Suzlon: A good Q1 in a FY18 which is expected to be tough

Suzlon looks much stronger from a year back when we initiated coverage given four consecutive quarters of profitability. However, the strength of the company does reflect itself in its stock price performance. A Suzlon stock holder has not made any money in the last 1 year.

We continue to be remain concerned that the stock may do nothing for its investors in FY18, given the volatility in volume and margins as the industry transitions from feed in tariffs to competitive bidding. The biggest casualty of this transition to competitive bidding is the way the timelines for the exit from the debt restructuring program has moved from Mar-17 to Sep-17 to sometime in FY18.

While the India wind market will go through the period of transition emerging from lower tariffs from the competitive bidding, leading to uncertainty in the volumes which will come up, we continue to remain positive on Suzlon as we like its strong operational performance and growing market share. While the stock price of Suzlon is constrained by its debt, we believe it provides us with an opportunity to buy the a large wind market globally quite cheap.

We like its operational performance because:

  1. Volume performance in Q1-18 was solid
    • 326 Mw for wind (60% growth yoy, 204 Mw in Q1-17)
    • 86 Mw for solar (vs 109 Mw for FY-17)
  2. Margin performance was in solid in Q1-18 (EBIT of 14.8% in Q1-18 vs 14.3% for FY-17)
  3. Optically, the order book is pointing towards increasing sales realization per Mw.
    • Q1-18 end order book of 1,169 Mw worth Rs 7,757 Cr indicating realizations of Rs 6.64 Cr/Mw (vs Rs 6.35 Cr/Mw as of Q1-17)
    • 411 Mw of new wind orders worth Rs 2,757 Cr were won in Q1-18, indicating realizations of Rs 6.70 Cr/ MW
    • Almost half is the order book is PPA backed + Captive. The value of the order book will depend on what happens to the other half of the order book.
  4. On the back of strong volumes in Q1-18 we would like to believe that Suzlon would be able to deliver around 40% market share in FY-18 as promised by the management.
    • For FY18, we have a visibility of Q1-18 volumes + Order book = 412 + 1,169 = 1,581 Mw
    • If the order book holds, the asking run rate to achieve 2,000+ Mw in the next nine months does not look to be a big challenge.
  5. On the back of the margin performance in FY-18 we would like to believe that Suzlon would be able to hold its margins in as promised by the management.
    • The margin pressure due to competitive bidding would be mitigated by the higher realizations expected from the order book.

The market cap of Suzlon is around Rs 9,000 cr. Assuming a FY-17 market share of 32% as claimed by the Suzlon management leads to 32% of the India wind market available for a market cap of $1.9 billion which looks quite cheap to us.


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