There have been many HUGE developments for Suzlon Energy Ltd in the last month or two. First there was the news about Suzlon selling it's German subsidiary Senvion SE to a Private Equity Fund for Cash of approx. Rs.7200 crores. The market probably saw some bit of positivity in this developments, with Suzlon's share price moving up from Rs.12-13 levels to about Rs.15-17 levels. Then there were rumours about Dilip Sanghvi's family buying substantial stake in Suzlon, which got everyone excited. The reason was Dilip Sanghvi's credibility in the market, especially with the way he has brought up Sun Pharma to become India's biggest Pharma company.
Surprisingly, the rumours got converted into actual development in very quick time and we read announcements about fresh issue of 100 crores shares of Suzlon to Dilip Sanghvi & Associates (DSA) at a price of Rs.18 per share. Every since this development was confirmed, Suzlon's share price has zoomed and is currently hovering in the price range of Rs.25 to 28. Everyone seems to be expecting things to improve for Suzlon like a Magic Wand. But let me caution everyone that it's gonna take time, lots of time. Yes....all these developments, especially the entry of DSA as a large Investor in Suzlon, is a very Big Positive development. But the ground reality remains that Suzlon still has to do a lot of work to kick-start it's Non-Senvion operations, scale it up to a level where it becomes operationally positive, and then start generating enough Cash to be able to service it's Interest Cost. Even after repaying Rs.6000 crores from Senvion sale proceeds, Suzlon still has a debt of over Rs.8000 crores. Suzlon now has enough Working Capital available with it, so we can expect Suzlon's annual Interest Cost to drop by about 50% from levels of over Rs.2000 crores to something in the region of Rs.1000 to 1200 crores.
On the revenue side, my estimate is that Suzlon's Annual Revenues consolidated with non-Senvion subsidiaries must be in the region of Rs.4000 to 6000 crores. Currently the EBITDA margins must be very very low or even negative. But Suzlon will now focus on ramping up operations and improving profitability. We can expect Suzlon to ramp up it's Annual Revenues to about Rs.8,000 to 10,000 crores level in the next 12-18 months. EBITDA margins can improve to something like 10%, translating into an EBITDA of about Rs.800 to 1000 crores, just about enough to cover it's Interest Cost or marginally short of it. That means we could see Suzlon breaking-even at Cash Operating level in about 18 months time. Any further growth in Revenues & improvement in profitability will lead to Cash Profits. Maybe by FY'18 or FY'19, Suzlon could be posting Annual Revenues of over Rs.12,000 crores. Historically, Suzlon has enjoyed EBITDA margins of over 15%. Assuming the company manages to get to an EBITDA margin of 15% by FY'18 or FY'19, we could see the company reporting an EBITDA of over Rs.1800 crores. By then the Interest Cost might have reduced a bit and the company could be posting a Cash Profit of around Rs.1000 crores then.
Coming to the valuations part, the most important question is how much will Suzlon's Equity get diluted to? At the end of December'14, Suzlon's Equity Capital comprised of about 322 crores shares. The company has issued 100 crores shares to DSA. And it's FCCB holders are constantly converting their Bonds into Shares, bit by bit. In total I am expecting Suzlon's Equity Capital to comprise of over 550 crores shares when all these issues get completed and the FCCB's get fully converted. Remember that the FCCBs are getting converted at a fixed price of Rs.15.46 per share and a fixed USD rate of around Rs.60.50 per USD. Taking the Equity base number as 550 crores shares, Suzlon's current Market Cap at the share price of Rs.27, stands at close to Rs.15,000 crores. Remember Suzlon is not expected to generate a Cash Profit of Rs.1000 crores before FY'18, which is a good 3 years away. That means at the current price of Rs.27 per share, Suzlon's share price is already factoring in the numbers expected 2-3 years in future. Those numbers too are very optimistic estimates. I think from an Investor's point of view, it's best to exit Suzlon at current prices and wait patiently. I am sure we will see Suzlon at much lower levels in the next 12-18 months. One can re-enter Suzlon when the price corrects to levels of about Rs.20 or lower.
Surprisingly, the rumours got converted into actual development in very quick time and we read announcements about fresh issue of 100 crores shares of Suzlon to Dilip Sanghvi & Associates (DSA) at a price of Rs.18 per share. Every since this development was confirmed, Suzlon's share price has zoomed and is currently hovering in the price range of Rs.25 to 28. Everyone seems to be expecting things to improve for Suzlon like a Magic Wand. But let me caution everyone that it's gonna take time, lots of time. Yes....all these developments, especially the entry of DSA as a large Investor in Suzlon, is a very Big Positive development. But the ground reality remains that Suzlon still has to do a lot of work to kick-start it's Non-Senvion operations, scale it up to a level where it becomes operationally positive, and then start generating enough Cash to be able to service it's Interest Cost. Even after repaying Rs.6000 crores from Senvion sale proceeds, Suzlon still has a debt of over Rs.8000 crores. Suzlon now has enough Working Capital available with it, so we can expect Suzlon's annual Interest Cost to drop by about 50% from levels of over Rs.2000 crores to something in the region of Rs.1000 to 1200 crores.
On the revenue side, my estimate is that Suzlon's Annual Revenues consolidated with non-Senvion subsidiaries must be in the region of Rs.4000 to 6000 crores. Currently the EBITDA margins must be very very low or even negative. But Suzlon will now focus on ramping up operations and improving profitability. We can expect Suzlon to ramp up it's Annual Revenues to about Rs.8,000 to 10,000 crores level in the next 12-18 months. EBITDA margins can improve to something like 10%, translating into an EBITDA of about Rs.800 to 1000 crores, just about enough to cover it's Interest Cost or marginally short of it. That means we could see Suzlon breaking-even at Cash Operating level in about 18 months time. Any further growth in Revenues & improvement in profitability will lead to Cash Profits. Maybe by FY'18 or FY'19, Suzlon could be posting Annual Revenues of over Rs.12,000 crores. Historically, Suzlon has enjoyed EBITDA margins of over 15%. Assuming the company manages to get to an EBITDA margin of 15% by FY'18 or FY'19, we could see the company reporting an EBITDA of over Rs.1800 crores. By then the Interest Cost might have reduced a bit and the company could be posting a Cash Profit of around Rs.1000 crores then.
Coming to the valuations part, the most important question is how much will Suzlon's Equity get diluted to? At the end of December'14, Suzlon's Equity Capital comprised of about 322 crores shares. The company has issued 100 crores shares to DSA. And it's FCCB holders are constantly converting their Bonds into Shares, bit by bit. In total I am expecting Suzlon's Equity Capital to comprise of over 550 crores shares when all these issues get completed and the FCCB's get fully converted. Remember that the FCCBs are getting converted at a fixed price of Rs.15.46 per share and a fixed USD rate of around Rs.60.50 per USD. Taking the Equity base number as 550 crores shares, Suzlon's current Market Cap at the share price of Rs.27, stands at close to Rs.15,000 crores. Remember Suzlon is not expected to generate a Cash Profit of Rs.1000 crores before FY'18, which is a good 3 years away. That means at the current price of Rs.27 per share, Suzlon's share price is already factoring in the numbers expected 2-3 years in future. Those numbers too are very optimistic estimates. I think from an Investor's point of view, it's best to exit Suzlon at current prices and wait patiently. I am sure we will see Suzlon at much lower levels in the next 12-18 months. One can re-enter Suzlon when the price corrects to levels of about Rs.20 or lower.
Happy Investing !!!
(P.S.: Compared to 7-8 years ago, there is a lot more competition in the Indian Wind Energy space as well as in the Global Wind market. It's not going to be easy for Suzlon to improve profitability to historically high levels of over 15% in EBITDA margins.)
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