INTERESTING READ ON SUZLON....
IMAGE 1)
The situation in Suzlon is a little complicated. We now know that Dilip Shanghvi of Sun Pharma fame bought a
truckload of shares - with an 1800 cr. investment, he bought 100 crore shares in the company. This helps the corporate governance structure of the company, but it does still leave a few financial questions.
We have written two posts about it:
• Suzlon faces 70% dilution on FCCB conversion
• Suzlon rids itself of REPower but it’s still overburdened.
We also know they have a truckload of FCCBs that are likely to be converted (and then, sold) because people will convert to shares and sell. That's about 158 cr. shares remaining to be bought and diluted.
Image 2)
Now, they will have about 600 cr. shares after dilution. The founder, Tulsi Tanti, will own 17.5%, Dilip Shanghvi gets 16.7%, and the rest is with the public.
Also it's important to unravel the sale of Senvion, which will give them about 1 billion euros. Here's what Suzlon has taken (as debt) to finance that acquisition.
Image 3)
Effectively, assuming the FCCBs convert (all of them), the debt in the company is
• $647M bonds
• $115M working capital
• $1.43 billion (8900 cr.) of rupee loans
That's a sum total of $2.2 bn.
They will get 1 billion euros for Senvion, which is about $1.15 billion. That will wipe out debt, and leaves them with $1.05 billion of debt.This will mostly be rupee debt, with a likely rate of about 11%.
Their interest costs will be $115 million at 11%, which is about Rs. 716 cr. per year.
Will They Be Profitable?
Let's look at their accounts:
Image 4)
The 9 month revenue was just Rs. 4,000 cr. and Earnings Before Interest, Tax and Depreciation (EBIDTA) was -280 crores, a loss!
Interest costs are now on top of this, so it makes earnings look really bad (nearly 1800 cr. for the nine months!)
But let's say we think they can generate Rs. 1 of Earnings per share.
They have 600 crore shares. (noted earlier)
So they need Rs. 600 crores of Net Profits after Interest, Tax, Depreciation etc.
Work the math backward
To get to a Rs. 600 cr. profit, let us:
• Assume no tax. All those losses of the last few years will have helped.
• They have about 300 cr. of depreciation per year. Assume that continues, so they have to earnRs. 900 cr.
• As we saw, they have 716 cr. of interest per year, so they have to generate 900+716= Rs. 1616 cr. in EBIDTA.
Will they be able to do this? For a number like this, they'll need either ridiculously high margins, or a big increase in revenues. It might be possible if they go back up to Rs. 10,000 cr. in revenues, but it's unlikely to happen otherwise.
The last time they saw anything close to this number was in 2006-07 when they had a profit before tax of 1600 cr. The bet now, is whether they will go back to those glory days.
The Dilip Shanghvi Money: Growth, But From Where?
They say the new money will be invested in technology and in growth. We're not sure where the growth is going to come from, because worldwide, the demand for wind energy will be muted due to the drop in crude prices, the drop in turbine prices and expiring tax benefits.
Vestas, one of the world's largest manufacturers, gave a low guidance for the coming year recently (lower revenue than 2014) and saw their shares tumble 8%.
If the international market won't help much (and with Senvion sold, it won't) the story has to be largely domestic. Their own reading of the domestic story is:
Image 6)
From 2,300 MW, they expect India to go to 4,000 MW in FY 17.
That means revenues might go up proportionately for Suzlon, a 70% increase in two years.
Current revenues are likely to be about Rs, 5,500 cr. (in FY 15)
They could get to Rs. 11,000 cr. from the India growth story.
If they do that, a margin of 15% means they make the 1,600 cr. EBIDTA they need.
The main consideration though is that India needs to respond. At this point, this will need a massive support from the budget.
Valuations
Even at Rs. 1 EPS the share, at Rs. 25 is at a valuation of 25x of 2 year forward earnings. To make it feasible, the company needs to earn even more money (a Rs. 1.5 to 2.0 EPS would be great). Or, the price needs to drop to 18-20 or lower.
They could get there if they invest in some newer tech, specially for India, like:
• harnessing energy in the sea (India has a long coastline)
• upper atmosphere wind harvesting, where you have very fast wind, and no interference.
• wind farms that could be set up on tall mountains
Such tasks will have to be promoted and the company will need to invest. But apart from that, they will need certain things:
• Continuation of Accelerated Depreciation and Generation based Incentives.
• Potentially, a requirement for thermal or non-renewable plants to "buy" or generate renewable power (so they'll either buy windmills, or buy "credits" from someone else who has, or some such). Note: We don't think this is a good thing, but economic forces think like this.
• Finally, for crude prices to go back up so that wind energy gains more acceptance.
Our View
We believe the budget will throw more into the mix here. We're not buying but we have analysed the stock so that if the opportunity were to arise, we should understand what levels the stock looks attractive at.
At this point, we would look to buy only if the accelerated depreciation (Introduced from Sep 2014) reflects in Suzlon's March quarter results. Or, if there is a big fillip to renewable power in the budget.
From a price perspective, if everything goes right the stock will be attractive on a valuation basis only at the Rs. 18-20 levels. Unless the financials can change dramatically, anything higher would not provide enough of a fundamental upside.
Technically, the stock hasn't even crossed its 52 week high, and is likely to see continuous selling pressure about Rs. 20 which is where the FCCB folks will convert and dump shares. So until a substantial volume has converted you will see the upside capped for the stock. In general comeback stories are rare, but this one looks interesting only because of the Shanghvi stamp of approval. Let's wait and see what the budget has in store.
IMAGE 1)
The situation in Suzlon is a little complicated. We now know that Dilip Shanghvi of Sun Pharma fame bought a
truckload of shares - with an 1800 cr. investment, he bought 100 crore shares in the company. This helps the corporate governance structure of the company, but it does still leave a few financial questions.
We have written two posts about it:
• Suzlon faces 70% dilution on FCCB conversion
• Suzlon rids itself of REPower but it’s still overburdened.
We also know they have a truckload of FCCBs that are likely to be converted (and then, sold) because people will convert to shares and sell. That's about 158 cr. shares remaining to be bought and diluted.
Image 2)
Now, they will have about 600 cr. shares after dilution. The founder, Tulsi Tanti, will own 17.5%, Dilip Shanghvi gets 16.7%, and the rest is with the public.
Also it's important to unravel the sale of Senvion, which will give them about 1 billion euros. Here's what Suzlon has taken (as debt) to finance that acquisition.
Image 3)
Effectively, assuming the FCCBs convert (all of them), the debt in the company is
• $647M bonds
• $115M working capital
• $1.43 billion (8900 cr.) of rupee loans
That's a sum total of $2.2 bn.
They will get 1 billion euros for Senvion, which is about $1.15 billion. That will wipe out debt, and leaves them with $1.05 billion of debt.This will mostly be rupee debt, with a likely rate of about 11%.
Their interest costs will be $115 million at 11%, which is about Rs. 716 cr. per year.
Will They Be Profitable?
Let's look at their accounts:
Image 4)
The 9 month revenue was just Rs. 4,000 cr. and Earnings Before Interest, Tax and Depreciation (EBIDTA) was -280 crores, a loss!
Interest costs are now on top of this, so it makes earnings look really bad (nearly 1800 cr. for the nine months!)
But let's say we think they can generate Rs. 1 of Earnings per share.
They have 600 crore shares. (noted earlier)
So they need Rs. 600 crores of Net Profits after Interest, Tax, Depreciation etc.
Work the math backward
To get to a Rs. 600 cr. profit, let us:
• Assume no tax. All those losses of the last few years will have helped.
• They have about 300 cr. of depreciation per year. Assume that continues, so they have to earnRs. 900 cr.
• As we saw, they have 716 cr. of interest per year, so they have to generate 900+716= Rs. 1616 cr. in EBIDTA.
Will they be able to do this? For a number like this, they'll need either ridiculously high margins, or a big increase in revenues. It might be possible if they go back up to Rs. 10,000 cr. in revenues, but it's unlikely to happen otherwise.
The last time they saw anything close to this number was in 2006-07 when they had a profit before tax of 1600 cr. The bet now, is whether they will go back to those glory days.
The Dilip Shanghvi Money: Growth, But From Where?
They say the new money will be invested in technology and in growth. We're not sure where the growth is going to come from, because worldwide, the demand for wind energy will be muted due to the drop in crude prices, the drop in turbine prices and expiring tax benefits.
Vestas, one of the world's largest manufacturers, gave a low guidance for the coming year recently (lower revenue than 2014) and saw their shares tumble 8%.
If the international market won't help much (and with Senvion sold, it won't) the story has to be largely domestic. Their own reading of the domestic story is:
Image 6)
From 2,300 MW, they expect India to go to 4,000 MW in FY 17.
That means revenues might go up proportionately for Suzlon, a 70% increase in two years.
Current revenues are likely to be about Rs, 5,500 cr. (in FY 15)
They could get to Rs. 11,000 cr. from the India growth story.
If they do that, a margin of 15% means they make the 1,600 cr. EBIDTA they need.
The main consideration though is that India needs to respond. At this point, this will need a massive support from the budget.
Valuations
Even at Rs. 1 EPS the share, at Rs. 25 is at a valuation of 25x of 2 year forward earnings. To make it feasible, the company needs to earn even more money (a Rs. 1.5 to 2.0 EPS would be great). Or, the price needs to drop to 18-20 or lower.
They could get there if they invest in some newer tech, specially for India, like:
• harnessing energy in the sea (India has a long coastline)
• upper atmosphere wind harvesting, where you have very fast wind, and no interference.
• wind farms that could be set up on tall mountains
Such tasks will have to be promoted and the company will need to invest. But apart from that, they will need certain things:
• Continuation of Accelerated Depreciation and Generation based Incentives.
• Potentially, a requirement for thermal or non-renewable plants to "buy" or generate renewable power (so they'll either buy windmills, or buy "credits" from someone else who has, or some such). Note: We don't think this is a good thing, but economic forces think like this.
• Finally, for crude prices to go back up so that wind energy gains more acceptance.
Our View
We believe the budget will throw more into the mix here. We're not buying but we have analysed the stock so that if the opportunity were to arise, we should understand what levels the stock looks attractive at.
At this point, we would look to buy only if the accelerated depreciation (Introduced from Sep 2014) reflects in Suzlon's March quarter results. Or, if there is a big fillip to renewable power in the budget.
From a price perspective, if everything goes right the stock will be attractive on a valuation basis only at the Rs. 18-20 levels. Unless the financials can change dramatically, anything higher would not provide enough of a fundamental upside.
Technically, the stock hasn't even crossed its 52 week high, and is likely to see continuous selling pressure about Rs. 20 which is where the FCCB folks will convert and dump shares. So until a substantial volume has converted you will see the upside capped for the stock. In general comeback stories are rare, but this one looks interesting only because of the Shanghvi stamp of approval. Let's wait and see what the budget has in store.
