SUZLON is in classic turnaround territory
Improving operational efficiencies, healthy order book, seasoned management, and considerable market demand bodes well for a turnaround. We are LONG.
Founded in 1995, Suzlon Group is among the world’s leading renewable energy solution providers, having installed over 19.4 GW of wind energy capacity in 17 countries over the past two decades. Suzlon Energy Limited (SUZLON), a flagship company of this group, is primarily engaged in the manufacture of wind turbine generators (WTGs) and related components of various capacities. Further, SUZLON is the only company that offers end-to-end service to its customers i.e. covering wind mast, land acquisition, connectivity, development and Operations and Maintenance Services (OMS).
A market leader that continues to be at the forefront
Wind energy in India has tremendous potential considering the cost of generation is 40 percent lower than conventional sources of power, according to the Global Wind Energy Council. India has set a target of harnessing 140 GW of renewable wind energy capacity (of which 30 GW is offshore wind) by 2030, growing at a CAGR of ~16% from current levels of 41.6 GW. Furthermore, of this 41.6 GW, more than 25 GW would need repowering as per estimates of the National Institute of Wind Energy. With an annual capacity of ~3,000 MW (2.1MW per unit), SUZLON is well positioned to take advantage of this opportunity.
A committed management despite headwinds
The company has faced several operational and external challenges over the last few years because of impaired volumes and high fixed cost structure of its WTG business. Undergoing a major restructuring and deleveraging exercise through a resolution plan (proposed by Late Mr. Tulsi Tanti) debt was reduced from INR13,000 cr to INR 3,000 cr. With a reduced financial burden, business-friendly government regulations, an increase in order book of WTG business, and a growing pipeline under OMS thanks to promoters' extensive experience, the company is on the verge of turnaround. The company is also backed by the Sanghvi family (Sun Pharma promoters) that hold around 11% and has an order commitment of 327.6 MW from the Adani group.
De-risking the investment profile due to ongoing financial improvements
SUZLON’s recent INR900 cr rights issue (oversubscribed 1.8 times thanks to participation by retail investors) would pare down its Debt significantly. If we look at growth on a 5-yr basis there is decline. However, if we look at the last 3 yrs - a significant uptick is evident considering improved capacity utilization (~30%) and higher OMS operations (from 12 GW to 13.4 GW assets under service). Margins are likely to follow considering increasing expected share of OMS business (typical WTG margin is 2-3%; OMS margin being ~40%). With 2x interest coverage rising steadily, leverage appears somewhat accommodating. And with more than 1 GW of orders, the financial parameters are on road to improvement.
Watch out for potential risk factors
Given the lower capacity utilization, cash flows from WTG business alone are not sufficient to cover debt. Key segment is the OMS segment. The company needs to regularly excel in the OMS business which attracts almost +40% EBITDA margins thereby inviting other small and medium size players. Nevertheless, commodity prices and huge working capital are also the key requirements for WTG business, and any significant variation in them could wipe-off any profits.
Valuation on absolute and relative basis looks fairly lucrative
SUZLON currently trades at 13.58x EV/EBITDA and 1.75x EV/Sales on LTM basis. Close comps like Inox Wind Ltd (NSE: INOXWIND) trades at -13.36x EV/EBITDA and 8.12x EV/Sales, while Orient Green Power Ltd (NSE: GREENPOWER) trades at 8.67x EV/EBITDA and 6.06x EV/Sales. Valuations are comparable wrt domestics however at a discount vs. global averages. To illustrate, global companies like Vestas trades at 61.08x EV/EBITDA and 1.99x EV/Sales, Goldwind 17.37x EV/EBITDA and 1.84x EV/Sales, Mingyang 10.68x EV/EBITDA and 1.84x EV/Sales, while Siemens at -ve EV/EBITDA and 1.65x EV/Sales. Given the growth prospects of the Indian market, Suzlon is priced at the lower end. The company’s debt has been receiving investment grade rating i.e. BBB- (vs. D grade in FY2020), indicating a fairly meaningful endorsement in its turnaround narrative.
We are LONG on the stock and continue to remain positive in the medium-term.
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Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.