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Suzlon puts in a good performance, but concerns remain

Suzlon puts in a good performance, but concerns remain
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First Published: Sun, May 15 2011. 08 05 PM IST
Updated: Sun, May 15 2011. 08 05 PM IST
Suzlon Energy Ltd’s profit for the March quarter has beaten Street estimates. It reported a profit after tax of Rs448.39 crore for the three months ended 31 March compared with a Rs188 crore loss a year ago.
Traditionally, March is a good quarter. However, part of this gain was due to an accounting policy tweak involving its subsidiary RE Power. This boosted revenue by Rs974.97 crore and net profit by Rs109.57 crore. Indeed, the domestic wind business saw revenue fall by 26.8%.
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To put things in perspective, RE Power compensated for this fall and pushed overall group revenue by 19.6%.
Still, the fact remains that Suzlon was able to control costs and double operating profits in the March quarter from a year ago. That, plus an 85% decline in taxes boosted the net profit number. The management indicated in an emailed statement that the outlook was positive and the focus would be on India and emerging markets. However, it might be a tad too early to see the fourth-quarter results as a point of turnaround.
To be sure, Suzlon’s order intake during the year was the highest in the last three; but the order backlog as on date is 4,369 megawatt (MW) or $6.7 billion. This is lower than the order backlog of 5,036MW or $7.3 billion at the beginning of February. Secondly, even if order inflow does pick up—a reasonable assumption, especially in India, with cash subsidies and a system of tradable renewable energy certificates—they might not be as profitable for Suzlon.
As JP Morgan India Pvt. Ltd points out, wind turbine prices are falling globally and competition has increased in the domestic market. Gamesa, Siemens, Vestas, et al, are planning to ramp up their business in India, and with the entry of Chinese companies, bidding will get more aggressive to secure orders.
As if that was not enough, raw material costs are rising and are bound to squeeze margins. Indeed, the company itself has guided for an earnings before interest and tax (Ebit) margin of 7-8% over the next fiscal year. That is quite a comedown from the 10.4% Ebit margin Suzlon reported in the fourth quarter.
Over the last three months, Suzlon Energy Ltd’s stock has outperformed the BSE100 index, largely because it was able to show some new orders, and the company raised money via foreign currency convertible bonds and a rights issue. It has also started legal proceedings to squeeze out the minority shareholders of RE Power, which will allow it to access some Rs1,700 crore from the latter’s balance sheet.
With the company overladen with debt of Rs12,200 crore, these events soothed investor fears about its balance sheet. However, future gains in the stock would depend on how well it does operationally.
Graphic by Yogesh Kumar/Mint
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First Published: Sun, May 15 2011. 08 05 PM IST