Suzlon’s FY08 performance was better than our expectations with an adjusted EPS of Rs9 (up by 49.3% y-o-y) against our estimate of Rs7.3.
However, the company has been receiving complaints from US customers with regard to the quality of its products. This may affect business from the US market, which accounts for 50% of the current order book.
We believe that these problems will get resolved after it acquires Martifer’s stake in Repower in Q1FY10 and becomes eligible to use the latter’s technology.
As per the management, margins should improve in the short term on the back of vertical integration benefits, a positive pricing environment, improving economies of scale, and the operational leverage of higher sales volumes in the US, China, and India.
The company is on track with regard to its capacity expansion plans. The enhancement of Wind Turbine Generators (WTG) capacity to 5,700 MW is expected to be commissioned by the end of FY09 and the gearbox capacity is expected to touch 14,300 MW by FY12.
Suzlon also aims to achieve backward integration by setting up a foundry and forging unit by March09.
Based on our DCF valuation, our target price does not provide any considerable upside from the current levels. We downgrade our rating to HOLD.