Suzlon was the largest wind turbine generator (WTG) manufacturer in India who aspired to be a dominant global player. The company took on large amount of debt to acquire a position for itself the global wind turbine market.With the global turmoil around the time period of 2008, its global aspirations soured and the company was saddled with debt which it could not service. The financial instability of the company not only severely dented its global aspirations but also dented its market share in the domestic market.
More than 95% of the market cap disappeared in thin air. Suzlon has been making losses for the last many years and the company is now fighting to regain its number one spot in the Indian market while struggling to servicing the debt it has.
So do we buy the stock?
- It appears that the management has recognized the mistakes it made. It has corrected its mistake by selling its assets to reduce debt and not be shy of reducing its own stake in the company.
- We are quite confident that Suzlon will take a 40-50% share from the new capacity which would be built out given the government plans to have 60GW installed capacity of wind energy by 2022
- We are reasonably confident about the around 16% EBIDTA margin performance.
- We believe that the realizations per MW of installed capacity will improve given its technical capabilities to deliver larger diameter WTG’s
- We like the large installed base of Suzlon which drives the service component of its revenue. It provides superior margins and and predictability to the quarterly revenue.
While we like the fact that Suzlon is quite near to the milestone of returning to profitability, we cannot envisage the temporary/ permanent misses along the way to repay its debt. We are also uncertain about the further dilution of equity which may take place.
We have a lots of confidence in its operational capabilities; we are scared of its financial position.
We have not considered the impact of its foray into the solar business. We will be watching progress on this front quite closely and hope its not another capital allocation mistake. However, given Suzlon’s operational capabilities we are not unduly alarmed by the upcoming solar business.
Where is the margin of safety?
There isn’t any! How can any safety exist in a stock which has lost more than 95% of its value from its peak. Invest in Suzlon if you
- like taking risks
- have the patience to wait for the turnaround story to unfold
- have deep pockets like Dilip Shanghavi and don’t mind investing some loose change on a risky bet
If things work out you could seriously multiply your money or else what more to expect from a stock which has lost more than 95% of its value from the the peak