About Rs6,741 crore of Suzlon Energy Ltd’s market value has been wiped out this week ahead of and after the wind power company reported a 79.16% drop in first quarter profit.
Between Monday and end of trading on Thursday, Suzlon’s shares have dropped 15.27%, closing at Rs1,298.75 a share on the Bombay Stock Exchange. The bulk of the decline was on Thursday, when they fell 7.36%, or Rs103.15. Ironically, the shares had hit a 52-week high of Rs 1,569 a share in intra-day trading on 24 July.
Suzlon’s market capitalization now stands at Rs37,400 crores, down from Rs44,141 crore.
Thursday’s drop came after Suzlon reported results late on Wednesday night, saying profit after tax for the quarter ended 30 June fell to Rs20 crore (consolidated for all its subsidiaries and holdings), from Rs96 crore for the year-ago quarter. That sharp decline came even as sales rose 81.94% from the year-before quarter to Rs1,945 crore.
“Our target is that it may decline to Rs1,200 level as the pressure on the company’s margins is likely to continue,” said Mukul Jain, a sector analyst with Prabhudas Lilladher. Jain said falling margins would lead him to lower his earnings forecasts. “The company now needs to deliver margins up to 20-25% for the coming quarters, which seems unachievable if the rupee continues to appreciate,” Jain said.
Suzlon Energy chairman and managing director Tulsi Tanti argues that focusing on profit after tax isn’t the right measure of the company’s recent health. “Don’t look at our PAT, which has declined because of volumes in transit,” he insists. “Look at our gross margins, which have remained pretty much the same—it was 39% last year and this year it is 37%. The 2% drop can be attributed to the change in our strategy. We have just begun doing engineering and procurement contracts which have increased our revenues.”
But Suzlon had also blamed goods in transit for a slower growth in profits even for its 2006-07 fourth quarter results.
Supply delays for some of the equipment needed to build wind turbines may also crimp earnings, said fund manager Chakri Lokapriya at BNP Paribas Asset Management UK Ltd.
“There must be a focus on long-term demand for alternative energy, which is growing more robust across the globe,” said Lokapriya, who manages $600 million (about Rs2,400 crore) of stocks in London.
Meanwhile, Suzlon’s operating profits in the April-June quarter are also down significantly—a 24.73% decline to Rs140 crore in the quarter.
Tanti also attributes the latest quarter’s woes to a change in Suzlon’s business profile. “Most of our sales were coming from the domestic market till last year,” he said. “But from this year, a large part of our revenues will come from our international operations. So, while the interest we are paying on the Repower acquisition is showing on our first quarter results, the profits will show up only in the next quarter.”
Indeed, exports have, for some time now, been Suzlon’s key driver with overseas business share in the overall business, rising at a time when the rupee has been appreciating.
Suzlon acquired a controlling interest in Germany’s No. 3, by sales, wind power company Repower AG in June at a valuation of €1.34 billion. Suzlon has, till date, invested €450 million buying out other shareholders to emerge as the controlling stakeholder of the marginally profitable company. Areva SA, the French nuclear power developer, has to be paid by next year at the prevailing market price, Tanti said. Repower’s shares are trading around €130 per share levels on the Frankfurt stock exchange, lower than the €150 per share price paid by Suzlon to shareholders.
Tanti aims to raise the wind energy group’s consolidated manufacturing capacity to 4,200MW by 2011-12 at an investment of Rs3,310 crore, including Rs400 crore invested last year. Tanti says the company plans to invest Rs2,000 crore this year for expanding output amid a global shortage of wind turbines.
Tanti also said that the company was considering listing itself on a European exchange, but refused to elaborate beyond saying: “As and when strategically required, we will list our company in the international market. Once we are listed outside, it will give our investors more comfort.”
Suzlon expects to maintain margins for the full year, Tanti said. The rupee’s gain, higher employee costs and a transformation from an equipment supplier to constructing wind turbine towers had a marginal impact on gross margin, he said.
Hiralal Vora of Reuters and Archna Chaudhary of Bloomberg contributed to this story.