REpower Systems AG is one of the leading turbine producers in the German wind energy sector.
Its product range comprises wind turbines with an output from 1.5 MW up to 5 MW and rotor diameters from 70 up to 126 meters. Suzlon currently holds approximately 74% stake in Repower.
Wind power installations have grown at a CAGR of 34% between CY04 and CY07. This period coincided with the bull run in fossil fuel prices, which resulted greater thrust by governments on development of renewable energy alternatives.
Currently, while the thrust on green energy continues, the credit freeze in financial markets has impacted development of new wind farms. As a result, wind power consultant ”Make Consulting” expects wind power installations to register a drop in CY09.
Repower is fully covered for CY09 given its order backlog of Euro 1.6 billion. For the FY09-10 the company has affirmed its forecasted sales growth of 30-35% and expects a rise in EBIT margin to 7.5-8.5%.
The company expects continued thrust from respective governments in the US and Europe on wind power and expects the US geography to be a main growth driver.
We have been cautious on Suzlon given the reduced level of visibility from order backlog point of view. There is a strong risk of revenue growth falling sharply in FY10 and FY11. Moreover there are liquidity related concerns and debt repayments.
The blade cracking issue had made the management to shift focus from order generation to addressing and containing the impact of blade cracking on customers.
The problem has been compounded by overall slowdown in wind power market as a result of liquidity crunch.
During the current fiscal, the stock has underperformed significantly in view of the above-mentioned concerns.
The stock valuations are undemanding given the size of assets (Hansen, Repower and SE Forge) that Suzlon has built over the years. But we prefer to remain cautious until there is a visible improvement in cash flow position and order inflows.
We estimate consolidated profit (including Repower) of Rs2.3 billion and Rs8.2 billion in FY09 and FY10 respectively.
Suzlon is trading at 26.5x and 7.6x FY09 and FY10 consolidated earnings respectively. Maintain ACCUMULATE with a price target of Rs77.