Suzlon Energy Ltd has had a terrible FY'13, but at the same time a crucial one too. It was the year when the company's India operations suffered the maximum liquidity problems with huge Interest payouts & Debt maturity repayments both coinciding at the same time. The Q3 & Q4 virtually went without any production as well as execution from the company's India division. Hence the revenue number suffered badly & the fixed costs meant that the company had to report huge operational losses for the 2nd half of FY'13.
But at the same time there have been some very positive developments for the company during H2 of FY'13. Suzlon's CDR package was approved & implemented by the company's Indian lenders. Under this CDR, the company's Debt repayment & Interest repayment has been rescheduled and there will be nil or very minimum payments to be made for an initial period of 18 months. Plus, the lenders have made a working capital of Rs.1500 crores available to the company, which will certainly help Suzlon in re-starting it's India operations & focus on execution of orders. The impact of these will be partially felt in Q1 of FY'14, but mainly boost the Q2 performance. Because of the CDR package, Suzlon's Equity Capital will increase about 65% from 177 crore shares currently to about 291 crore shares by the end of FY'14. This is mainly because the Interest due on loans taken from Indian Banks will be converted into Equity Shares of the company. In a way, the Banks are Investing their capital in Suzlon's business. This is a vote-of-confidence from the banks that the company can turnaround it's operations & be profitable again over the next 12-18 months.
Now coming to Suzlon's operations: It is mainly comprised of two units - Suzlon Wind, which is the company's India operations, and REpower Systems, which is Suzlon's wholly-owned German subsidiary acquired in late 2011. Suzlon Wind has almost all it's manufacturing operations in India, but does execution of Wind-farm contracts in many other countries as well, other than India. Suzlon Wind has gone through troubles times over the last few years. First it was the US economic/liquidity crisis in late 2008, which affected order flow, then there were reports of Quality issues in some of Suzlon's installations abroad, and finally the company's own liquidity problems over the last 12-18 months because of rising Interest burden & maturing Debt obligations. The recently implemented CDR package will allow Suzlon Wind to restart it's manufacturing operations & hence it's execution of pending orders.
On the other hand, REpower Systems is going from strength to strength. Over the last 2 years, REpower Systems has reportedly grown at a CAGR of 35%. It's revenues were reported to be 2.22 billion Euros in FY'13, which must be around Rs.14,000 to 15,000 crores. That also means that REpower Systems contributed around 75% of Suzlon's consolidated Total Income for FY'13, up from a little under 50% contributed in FY'12. Suzlon Wind had done revenues of about Rs.11,000 crores in FY'12, but it dropped sharply to just about Rs.4,000 crores in FY'13, mainly because of it's operations remaining shut for more than half of the fiscal due to liquidity problems. Despite Suzlon's huge losses during FY'13, the company paid a Tax of about Rs.350 crores, which must be almost entirely by REpower Systems. That means the German subsidiary is making decent amounts of Net Profit. Unfortunately the company has not been able to use REpower's Cash to repay some of it's Indian Debt. There is some kind of a lock-in period under the purchase agreement because of which Suzlon cannot access REPower's Cash balance.
Suzlon Energy Ltd is reportedly sitting on a consolidated Order Book worth over Rs.40,000 crores and 70% of that must be for REpower Systems. Thanks to the strength of the Order flows, we can expect REPower to easily post a 20% growth in it's revenues during FY'14. That means it should be somewhere close to Rs.18,000 crores. Suzlon Wind too is expected to do substantially more revenue this fiscal compared to last fiscal. I am expecting Suzlon Wind to do atleast Rs.7,000 to 9,000 crores in revenues this fiscal. That means Suzlon Energy's consolidated revenues should be in excess of Rs.25,000 crores this fiscal. With an expected EBITDA margin of about 10% during FY'14, the EBITDA figure too should be in excess of Rs.2500 crores. Since Suzlon has been given an Interest holiday for an 18-month period, the total Interest outgo this fiscal will be substantially lower at around Rs.500 crores compared to over Rs.1850 crores paid last fiscal.
This should help Suzlon Energy Ltd to post a healthy Net Profit for FY'14 at around Rs.1000 crores, translating into an EPS of about Rs.3/- even on the expanded Equity Capital of 291 crore shares. At the current share price of just about Rs.8/-, the company is commanding a measly Market Cap of less than Rs.2400 crores (on the expanded Equity Base), which is peanuts for a company which fully owns REpower Systems. At some point of time in the next few years, the lock-in period will be over or REpower will start generating Free Cash Flow and the company will atleast start declaring dividends, which will flow straight into Suzlon Energy's accounts since it owns 100% of the company.
This is the time for long term investors to tank up on shares of Suzlon Energy to the tune of atleast 4 to 5% of one's portfolio and sit on it for a period of atleast 2 to 3 years. As per my calculations, it should deliver stellar returns from current levels.
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