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.

Adani Power Ltd. - Seems like Good times are rolling in.

Adani Power Ltd is amongst the newest Thermal Power companies in India, but probably is already the largest Thermal Power producer in the Private sector, overtaking the big daddy (in terms of Age) Tata Power. NTPC, from the public sector, is the largest Power producer in India by miles. But many of it's power plants are old and are due for complete overhaul of equipment & machinery. On the other hand Adani Power Ltd. has built quite a few medium to large capacity Power plants using the latest super-critical technology, which makes it on the most efficient power producers in the country. Apart from building it's own power plants, Adani Power is also on the lookout for potential acquisitions. Last year it completed the acquisition of Lanco's Udipi project of 1200 MW, which is now making profits for the company, and is already planning on expanding it's capacity further by 1600 MW in the coming few years. Another couple of smaller acquisitions are in still awaiting clearances.

As things stand, Adani Power already has over 10,000 MW of Thermal Power generation capacity in operations and is looking to expand this capacity to about 20,000 MW by the year 2020. Eventhough this target is pretty aggressive to achieve, I think Adani Power is well prepared to be very close to that goal by that time. In order to achieve that goal, Adani Power needs to ensure that it's existing power plants are in good financial shape and are generating decent amounts of Cash Profits. Power Generation being not just a very Capital Intensive business, it also takes about 3-4 years to build & commission a new power project and then another year or two for it to breakeven on the Cash Profit front. It's interesting to see how Adani Power's financials have progressed over the last few quarters.

As usual I prefer to check the Trailing-Twelve-Months numbers while analysing financials of any business as it gives us some idea of a trend. Have a look at the T-T-M Total Income chart of Adani Power. After remaining steady within a range for a few quarters, it has started moving up again. As an when a new project gets commissioned, it starts adding to the company's revenues and the numbers for following 4 quarters show an increasing trend on T-T-M basis due to that project. Adani Power's Total Income crossed the Rs.25,000 crores mark after the most recent jump in March'16 quarter. Even if the Q4-FY'16 numbers are annualised, Adani Power's 12-months Income should be very close the Rs.30,000 crores level in another 3 quarters. This will take Adani Power to within 20% of Tata Power's Consolidated Total Income figure, which currently stands at around Rs.37,500 crores mark. If this trend continues, Adani Power should be overtaking Tata Power in another couple of years. And remember that Tata Power's Consolidated numbers includes many things other than it's Thermal Power generation business, like Renewable energy, Power Distribution business, Foreign assets, as well as a small unit dedicated to defence-related technologies. On the other hand Adani Power is a pure-play Thermal Power producer. (I understand that Adani Group's investments in Solar

Power generation projects were done by Adani Enterprises Ltd & not by Adani Power Ltd.. I am not sure if there has been transfer of assets arrangement between the two group companies as yet. I will try & find out more about it from Adani Power's FY'16 Annual Report.)

Coming to Adani Power's progress on the EBITDA front, it has got a substantial jump in the latest quarter, which took the T-T-M EBITDA of the company to it's best ever figure of Rs.8754 crores. In the next 1 or 2 quarters, it should be past the Rs.10,000 crores mark. Adani Power's 12-months EBITDA number is now within 5% of Tata Power's 12-months EBITDA number. The former will overtake the latter here as well within the next 1 or 2 quarters. It seems like some of it's projects, which were commissioned in the last 1 or 2 years, have reached peak operating performance. This combined with the operating turnaround of Adani Power's last acquisition, i.e. Lanco's Udipi Power project, seem to have boosted Adani Power's EBITDA as well as EBITDA margins. With the increased rollout of Central Govt.'s UDAY scheme, the financial health & payment track record of State Electricity Boards is expected to improve in the coming quarters. This will also help Power producers like Adani Power to receive their dues in full and with lesser delay. This will indirectly help these companies to control their Interest Costs, which is the biggest outgo from their EBITDA.

Since setting up a Power project is extremely Capital Intensive & most projects are funded by approximately 80:20 - Debt:Equity Ratio, the Interest burden forms a large portion of the project's cost, especially in the initial few years of the project's commissioning. From the time of Financial Closure of a project file & start of EPC work, it takes anywhere between 2 to 4 years to complete all the EPC work & commission the power plant. After commissioning, it takes about a year or two for the plant to reach near-peak operating performance levels. That is when the project starts generating healthy operating profits to not just cover the recurring Interest Cost, but also leave some Cash Profit to start repaying the Debt associated with that project. That is when we can say that the Project has matured.

Have a look at the T-T-M Interest Cost chart. Adani Power's 12-months Interest Cost stood at just over Rs.4000 crores in March'14, while it's EBITDA was over Rs.4800 crores then. By March'15, it's EBITDA jumped by just under 25%, but it's Interest Cost jumped by about 33%, which suppressed the company's Cash Profits. The situation has drastically improved over the last 1 year. Between

March'15 and March'16, Adani Power's 12-months EBITDA jumped by about 45%, while it's 12-months Interest Cost increased by only about 10%. This has led to a substantial expansion in Cash Profits for the company. Have a look at the T-T-M Interest/EBITDA % chart. From a peak level of about 93%, the situation has rapidly improved over the last 3 quarters and now Interest Cost forms just under 70% of the company's EBITDA. We could see some reversal in this trend for a few quarters as and when a new project is commissioned. But the existing operating projects, which have either reached maturity stage or approaching it, will help the company keep a tab on it's Interest Costs.

A quick comparison with Tata Power's 12-months Interest Cost number tells us that Adani Power's Interest Cost is nearly 70% higher than the former. In case of Tata Power, Interest Cost forms less than 40% of the company's EBITDA. This is case primarily because most of Tata Power's generating assets are much much older and many of them have already been paid for. Even in case of Adani Power, as the average age of it's generating assets increases, we will see the Interest/EBITDA % coming down to even more comfortable levels from the current near-70% levels.

Valuations: At the current share price of around Rs.29/- and considering the existing Equity base of 333.4 crore shares, the Market Cap of the company stands at about Rs.9700 crores. The Promoter Group increased it's shareholding in the company during March'16 quarter by 5%, when it converted the warrants it was holding at the rate of Rs.28 per share. This took the Promoter holding in the company to over 63%. Few weeks ago, another set of warrants were issued for 52.3 crore shares and the conversion price was set at Rs.32.54/-. Assuming full conversion sometime during the next 12 months, the Equity base will expand to just over 385 crore shares. Considering the expanded Equity base, Adani Power's Market Cap at current price will be around Rs.11,000 to 11,500 crores. At this Market Cap level, Adani Power is trading at less than 1.5 times it's T-T-M EBITDA and about 4 times it's T-T-M Cash Profit. Considering the fact that both the EBITDA and Cash Profit of Adani Power is set for a big surge over the next few quarters, I think this current valuation of the company is just too mouth-watering to ignore for Investors. Adani Power could very well prove to be a 2 or 3-bagger over the next 1 to 3 years. Excellent investment for the medium to long term.