stake sale to subsidiaries to help pare debt without significant dilution of PAT.

EPS to expand from Rs 0.96 in FY16 to Rs 2.17 Rs in FY20 despite 20% equity

expansion from conversion of FCCB’s. (599 crore equity shares in FY20 from

502 crore shares currently).

Healthy cash flow generation to cater to further debt reduction beyond the

forecast period.

Suzlon has forayed into Solar power with an intention to develop hybrid farms,

i.e a combination of wind and solar which will help to increase the PLF in coming

years. However we have not factored in any revenues from the same & that

remains an upside risk to our target price.


April, 2017


Suzlon’s financials under both scenerios

(Rs in crore)

Particulars FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2018 FY 2019 FY 2020

Revenues 9562.6 12917.5 13499.8 15311.8 16392.4 13499.8 15311.8 16392.4

EBITDA 968.6 2248.3 1991.4 2217.4 2312.3 1991.4 2217.4 2312.3

EBITDA Margin (%) 10.1 17.4 14.8 14.5 14.1 14.8 14.5 14.1

Interest 1226.1 1319.7 982.3 928.0 694.7 963.7 832.5 522.4

Interest as % of sales 12.8 10.2 7.3 6.1 4.2 7.1 5.4 3.2

Depreciation 403.3 400.0 424.0 449.4 476.4 424.0 449.4 476.4

Consolidated PAT 482.6 601.1 608.1 860.0 1154.2 626.7 4131.4 1272.4

Debt (a+b+c) 11136.0 12155.7 12421.7 10954.2 7647.9 11773.8 8652.6 4392.1

a) Secured Loans 7519.4 7572.0 7438.0 7051.0 6479.0 7438.0 6045.3 3223.3

Rupee Term debt - 2776.9 2665.6 2344.1 1869.0 2665.6 2344.1 0.0

Forex Debt - 566.1 543.4 477.9 381.0 543.4 477.9 0.0

SBLC backed AERH - 4229.0 4229.0 4229.0 4229.0 4229.0 3223.3 3223.3

b) Unsecured Loans

(including FCCB's) 1706.9 1606.8 1606.8 1606.8 0.0 958.9 311.0 0.0

c) Short Term Borrowings 1909.7 2976.9 3376.9 2296.4 1168.9 3376.9 2296.4 1168.9

Shareholders funds -7079.3 -6436.3 -5828.2 -4968.3 -2207.3 -5161.7 -382.4 1200.9

Weighted Number of shares - 502.1 502.1 502.1 574.5 521.5 550.7 586.7

Weighted avg EPS 1.0 1.2 1.2 1.7 2.0 1.2 7.5 2.2

Pre Financial Engineering (Status Quo)

Post Financial Engineering

(Favoured Scenerio)


April, 2017


Financial & Projections- If Suzlon does not cut down debt and FCCB’s are

converted only at mayurity ie on 16th July,2019

Y/E March, Fig in ` Cr FY17E FY18E FY19E FY20E Y/E March, Fig in ` Cr FY17E FY18E FY19E FY20E

Profit & Loss Statement Per Share Data (Rs)

Net Sales 12917.5 13499.8 15311.8 16392.4 Adj. EPS 1.2 1.2 1.7 2.0

% Chg. 35% 5% 13% 7% Cash EPS 2.0 2.1 2.6 2.8

Total Expenditure 10669.2 11508.4 13094.4 14080.1 Book Value NA NA NA NA

% Chg. 24% 8% 14% 8% DPS 0 0 0 0

EBDITA 2248.3 1991.4 2217.4 2312.3 Capital, Liquidity, Returns Ratio

EBDITA Margin % 17.4% 14.8% 14.5% 14.1% Debt / Equity (x) NA NA NA NA

Other Income 75.5 28.0 28.0 28.0 Current Ratio (x) 1.0 1.0 1.1 1.1

PBDIT 2323.9 2019.4 2245.4 2340.3 ROE (%) NA NA NA NA

Depreciation 400.0 424.0 449.4 476.4 ROCE (%)* 78.7% 53.5% 52.0% 46.8%

Interest 1319.7 982.3 928.0 694.7 Dividend Yield 0% 0% 0% 0%

Exceptional items 0.0 0.0 0.0 0.0 Valuation Ratio (x)

PBT 604.1 613.1 868.0 1169.2 P/E 16.6 16.4 11.6 9.9

Tax Provisions 0.0 0.0 0.0 0.0 P/BV NA NA NA NA

Reported PAT 604.1 613.1 868.0 1169.2 EV/Sales 1.6 1.6 1.3 1.0

Minority Interest 3.0 5.0 8.0 15.0 EV/EBIDTA 9.4 10.8 9.2 6.8

Share of Associate 0.0 0.0 0.0 0.0

PAT 601.1 608.1 860.0 1154.2 Efficiency Ratio (x)

PAT Margin (%) 5% 5% 6% 7% Inventory (days) 110 110 105 100

RM / Sales (%) 59% 62% 65% 67% Debtors (days) 113 110 100 95

Tax Rate (%) 0% 0% 0% 0% Creditors (days) 115 87 95 105

Balance Sheet Cash Flow Statement

Share Capital 1007.5 1007.5 1007.5 1200.8 Profit Before Tax 604.1 613.1 868.0 1,169.2

Minority Interest 6.2 11.2 19.2 34.2 Depreciation 400.0 424.0 449.4 476.4

Reserves & Surplus -7443.9 -6835.8 -5975.8 -3408.1 Working Capital Changes (946.4) (815.4) 433.3 1,869.0

Borrowings 9178.8 9044.8 8657.8 6479.0 Others 1,244.2 954.3 900.0 666.7

Deferred Tax liability 12.6 12.6 12.6 12.6

Long Term Provision 304.4 350.1 402.6 463.0 Operating Cash Flow 1,302.0 1,176.0 2,650.6 4,181.3

Other Non Current Liabilities 129.2 135.0 153.1 163.9 Capital Expenditure (701.6) (322.7) (342.1) (362.6)

Total Liabilities 3194.9 3725.4 4277.0 4945.4 Other Investment Activities (72.9) (142.7) (297.3) (217.1)

Gross Block 5606.8 5929.5 6271.6 6634.3 Cash Flow from Investing (774.5) (465.4) (639.4) (579.7)

Less: Acc. Depreciation 3379.8 3803.8 4253.2 4729.6 Changes in Share Capital - - - -

Net Block 2227.0 2125.8 2018.4 1904.7 Changes in Borrowings 1,061.6 266.1 (1,467.6) (1,699.5)

Non current Investments 44.8 44.8 44.8 44.8 Dividend and Interest (1,308.7) (930.8) (857.3) (623.6)

Other Non Current assets 781.7 898.9 1033.8 1188.9 Cash Flow from Financing (247.1) (664.8) (2,324.9) (2,323.1)

Long term Loans & Advances 356.1 409.5 600.0 690.0 Net Change in Cash 280.3 45.8 (313.7) 1,278.6

Net Current assets -214.7 246.4 580.0 1117.1 Opening Cash Balance 629.3 909.6 955.5 641.8

Total Assets 3194.9 3725.4 4277.0 4945.4 Closing Cash Balance 909.6 955.5 641.8 1,920.3


April, 2017


* Optically high number due to negative equity

Financial & Projections- If Suzlon cuts down on debt by sale of two

subsidiaries(40% stake sale assumed) and conversion of 248 mn $ FCCB’s.

Y/E March, Fig in ` Cr FY17E FY18E FY19E FY20E Y/E March, Fig in ` Cr FY17E FY18E FY19E FY20E

Profit & Loss Statement Per Share Data (Rs)

Net Sales 12917.5 13499.8 15311.8 16392.4 Adj. EPS 1.2 1.2 7.5 2.2

% Chg. 35% 5% 13% 7% Cash EPS 2.0 2.0 8.3 3.0

Total Expenditure 10669.2 11508.4 13094.4 14080.1 Book Value -12.8 -9.9 -0.7 2.0

% Chg. 24% 8% 14% 8% DPS 0 0 0 0

EBDITA 2248.3 1991.4 2217.4 2312.3 Capital, Liquidity, Returns Ratio

EBDITA Margin % 17.4% 14.8% 14.5% 14.1% Debt / Equity (x) NA NA NA 3.7

Other Income 75.5 28.0 63.6 66.5 Current Ratio (x) 1.0 1.0 1.3 1.1

PBDIT 2323.9 2019.4 2280.9 2378.8 ROE (%)* NA NA NA 310.9%

Depreciation 400.0 424.0 449.4 476.4 ROCE (%)* 78.7% 53.4% 39.8% 36.6%

Interest 1319.7 963.7 832.5 522.4 Dividend Yield 0% 0% 0% 0%

Exceptional items 0.0 0.0 3199.5 0.0 Valuation Ratio (x)

PBT 604.1 631.7 4198.4 1380.0 P/E 16.6 16.6 2.7 9.2

Tax Provisions 0.0 0.0 0.0 0.0 P/BV NA NA NA 9.7

Reported PAT 604.1 631.7 4198.4 1380.0 EV/Sales 1.6 1.5 1.0 0.7

Minority Interest 3.0 5.0 67.0 107.6 EV/EBIDTA 9.4 10.4 7.2 5.2

Share of Associate 0.0 0.0 0.0 0.0

PAT 601.1 626.7 4131.4 1272.4 Efficiency Ratio (x)

PAT Margin (%) 5% 5% 27% 8% Inventory (days) 110 110 105 100

RM / Sales (%) 59% 62% 65% 67% Debtors (days) 113 110 100 95

Tax Rate (%) 0% 0% 0% 0% Creditors (days) 115 87 95 105

Balance Sheet Cash Flow Statement

Share Capital 1007.5 1085.5 1163.4 1200.8 Profit Before Tax 604.1 631.7 4,198.4 1,380.0

Minority Interest 6.2 11.2 228.6 336.3 Depreciation 400.0 424.0 449.4 476.4

Reserves & Surplus -7443.9 -6247.2 -1545.8 0.2 Working Capital Changes (946.4) (815.4) 433.3 1,869.0

Borrowings 9178.8 8396.9 6356.2 3223.3 Others 1,244.2 935.7 (2,430.5) 455.9

Deferred Tax liability 12.6 12.6 12.6 12.6

Long Term Provision 304.4 350.1 402.6 463.0 Operating Cash Flow 1,302.0 1,176.0 2,650.6 4,181.3

Other Non Current Liabilities 129.2 135.0 153.1 163.9 Capital Expenditure (701.6) (322.7) (342.1) (362.6)

Total Liabilities 3194.9 3744.1 6770.8 5400.0 Other Investment Activities (72.9) (142.7) 2,704.3 121.4

Gross Block 5606.8 5929.5 6271.6 6634.3 Cash Flow from Investing (774.5) (465.4) 2,362.2 (241.2)

Less: Acc. Depreciation 3379.8 3803.8 4253.2 4729.6 Changes in Share Capital - - - -

Net Block 2227.0 2125.8 2018.4 1904.7 Changes in Borrowings 1,061.6 266.1 (2,473.3) (3,949.5)

Non current Investments 44.8 44.8 44.8 44.8 Dividend and Interest (1,308.7) (912.2) (761.9) (451.2)

Other Non Current assets 781.7 898.9 1033.8 1188.9 Cash Flow from Financing (247.1) (646.1) (3,235.2) (4,400.7)

Long term Loans & Advances 356.1 409.5 600.0 690.0 Net Change in Cash 280.3 64.4 1,777.6 (460.6)

Net Current assets -214.7 265.1 3073.7 1571.7 Opening Cash Balance 629.3 909.6 974.1 2,751.7

Total Assets 3194.9 3744.1 6770.8 5400.0 Closing Cash Balance 909.6 974.1 2,751.7 2,291.1


April, 2017


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