The Suzlon Energy stock was punished by the market on Tuesday after the company announced results well below street expectations.
The company has disappointed on volumes, on margins and on profits. Net profits for the company’s consolidated operations in the March quarter were Rs358.98 crore, lower than the year ago figure of Rs375.26 crore. Operating margins of around 17% for the wind turbine business in FY07 were well below the guidance of 20% given by the company. Sales of wind turbines amounted to 1,456MW in FY07, while the management had earlier guided that sales would be between 1,500MW and 1,600MW.
The management says margins were low because the company ended the year with stock-in-transit of 220MW. The profit on this stock, amounting to Rs234 crore, could not be booked. Actually, the fourth quarter started with an opening stock-in-transit of 80MW and the management had targeted a closing stock-in-transit of 120MW, but that turned out to be 100MW more than anticipated. Since this stock is booked at cost, the profit on the difference between the closing stock and the opening stock is lost. But with the volume of production going up, it’s very likely that stock-in-transit too will continue to rise, although the management believes that, because the opening stock for FY08 is a high 220MW, the problem will not recur this fiscal.
Margins also fell because 50MW was lost on account of a delay in supply of critical components. The cost of towers in the US increased. Operating margin was impacted by 0.4% because of rupee appreciation. And lastly, the US rotor blade unit took time to stabilize.
However, the management says margins will rise in FY08, because of higher capacity utilization in the US and China plants, higher volumes and slightly higher prices. Despite the management’s optimism, however, it’s worth remembering that Repower Systems AG, which the company wants to acquire, has much lower margins than Suzlon. Also, the shortage of critical components in the business is a fact and losses due to difficulties in sourcing them are possible. Moreover, raw material cost as a percentage of sales has gone up in FY07.
The company’s order book, however, has gone up significantly from 1,643MW at the end of the third quarter to 1,958MW as on 11 May. Suzlon is going in for massive capital expenditure, with Rs3,310 crore to be spent in the next two years. It recently received a 400MW order from the US, its single largest order till date.
Suzlon has been quick to take advantage of the potential in non-conventional energy. Its ability to get orders and expand in new territories is not in doubt. The Repower acquisition, if it goes through, will give it access to new technology. But all these factors are factored into the stock, which is not cheap. That leaves the room open for sharp corrections, as Tuesday’s fall bears out.
Could the speculation that the Reserve Bank of India has deliberately stopped intervening in the foreign exchange market be wrong? Recently released data show that RBI purchased $2.3 billion (Rs9,430 crore) in March. That is much less than the record $11.8 billion it bought in February, but is not much lower than the $2.8 billion it bought in January and more than its dollar purchases of $1.8 billion in December. During March, the rupee appreciated from Rs44.2 to the dollar at the beginning of the month to Rs43.4 by the end. Could it mean that it’s not that RBI has stopped intervening, but that dollar inflows are too strong?