Suzlon improves execution, FCCBs remain key worry

With Suzlon Energy sustaining profitable operations for the second consecutive quarter, the company has managed to mitigate two of the three concerns that have haunted it since the 2008 slowdown.

Order flows, initially sluggish, had picked up from the beginning of 2011 itself. The latest June quarter numbers reinforce improved pace of execution for the company.

The third concern of FCCBs (foreign currency convertible bonds) falling due in FY-13 and FY-14, though, remains.

The company would have to maintain very strong operating cash flows either to fundamentally push the stock price to levels closer to the FCCB conversion price or to repay if the bonds are not converted by the holders.

Record execution

Suzlon Energy has seen a turnaround in performance in 2011 at a time when its international peers Vestas and Sinovel Wind Group Co have been in losses or are struggling to grow profits.

The June quarter was unusually strong for Suzlon, with record execution of 437 MW by the parent alone. In all, sales expanded by 80 per cent compared with a year ago, thanks to high execution in the Indian unit and by subsidiary REpower. The quarter was clearly a volume-driven one, as the parent's realisations saw a sharp dip from Rs 6.9 crore/MW in the June 2010 quarter to Rs 5.9 crore/MW.

While this could be a result of product mix as well, we do not expect realisations to see any sharp improvement as much of the orders received recently are bulk orders which could typically have required price discounts. The aggressive reach of competitors Vestas and Gamesa in the Indian market too, could keep pricing under pressure for some more time, until Suzlon decides to bring REpower's equipments to the Indian market.

EBITDA margins at 12 per cent for the June quarter remained healthy, thanks to the high volumes.

Suzlon's consolidated order book at Rs 29,300 crore is primarily driven by order flows from India, besides REpower's own orders. The order book provides revenue visibility for another 18 months. Surprisingly, new orders from North America have seen a revival after a lull for almost a year. While competition in the Indian market would be intense, Suzlon may have a couple of strategies up its sleeve to maintain its current market share of over 50 per cent.

The company has introduced its S9X series of products which also cater to low-wind sites and has already received orders for this product. Its introduction of REpower products, which can be expected after the squeeze-out proceedings of the remaining 5 per cent stake for the subsidiary is over, can be expected to provide unique offerings to customers in the Indian market.

FCCB worries

Suzlon's chief worry now remains its FCCBs falling due for repayment in 2013 and 2014. The liability including redemption premium would be around Rs 4,900 crore; the premium notably is not provided for in its accounts. The first tranche falling due in June 2012 has a conversion price of Rs 76.6 (current market price Rs 54). Stake sale of its holding in gearbox maker Hansen Transmission would provide about Rs 828 crore, while receivables from a major client at Rs 900 crore, if received in the current year, would further add to the cash kitty.

The cash-rich status of REpower (over Rs 2,000 crore as of March) may also help. If Suzlon does not generate strong operating cash flows over the next three quarters, it would have to dig into its reserves (which are sufficient to cover this outstanding liability), though this is not a welcome proposition. The company, meanwhile, has received board approval to raise Rs 5,000 crore through shares or other means.

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