There was panic amongst Suzlon's shareholders on Friday, i.e. 19th Sept.'14, when the company's stock price hit Lower Circuit within minutes of starting to trade at 9:15 am. Hitting the Lower Circuit was nothing new for Suzlon's counter, but the Panic was due to the quantity of shares up for Sale. There were over a crore shares up for sale in the early minutes and the quantity kept piling up through the day with every passing hour. By the end of the trading on Friday, the Quantity had increased to about 10 crore shares. During the day nearly 92 lakh shares were traded on NSE alone and as expected most of them went for delivery. Monday was no different as over 15 crore shares were put up for Sale on NSE and only about 34 lakh shares were purchased.
The reason for this huge Sale quantity since Friday is that part of the FCCB holders converted their Bonds into Equity shares of Suzlon & they are cashing out. About 13% of the total FCCBs were converted into shares this month & the total quantity issued is 27 crore shares of Suzlon & it's pretty obvious that these holders are in a big hurry to cash out. What is foxing me is that why will these Institutions put such large Sell orders in one go, which is bound to scare away genuine buyers too. Any potential buyer of Suzlon shares will certainly postpone his/her purchase decision thinking that such large Sell orders will bring the price further down in a few days & it will be more attractive to buy then. Some buyers will even start questioning whether Suzlon's business recovery is actually true or not as for many shareholders the share price movement reflects the positives or negatives happening in the company's operations.
Now the Question that arises is till when will this slide continue? If we believe that the FCCB holders who converted their bonds into shares are lining up to sell and they seem to be in a tearing hurry to cash out, then will they stop selling at the price that they got their shares, i.e. about Rs.15.50/-. If they are too desperate for Cash, then some of them might continue to Sell even lower than that price. But atleast some of them who are not so desperate will withdraw their Sell orders and at the same time we could see some other large Institutions who believe in Suzlon's recovery to start buying the beaten down stock as it will get very attractive at the price of close to Rs.15/-. Even if we look from the valuation side, Suzlon was fairly valued when at Rs.20-22 range. In my previous post on Suzlon, I had mentioned that I am expecting Suzlon's Market Cap to climb to about Rs.10,000 crores by the end of this fiscal or middle of next calender year. At the end of June'14 quarter, Suzlon's Equity Capital consisted of about 271 crore shares. The company has issued about 34.2 crore shares this quarter including the 7.18 crore shares issued to CDR Lenders & 27.03 crore shares issued to FCCB holders. So the company's Equity Base has already expanded to little over 305 crore shares. At the price of Rs.18/-, Suzlon's Market Cap stands at about Rs.5500 crores, which is not far away from the company's current Fair Valuation.
Now here comes the Real Scary Part: Only about 13% of the FCCBs have been recently converted into shares, which translated into 27.03 crore shares. If the remaining FCCB holders also decide to convert their Bonds into shares, then another 181 crore shares will be issued by Suzlon, further diluting the company's Equity capital. And the scariest part is that all these Bonds will be converted into shares at a price of Rs.15.46/- each and at a Fixed USD rate of Rs.60.225/-. If all these bonds get converted into shares ( and I am sure they will convert at some point if the share price trades at a substantial premium to their conversion price ) then Suzlon's Equity base could be at a touching distance of 500 crore shares. The Equity dilution will be massive and then we can forget the possibility of Suzlon's share price flying away to much higher levels for a considerable amount of time. Every time it goes a bit higher, some of the Bond holders will convert their shares & Sell them to Cash Out.
After considering the possibility of FCCB conversion, I am of the opinion that Suzlon's share price might not go much above Rs.30 level for atleast the next 2 years. Approaching Rs.30/- itself will be very difficult. Other that the FCCB holders, the CDR Lenders are being issued shares at a price of about Rs.18.50/- with a lock-in period of 1 year from the date of issue. Sometime in 2015 even the CDR lenders could think of selling their holding if the share price is trading at a decent premium to their conversion price. One thing is for sure that Suzlon's share is not going to be a Multi-bagger until all these hangovers are eliminated.
The reason for this huge Sale quantity since Friday is that part of the FCCB holders converted their Bonds into Equity shares of Suzlon & they are cashing out. About 13% of the total FCCBs were converted into shares this month & the total quantity issued is 27 crore shares of Suzlon & it's pretty obvious that these holders are in a big hurry to cash out. What is foxing me is that why will these Institutions put such large Sell orders in one go, which is bound to scare away genuine buyers too. Any potential buyer of Suzlon shares will certainly postpone his/her purchase decision thinking that such large Sell orders will bring the price further down in a few days & it will be more attractive to buy then. Some buyers will even start questioning whether Suzlon's business recovery is actually true or not as for many shareholders the share price movement reflects the positives or negatives happening in the company's operations.
Now the Question that arises is till when will this slide continue? If we believe that the FCCB holders who converted their bonds into shares are lining up to sell and they seem to be in a tearing hurry to cash out, then will they stop selling at the price that they got their shares, i.e. about Rs.15.50/-. If they are too desperate for Cash, then some of them might continue to Sell even lower than that price. But atleast some of them who are not so desperate will withdraw their Sell orders and at the same time we could see some other large Institutions who believe in Suzlon's recovery to start buying the beaten down stock as it will get very attractive at the price of close to Rs.15/-. Even if we look from the valuation side, Suzlon was fairly valued when at Rs.20-22 range. In my previous post on Suzlon, I had mentioned that I am expecting Suzlon's Market Cap to climb to about Rs.10,000 crores by the end of this fiscal or middle of next calender year. At the end of June'14 quarter, Suzlon's Equity Capital consisted of about 271 crore shares. The company has issued about 34.2 crore shares this quarter including the 7.18 crore shares issued to CDR Lenders & 27.03 crore shares issued to FCCB holders. So the company's Equity Base has already expanded to little over 305 crore shares. At the price of Rs.18/-, Suzlon's Market Cap stands at about Rs.5500 crores, which is not far away from the company's current Fair Valuation.
Now here comes the Real Scary Part: Only about 13% of the FCCBs have been recently converted into shares, which translated into 27.03 crore shares. If the remaining FCCB holders also decide to convert their Bonds into shares, then another 181 crore shares will be issued by Suzlon, further diluting the company's Equity capital. And the scariest part is that all these Bonds will be converted into shares at a price of Rs.15.46/- each and at a Fixed USD rate of Rs.60.225/-. If all these bonds get converted into shares ( and I am sure they will convert at some point if the share price trades at a substantial premium to their conversion price ) then Suzlon's Equity base could be at a touching distance of 500 crore shares. The Equity dilution will be massive and then we can forget the possibility of Suzlon's share price flying away to much higher levels for a considerable amount of time. Every time it goes a bit higher, some of the Bond holders will convert their shares & Sell them to Cash Out.
After considering the possibility of FCCB conversion, I am of the opinion that Suzlon's share price might not go much above Rs.30 level for atleast the next 2 years. Approaching Rs.30/- itself will be very difficult. Other that the FCCB holders, the CDR Lenders are being issued shares at a price of about Rs.18.50/- with a lock-in period of 1 year from the date of issue. Sometime in 2015 even the CDR lenders could think of selling their holding if the share price is trading at a decent premium to their conversion price. One thing is for sure that Suzlon's share is not going to be a Multi-bagger until all these hangovers are eliminated.
2 comments:
Good analysis...albeit incomplete...my analysis:
Senvion, which is valued around 25k crores is expected to be listed on LSE by end of FY15 with a 25% stake offloading which shall further help Suzlon address its huge debt – this will help the stock price in two ways: (1) Current market capitalization of Suzlon is around 5k crores and assuming Senvion at listing is valued at 25k crores then this itself shall take Suzlon stock to around Rs 108 (as there are 277 crore shares of Suzlon including the recent 27 crs dilution) and (2) With the proceed from Senvion listing, Suzlon debt shall be reduced significantly - meaning its earning potential shall increase substantially and hence, the stock should go up dramatically thereafter – that’s an upside we can’t predict at this point. Further, assuming the remaining bondholders also decide to covert into shares, we will have another round of dilution taking the total shares base of Suzlon to about 458 crore shares and with Senvion listed by end of FY15, we can expect look at Suzlon price at Rs 65 to a share plus an upside resulting from better earnings prospect after debt reduction – all this expected within 2015. So, in less than 2 years, Suzlon is sure to be a multi-bagger from here!!
I think that many of your numbers are on the optimistic side. As per Suzlon's management, Senvion's valuation is expected to be just around Rs.8k crores, which I feel is very low. It should be around Rs.12-13k crores. Suzlon's Equity has expanded to over 300 crore shares now. It will be seen in the Q2 result. But major dilution is yet to happen. The company's management is even thinking of raising Debt at Senvion & sell some assets from Suzlon's India business to Senvion. This move could help reduce Suzlon's high-cost debt at the India business. All these things will certainly help, but the overhang of potentially large Equity dilution due to FCCB conversion cannot be ignored. I too am very positive on Suzlon's operational recovery (pls read my earlier posts). But the huge fresh issue of shares might not let the share price fly away until the company starts posting healthy Net Profit numbers again, which itself is more than 4-6 quarters away. If the FCCBs are not converted during the next 12 months, we could see Suzlon's share price move to Rs.30 levels, but I strongly feel that other FCCB holders will also look at conversion sooner or later, considering the very attractive price that the company has offered them. And if conversions happen, then Suzlon's share price will really find it very very difficult to reach the Rs.30 levels in the next 12-18 months.
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