Suzlon Energy – Falling Volumes And Declining Prices

In the equity markets no one can remain bullish on stocks forever. As there are highs for the stocks, there are lows as well. While companies go through a bad phase of business cycle, the stock prices move along the same direction. The bad phase of the business however may not last for a long time. During these times, though the stocks come down from their highs, investors hold the stocks of those companies who have strong fundamentals and bright prospects. The energy sector is one such where the demand will always be high what with a growing population pushing up the need for more energy.

As the commodity prices are increasing, renewable energy has a potential to replace the conventional energy sources. The outlook for the wind energy sector however has tumbled as globally there is a severe liquidity crunch. The governments across Europe are in a hurry to cut their budgets in order to reduce the debt burden and avoid the downgrades. Impacted by this the growth guidance for the sector was lowered form 15 per cent to 11 per cent and then to 7 per cent in FY12 alone. Presently the outlook for the wind power industry is 5.5 per cent for the next five years, indicating that the growth will be significantly lower in the future. We may see a further decline in guidance for the wind power sector as the photovoltaic cells have become cheaper.

Under such circumstances, Suzlon Energy, the world’s fourth-largest wind power company, has been seeing the investors’ bearishness on the bourses for the last five years. The shares of the company from January 2008 have lost by a whopping 96 per cent which means it has destroyed all the faith and the money that the investors had put in. Issues like failed REPower acquisition, huge pile of debt and receivables and the overall competitive environment for the wind power business has eroded the shareholders’ wealth in Suzlon Energy. The financial situation of the company is so delicate that the promoters have pledged almost all of their shareholding and had to extend the deadlines for the redemption of the FCCBs as well. The company is also divesting its non-core assets, which is a flip side of the acquisition it did earlier.

As the business environment has been severely impacted, Suzlon is also facing heat on that front. The order book position tells more about this. In the last three quarters the order book has remained nearly flat. Most of its orders are with its German subsidiary REPower which contribute 67 per cent to its total order book (in FY11 it contributed about 60 per cent). In the last two quarters, however, the REPower orders have remained almost flat which we believe could be due to the lower off-take. The orders in the international and domestic markets are also declining. Except for the December 2011 quarter, its order book has been constantly eroding. The domestic order book has also declined which is clearly reflected in the June 2012 domestic order book, which is down by 7.41 per cent.

Ahead of this the company is now moving in the emerging markets and has recently created a new post as CEO of ‘Operations in India and Emerging Markets’. The overall global wind power market is suffering from the situation of the overcapacity, pricing pressure and faded demand. We believe that Suzlon is not the only company to enter in the emerging markets; other top global wind makers are also entering that space there would be pricing pressure on that front as well. Suzlon’s margins have already squeezed hence there would not be much breather from the emerging markets.

Chinese growth has slowed down and hence Chinese turbine makers would start looking elsewhere for the business opportunity, overcrowding the wind power sector. Reports suggest that the global market is expecting 8 per cent decline in the wind power installations this year hence with many players, the pricing pressure will keep haunting the wind power companies including Suzlon Energy.

Since the external business environment is becoming tough, financially the company is not insulated as it carries debt loaded balance sheet. It debt burden has been increasing in last two years. By the start of the last fiscal (FY12), it had Rs 10,554 crore sitting in debt which grew to Rs 11,129 crore by March 2012. By June 2012 its net total debt has crossed Rs 13,000 crore with debt to equity ratio of 2.9x. The gross debt is Rs 14,389 crore little below the Rs 15000 crore mark in FY10. It is carrying a FCCB burden of Rs 3,641 crore of which about 700 crore are due in October 2012. Looking at its delicate financials and lower share price, it would become very difficult for the company to meet the October deadline of conversion / redemption.

As the company is moving towards the FCCB deadline, its stock price has been steadily declining. This bearish sentiment on the stock has continued for nearly five years now and we don’t expect a sudden change in the same. On standalone basis, the company has reported back to back losses in last four years while on consolidated basis, last three fiscals have been of losses. Even in FY13 the same story has continued as it has reported loss of Rs 850 crore in June 2012 quarter. We expect this year also to be repeat the same feat as the focus of the company is more on reducing the debt burden, divesting assets etc.

In FY10, the stock had shown some strength with high volumes, but that seems more of speculation lacking any fundamental support. In comparison to robust volumes in FY10, current volumes are far less. In this calendar year we have again seen spike in volumes, but towards the end of the year the volumes are again declining. We strongly believe that rise in volumes is mainly on account of the speculations and there is no fundamental change in the company. The decline in the share price clearly suggests it. The turnaround seems far distant possibility given the subdued business scenario and weak financials.

We have always told investors to exit the scrip as there is no health in the counter. We strongly suggest to ‘Exit’ the counter of Suzlon Energy.