The Hindu Business Line : Retrofit costs haunt Suzlon earnings

BL Research Bureau A strong 37 per cent growth in Suzlon Energy’s volumes for the quarter ended March 2009 over a year ago numbers provided little succour to Suzlon’s earnings picture as extraordinary items dragged consolidated profits down by 32 per cent to Rs 315 crore.

Revenues, on a consolidated basis, expanded by a remarkable 85 per cent, aided of course by REpower consolidation.

Comparable revenue growth (as REpower’s financials have been consolidated only in the March quarter of FY-09) nevertheless remained robust at 33 per cent, suggesting that Suzlon, excluding its new acquisition REpower, has made healthy progress in execution of orders, despite slowdown and postponement of capex by clients. For FY09, Suzlon saw a 91 per cent growth in revenue while net profits plummeted by 63 per cent. Outstanding order book stood at Rs 7,901 crore or 1,463 MW.

The wind power equipment manufacturer continued to be troubled by expenses on its retrofit programme for defective turbines as well as liquidated damages. Even as Suzlon had made sufficient provisioning in the previous quarter, it had to incur additional costs in the March quarter as a result of the programme surpassing the original plan of completion by June. With just 80 per cent of the programme completed, the company was exposed to higher costs related to the non-completion of the remaining 20 per cent and also related turbine availability compensation. Turbine availability is the percentage of time that a plant is available for generation of power.

The management has stated that it has provided sufficiently for costs for the retrofit in the latest ended quarter and expects to complete the project by August. Any further delay can start harming Suzlon’s profitability and reputation. On the positive side, Suzlon’s subsequent version three of S88 turbines has shown encouraging performance. To this extent, its chances of receiving repeat orders may not be badly hit. While operating profit margins dipped to 6.3 per cent as a result of “other expenses”, adjusting for the extraordinary items OPM remained at the 13 per cent norm.

Net profits were also hurt by a 186 per cent increase in interest costs; interest on acquisition loans surprisingly remained low as the company managed to sell part of its stake in Hansen Transmission to fund the REpower acquisition. Suzlon’s key achievement during the quarter was its modification of debt covenant terms, especially with regard to FCCBs. This is likely to provide some relief to the balance sheet. Suzlon’s debt equity ratio at 1.1:1, nevertheless, may not provide much room to borrow further.

In this regard, the company’s plan to sell stake in Hansen partly or in entirety may be crucial to provide financial strength. It is to be noted, unlike the REpower acquisition, which is likely to provide a superior and multiple product platform as well as geographical diversification for Suzlon, the Hansen Transmission stake was more strategic to secure supply chain, specifically for gearboxes. We believe that Suzlon’s linkages to gearbox sourcing has improved since then, what with Hansen setting up facilities in India as well as China, where Suzlon’s key facilities are located.

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