Suzlon has given two consecutive years with a positive PAT. A positive PAT for FY-16 was delivered on the back of Senvion sale and not based on operational performance. FY-17 PAT was delivered based on strong operational performance and strong market share gains. We are reasonably comfortable with our initial thesis from a year ago as Suzlon delivered a strong FY-17. (Refer Suzlon: Not for the faint hearted and impatient investor)
We continue to be optimistic as we look towards FY-18
Observation 1: Management missed their FY17 guidance
Remarks made by the Suzlon management in its Investor presentations.
Q1 typically is 10-15% of the full year volume in India.
This implied that the Suzlon Management at the end of Q1-17 was guiding for Revenue Recognition Volumes of 2,040 MW to 1,360 MW in FY-17
H1 is typically 30-35% of full year volumes.
This implied that the Suzlon Management at the end of Q2-17 was guiding for Revenue Recognition Volumes of 1,857 MW to 1,591 MW in FY-17
In reality Suzlon delivered 1,573 MW of Revenue Recognition Volumes in FY-17. Suzlon missed the lower end of their guidance given at the end of H1-17, albeit by a whisker.
We are not complaining as 1,573 MW of Revenue Recognition Volumes in FY-17 is reasonable compared to 900 MW in FY-16. However, we need to be cautious about the overly rosy comments of the management.
Observation 2: Market share gains delivered
TARGET: Regain 50%+ market share
Suzlon appears to be progressing towards its target of regaining market share, though its still some distance away from the target of 50%+ market share. It market share across the years is steadily increasing and we like market share gains in a growing market.
- FY-17 = 32% (market share of commissioning volumes MW)
- FY-16 = 26%
- FY-15 = 19%
- FY-14 = 19%
- FY-13 = 24%
- FY-12 = 37%
A 6% improvement in market share (26% to 32%) in FY-17 is huge. However, we are a bit worried about the quality of the market share. The market share is based on commissioning volumes (MW). It appears that a significant part of the order book was commissioned in Q4-17 with no or limited new wins. It may be a temporary issue with new orders now coming up in the last quarter of the year. We give a lot of importance to market share and would be watching it.
Observation 3: Weak order book
It appears that Q4-17 was a very poor quarter in terms of order win. Order backlog reduced from 1,231 MW on Dec-16 to 670 MW on 31-Mar-17. This means that order backlog reduced by 561 MW in Q4-17. The Revenue Recognition Volumes for Q4-17 were 554 MW. Does this mean that Suzlon did not win any order in Q4-17?
The secular trend of realizations trending lower does not bode well for the margin profile of Suzlon. The realization from the order backlog as of 31-Mar-17 is Rs 6.04 Cr/MW (the lowest realization per MW in the last 9 quarters). We are not expecting a great Q1-18, assuming the backlog as of 31-Mar-17 will be delivered in Q1-18.
However, we are excited by the order wins in the current quarter. Suzlon won 411 MW of new orders during Q1-18 valued at Rs 2,757 Cr. This leads to an average realization of Rs 6.7 Cr/MW for the order won during Q1-18. The realization moving to Rs 6.7 Cr/MW is huge for Suzlon and we should see the impact of the improved realization during Q2-18. The increase in realization seems to be contradictory to the comments made by Mr Tulsi Tanti as quoted from Livemint
Due to aggressive auction prices there will be some initial impact on margins for a year but it will unlock a bigger market and I’m very much interested in this opportunity
|Quarter Ending||Order Backlog(MW)||Order Backlog(Cr)||Realization(Cr/MW)|
Observation 4: Other topics
- We don’t have anything new to report or analyze on the debt situation
- Exit from the CDR would be a psychological boost
- The Operation and Maintenance service business continues to be healthy. Its business as usual.
- We would start analyzing the solar business in greater detail in the coming quarter.
- We would like to see something substantial before we comment on the international business.