Strong tailwind

Suzlon Energy, the world’s fifth-largest wind turbine manufacturer, posted better-then-expected results for the quarter ended September (Q2).

Suzlon also announced a plan to split its stock from the face value of Rs 10 to Rs 2 and revised its capex plans upwards.

The market certainly perceived these developments as positive, for the stock jumped 9.84% post-results to Rs 1,741.05, much higher than the Sensex’s 5% rise.

Consolidated revenues increased by 74.5% over Q2 last year to Rs 3,641.29 crore, driven by higher contribution from global markets, which account for 61% of the total revenues.

The wind turbine generator (WTG) business contributed 84% to the gross sales of Rs 3,083.39 crore and grew by 91.2% year-on-year. Growth in WTG revenues was driven by a 68% rise in volumes to 645 MW and 9% rise in average price realisation to Rs 4.59 crore (per MW).

But, even as profits of WTG business grew by 80.2% to Rs 533.81 crore, margins fell to 17.31% from 18.41%, as the company incurred a one-time expense of Rs 43 crore towards restoration costs on account of disruption of operations in Dhule and Sangli.

The gearbox business (14% of revenues) grew 20.8% to Rs 527.59 crore. Suzlon plans to list its 100% subsidiary, Hansen Transmissions (a leading global gearbox manufacturer), on the London Stock Exchange.

Analysts expect this to unlock value. Mukul Jain, research analyst, Prabhudas Lilladhar says,

“Although it’s not clear whether Suzlon will sell off its partial stake or issue new shares in Hansen, the proceedings received from the listing should in all probability be used for expansion at Hansen itself (from 3,600 MW to 6,600 MW by 2008 and to 14,600 MW by 2010 tentatively).”

Overall, net profit grew by 67.8% to Rs 397.77 crore, to some extent curtailed by the near-doubling of interest expenses (adjusted for rise in other income) to Rs 85.21 crore.

While growth in revenues and net profit looks robust the tight supply chain situation in gearboxes and other components, which has partly impacted the margins.

Analysts expect the supply chain pressures to continue for the next few quarters. Also, interest costs are likely to remain higher given the company’s expansion plans.

Suzlon plans to spend Rs 2,600 crore to expand its integrated capacity from 2,700 MW to 5,700 MW by end of 2009 to cater to the rising demand.

It has an order backlog of Rs 16,328.04 crore, twice the Rs 7,985 crore revenues reported in 2006-07.

The stock has outperformed the Sensex since the beginning of this month in anticipation of good results for Q2 and the impending value-unlocking via listing of Hansen.

At Rs 1,741.05, the stock trades at 30 times its estimated consolidated EPS for 2008-09. While valuations appear to be high, the growth potential remains good. Long-term investors could consider it on the dips.

Contributed by Vishal Chhabria & Pallavi Pengonda