Suzlon which is trying to come back on the path on profitability delivered a setback as it started the first quarter of FY17 in the red and jumped into profitability in Q2-17 and hence ending H1-17 with a marginal loss. A negative PAT (profit after tax) does not concern us significantly as we never expected a straight line path to recovery.(Refer: Suzlon: Not for the faint hearted and impatient investor and Suzlon: Q1-17 is not good) What concerned us is that the growth outlook for the wind business though improving from Q1-17, still does not give us the full confidence.
Issue 1: Improved Q2 volumes do not make up for the poor Q1 volume making H1-17 look weak
Suzlon claims:- “H1 is typically is 30-35% of full year volumes”
H1-FY16 was 38% of the full year volume. Now claiming that “H1 is typically is 30-35% of the full year volume in India” makes H1-17 look weaker than H1-16.
Even if we assume that H1 is 30-35% of the full year volume, it would imply the FY17 volumes would range from 1,857 MW to 1,591MW. This would translate into a YoY growth outlook of FY17 to range from 41%-64%. The range has narrowed from the yoy 20%-80%growth estimate implied from the management commentary.
Q2-17 vs Q1-17, the lower end of the growth forecast for the year has improved but the upper end of the growth forecast has been bought down.
The narrower range of growth forecasts provided do not provide any trigger to the stock price.
Issue 2: Outlook for the year does not inspire confidence given the falling order book
Order book as of
- 30-Sep-16 = 1,136 MW
- 13-Sep-16 = 1,306 MW
- 30-Jun-15 = 1,205 MW
- 31-Mar-16 = 1,243 MW
The falling order book, along with weak H1-17 volumes makes the future outlook not as rosy as the Suzlon management would like us to believe.
It can lead us to two conclusions
- The industry outlook is not as rosy as Suzlon claims
- Suzlon is not winning enough. We are wondering whether Suzlon is going to reclaim the 50%+ market share it aims for.
We still maintain that the path to recovery will not be straight and easy. We are still reasonable confident of the recovery in Suzlon. However, we don’t think we have seen anything in the H1-17 performance which deserves a rerating in the stock price. We keep watching the performance of the business with patience.