Suzlon Energy vs Inox Wind - T-T-M Comparison post Q2-FY17.

I had posted a T-T-M comparison report between Suzlon Energy & Inox Wind a couple of months back based on the numbers available till Q1-FY17 (Click here for that report). The situation was clearly in favour of Inox Wind at that point. Coming to Q2-FY17 numbers announced recently, Inox Wind announced came out with substantially improved performance compared to Q1, but was still short of it's Q2-FY16 numbers. On the other hand, Suzlon Energy came out with numbers that can be termed as 'stupendous', especially the EBITDA & margin numbers, which also helped the company to post healthy Cash & Net Profit numbers for the quarter. While EBITDA margins were expected to be in the 14 to 18% range, Suzlon's Q2 numbers reported an EBITDA margin of almost 23%!! Suzlon's Q2 numbers have had a terrific impact on the company's T-T-M numbers. Hence it's prudent to see how the two companies now fare at the end of Q2-FY17.

At the end of Q1-FY17, Inox Wind's T-T-M Total Income was 49.5% of Suzlon's figure, which is now down to 42.3%, because of Suzlon's much stronger Y-o-Y performance in the latest quarter. On the T-T-M EBITDA front, Inox Wind's number was 74.5% of Suzlon's number last quarter, but now it is just 46%. The huge gap in EBITDA margins of the two companies on T-T-M basis has now been closed substantially. Suzlon's T-T-M EBITDA margin now stands at around 15.5% compared to 16.8% for Inox Wind. Now the big question is whether the 23% EBITDA margin posted by Suzlon Energy for Q2-FY17 is sustainable or was it due to some one-off event. We will come to know about it only after Q3 numbers are posted.

Coming to the Interest Cost of the two companies, this is the only part where Inox Wind's figure has maintained the same percentage over the previous quarter. Inox Wind's Interest Cost continues to be just under one-tenth of Suzlon Energy's Interest Cost. Interest Cost continues to be a pain point for Suzlon Energy. With a stupendous EBITDA performance and strong Cash Profit figure during Q2-FY17, there is a possibility of the company's Interest Cost showing decreasing trend in the coming few quarters. Thanks to the sharp jump in it's EBITDA, Suzlon Energy was able to post a decent positive T-T-M PBDT number this time, bridging the gap to Inox Wind considerably. Inox Wind's PBDT continues to be higher by a good margin, but the gap is now down by more than half of what it was at the end of the previous quarter. Market Caps of the two companies continue to maintain about the same proportions compared to what it was 2 months ago.

Other factors: From the above numbers, it is quite obvious that during Q2-FY17 Suzlon Energy has clawed back a major chunk of the advantage that Inox Wind held over it. But there is one small troubling factor for Suzlon Energy. During Q2-FY17, the company's Order Book dropped by over 100 MW, from levels of 1200+ MW to around 1100 MW. On the other hand, Inox Wind's Order Book expanded from 1100+ MW to over 1300 MW. Suzlon Energy's sales team will have to work harder to keep it's production & execution teams busy in the coming few quarters. On the other hand, Inox Wind's management has continued to exude confidence of achieving a Turnover of between Rs.5000 to 5500 crores for the current fiscal, despite the fact that the company's H1-FY17 turnover is lower than that of H1-FY16 by around 25%. Inox Wind will have to post a growth of 35 to 40% during the second half of this fiscal to achieve it's targeted turnover. They have enough orders in hand and that is probably where the management is getting it's confidence from. Let's wait & watch for Q3 numbers, which should be announced in February'17.

Suzlon Energy vs Inox Wind - Trailing-Twelve-Months comparison!!

Suzlon Energy Ltd.'s sale of Senvion AG got concluded in the last week of April'2015. Hence there was some impact of the German subsidiary on Suzlon's numbers for Q1-FY'16. From Q1-FY'16 onwards, it's now completed 4 full quarters of Suzlon's own performance. Hence now we can start comparing Suzlon's numbers with Inox Wind Ltd., which is a smaller & much younger player in the Wind Energy business in India. Frankly, I had never had a proper look of the numbers from Inox Wind Ltd until the day I was writing a post on Suzlon Energy about 3 months ago. (Click here for that post) After a quick glimpse of Inox Wind's numbers that day, I have studied the numbers better & tried to analyse the company's business performance properly. And I have become a fan of Inox Wind Ltd. I have been closely following the company's share price movement since then and have also included it in my portfolio with reasonably weightage.

Now let me present you the comparison of Trailing-Twelve-Months numbers of Suzlon Energy & Inox Wind:

The Financial Numbers presented here are for the 12-months period from July'15 to June'16. The Market Cap numbers are arrived at by using closing share prices of 20th Sept'16 alongwith the Equity Capital figures for June'16 result. While Inox Wind's Equity Capital is not expected to change any time soon, Suzlon's Equity Base could expand soon from the current level of 502 crore shares to potentially about 599 crore shares, as and when the remaining FCCBs also get converted into shares. Hence the effective fully-diluted Market Cap of Suzlon Energy is potentially nearly 18-20% higher than the number I have mentioned in the table alongside.

As we can see, Inox Wind's Total Income is just under 50% of Suzlon Energy's Total Income. How this percentage number moves in the coming quarters will tell us which one of the two is growing faster. Coming to the EBITDA numbers, Inox Wind's EBITDA is a whopping nearly 75% of Suzlon Energy's EBITDA number. This clearly means Inox Wind is currently enjoying very superior EBITDA margins when compared to Suzlon Energy. We can certainly give some space to Suzlon Energy here as it is still in the midst of a business revival & hence is expected to see a substantial improvement in it's EBITDA margins in the coming quarters. We can certainly expect to see the Inox-to-Suzlon EBITDA comparison percentage coming down to about 65% in the coming 2-3 quarters. I will certainly be disappointed with Suzlon's performance if this does not happen.

Coming to the Interest Cost comparison, it's a no-brainer. Inox Wind's Interest Cost is less than 10% of Suzlon Energy's Interest Cost. On one hand Inox Wind's Net Debt was very low until 2 or 3 quarters ago as the company had enough Equity Capital and Cash Profits to fund it's operations. The Net Debt has now risen to about Rs.1500-1600 crores over the last couple of quarters primarily due to huge capacity expansion undertaken & higher working capital requirements. On the other hand, Suzlon Energy continues to have some bit of Debt hangover from it's past. Even though the 12-months Interest Cost for Suzlon has already dropped by close to half, it still has more work to do in order to bring it down to reasonable levels. The company will need improved Cash Profits to take care of it's expansion requirements on one side as well as paring down it's debt on the other side. Taking the 12-months Interest Cost well below the Rs.1000 crores mark will remain a challenge for Suzlon Energy, atleast in the coming few quarters. Thanks to this Interest Cost factor, Inox Wind will continue to enjoy substantially superior Cash Profit & Net Profit margins in the coming few years.

Suzlon continues to be PBDT Negative currently, but is expected to be in the positive in the next 1 or 2 quarters. But Suzlon might take much longer time to come close to matching Inox Wind's PBDT numbers, maybe even 2 years. Coming to Market Cap comparison, Inox Wind's market value is just about 56% of Suzlon's (non-diluted) figure. This is despite the fact that Inox Wind is already posting healthy profits, while Suzlon continues to be Loss making. Higher Market Value being awarded to Suzlon then suggests that the market expects Suzlon's Financial performance numbers to improve substantially in the coming quarters. It will be interesting to see if this expectation turns out to be true or the market changes it's opinion in the coming months and we see a substantially stronger increase in market value of Inox Wind in comparison to that of Suzlon Energy. Let's wait & watch. My bet is on Inox Wind to get re-rated upwards in the coming months/quarters, while Suzlon continues to linger within a 10-20% range from current levels.

How good is the situation with Suzlon Energy Ltd.?

Suzlon Energy Ltd. got rid of a substantial portion of it's Debt pain in the month of April'15 when it's sale transaction of it's German subsidiary Senvion, was executed. There was another big positive development for Suzlon in the first couple of months of 2015, which is the entry of a Strategic Investor in the form of Sun Pharma's promoter, in his personal capacity. Considering all these developments, I had written a post on Suzlon Energy Ltd. in the last week of February'2015. Here is the link to it:

Suzlon Energy Ltd. - Supremely Over-valued at current levels!!

I am very happy to say that most of the expectations that I had expressed in that post have come perfectly true over the last 12-15 months. Suzlon's stock price was flying after the two big announcements & had more than doubled within a short span of time. I wanted Investors to have a realistic view of the things at Suzlon & not jump into it at crazy valuations.

Things have cooled down now and Suzlon's share price is about 40% lower than those levels about 15 months ago. Now lets to a reality check again based on the current situation.

Suzlon Energy Ltd's management has done an excellent job of reviving it's India operations in very quick time post sale of Senvion. The substantial Working Capital available to the company throughout last year certainly helped the management to get things moving rather quickly. The entry of a credible strategic investor also infused lots of confidence, not just in the management, but also amongst it's potential

customer base. As per my rough estimates, Suzlon Energy Ltd must have managed a near 60-70% growth in Revenues for it's Non-Senvion operations. The company posted a Total Income figure of about Rs.9600 crores for FY'16, which is closer to the upper limit of the expected range I had mentioned last year. On the EBITDA front, Suzlon managed to post little over Rs.1000 crores, which translates into an EBITDA margin of between 10 to 11%. What is even more heartening is that the EBITDA margin was consistently over 13% for the last 2 quarters of the fiscal gone by.

The chart alongside shows the T-T-M progress of Suzlon Energy's Interest Cost vs it's EBITDA. As was expected, Suzlon's 12-months Interest Cost has dropped rapidly and stood at little over Rs.1200 crores for March'16. I am pretty confident that the same will be around Rs.1000 crores within the next 1-2 quarters. At the same time, the company's EBITDA, which is currently falling a little short to cover the Interest Cost on 12-months basis, has already overtaken the latter during Q4-FY'16 on a quarterly basis. Even on 12-months basis, Suzlon's EBITDA is expected to be higher than it's Interest Cost either by end of June'16 or by Sept'16. This break-even at Cash Profit level gives a lot of confidence to all stakeholders of the company, including it's lenders.

Going forward, the growth the company is able to generate will depend on the Order Inflow momentum in the coming months & quarters. The order intake was extremely strong during Q4, which helped build Revenue-visibility for the company to about 9 to 10 months of current fiscal. But that is not enough. To enable the company to confidently expand it's capacity further, the Revenue-visibility should be in excess of 18 months. As per media release post announcement of Q4-FY'16 results, the management of Suzlon has mentioned that it is expecting the Wind Energy market in India to expand by another 30% in this fiscal and they are confident of doing better than industry growth. But I prefer to be conservative in my estimates and would be happy even if Suzlon manages a Topline growth of between 20 to 25% for FY'17 (i.e. Revenues of around Rs.11,500 to 12,000 crores), alongwith improvement in EBITDA margin to about 15% (i.e. an EBITDA of close to Rs.1800 crores). With Suzlon's Interest cost expected to dip further to little under Rs.1000 crores for FY'17, the company will be left with post-Interest Cash Profit of about Rs.800-850 crores.

Valuations: Suzlon's Equity Capital currently comprises of about 502 crore shares. But it's expected to increase further to over 550 crore shares once all the remaining FCCBs are converted into shares. At the current share price of around Rs.17/-, Suzlon's market capitalisation on fully-diluted equity capital stands at around Rs.9500 crores. At this level, the company is valued at just about 11-12 times it's Post-Interest Cash Profit expected for FY'17. This cannot be termed as very expensive valuations anymore, especially considering the positive momentum surrounding the company. But then if we have a look at the financial numbers & valuation of Suzlon's younger competitor, Inox Wind Ltd., which is also expected to manage a Post-Interest Cash Profit of around Rs.800-850 crores for FY'17, despite being much smaller in Revenue terms, purely because of sharply lower Interest burden. Inox Wind currently trades at a Market Cap of just about Rs.5300 crores, which is nearly 40% lower than Suzlon's current Market Cap. Suddenly Suzlon's valuation starts looking far expensive in comparison. Hence a lot will depend on whether & how Suzlon manages to outperform the conservative growth estimates I have mentioned above. If Suzlon does manage to post much stronger growth rates of around 40% or so, then we can say that it can hold on to the current valuations or even see some bit of up-rating. But I am not expecting any run-away rally in Suzlon stock in the coming few months. I would prefer to wait & watch the company's results for another 2 or 3 quarters before I can say if it deserves any higher Market Cap or not. Alternately, if the entire Industry is re-rated upwards, then Suzlon's stock could rally higher.

Suzlon Energy Ltd. - Supremely Over-valued at current levels!!

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. 

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.)

Suzlon's price collapse: Is it time to Panic?

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. 

Suzlon Energy's progress till Q2-FY'14.

Frankly, Suzlon Energy's Q2 FY'14 numbers did disappoint me a little bit. But still, it is a positive indicator compared to Q1, when Suzlon had posted Consolidated revenues of about Rs.3900 crores, the lowest figure in 9 quarters. Suzlon's EBITDA loss was at Rs.291 crores in Q1. For Q2, Suzlon has posted a 23% Q-o-Q jump in Consolidated revenues to about Rs.4800 crores and an negligible EBITDA loss of less than Rs.20 crores. Suzlon's cost reduction efforts seem to be showing it's effect in both Q1 & more so in Q2. The near break-even on the EBITDA front in Q2 itself is a very big relief. Any further boost in order execution will lead to bigger boost in Suzlon's EBITDA in the coming quarters.

The following chart shows Suzlon's Quarterly progress on Total Income, EBITDA & Net Profit over the last 10 quarters. Note the improvement the company has posted in the last 2 quarters, compared to the immediately preceding quarters.

Suzlon's Order book stands expanded at over Rs.43,000 crores. REPower continues to win new orders at a pace faster than it's execution. Hence, it's order book is gradually increasing. In the first half of the current fiscal, REPower contributed nearly 80 to 85% of Suzlon's Consolidated revenues. The company's India division has started moving, but there is still work to be done to get to levels where it was about 4 to 6 quarters back. Suzlon Wind has done lots of restructuring work during H1 of FY'14. Hopefully, Suzlon Wind's order execution will improve substantially from Q3 onwards. Increasing order execution will give confidence to it's customers, vendors & partners, and this will ultimately help it win more orders in the coming quarters.

Suzlon's stock price has started moving up in the last couple of weeks. From levels of about Rs.7, it has now got into double digits. At a price of Rs.10/-, Suzlon's Market Cap on Fully diluted Equity Base will be close to Rs.2900 crores, which I feel is still very small compared to the company's potential. If Suzlon does manage to successfully get back to normal speed of execution in the next 3 to 4 quarters, it could be doing handsome levels of EBITDA & Cash Profits. And once the Cash Profits start pouring in, Suzlon could start reducing it's Debt burden. This could further boost Suzlon's valuation. But all these things could take upto 2 years of hard work for the company's management. But if they do manage, then Suzlon's valuation could easily scale upto well in excess of Rs.15 to 20,000 crores or more.