Suzlon Energy Ltd has surprised the Street for the second straight quarter with a profit of Rs 60 crore in the June quarter compared with a year-ago loss. Revenue climbed 80% from a year ago and the company was able to restrain expenses growth to show an operational profit. A part of this jump is also because it had to defer delivery of some 130 megawatts (MW) to June from the previous quarter.
Investors have two key questions for the firm—will the recovery be sustained and what is it doing about deleveraging its balance sheet?
The management is optimistic about the recovery and has guided for a full year revenue of Rs 24,000-26,000 crore. Suzlon’s group order book stands at 4,739MW, which can certainly bring in that much revenue if executed this year. However, the current order book shows a net increase of only 2.1% since May. While that may be due to the higher-than-expected sales this season, order inflow has to continue growing at a fast pace.
Sure, there’s enough reason for order inflow to pick up in India with the new system of renewable energy certificates gaining momentum, subsidies, etc. However, Suzlon’s domestic business has got no new foreign orders in the past six months. Although REpower Systems AG secured some orders, Antique Stock Broking Ltd says it had order inflows of €218 million in the June quarter, some one-third less than what it had won a year ago. Note that things aren’t exactly rosy in the US and Europe with talks of a slowdown.
Even in India, where the wind business is expected to grow faster, incremental orders are coming in at lower prices due to increasing competition. The domestic business was able to realize some Rs 5.92 crore per MW, down 14% from a year ago. For the group, net working capital has increased by 12% over March, mainly on account of an increase in receivables from consumers.
Maintaining realizations is important for Suzlon if it wants to achieve its targeted earnings before interest and tax margin of 7-8% for this fiscal year. More importantly, it will want cash flow to service its debt of Rs 10,800 crore. For now, the sale of a stake in its Hansen Transmissions International NV unit and squeezing out the minority shareholders of REpower, which will allow it to access some Rs 1,700 crore from the latter’s balance sheet, will help. But for the stock to sustain its gains, the recovery in operations has to continue.
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