Suzlon Energy Ltd launched a $300 million (Rs1,230 crore) zero-coupon five-year foreign currency convertible bond (FCCB) that will be listed in Singapore to raise money for a southern Indian expansion, prompting some analysts tracking the stock to downgrade it on account of the consequent equity dilution and an anticipated dip in the company’s performance.
According to a Suzlon spokesperson, the bond issue will lead to a 2.5% dilution in the company’s equity. Suzlon is engaged in a prolonged bidding war with Areva SA for German wind energy company Repower Systems AG; its last bid was $1.65 billion.
The five-year bonds are convertible at Rs1,800 per share, close to a 60% premium over the average price of Rs1,127.90 on the Bombay Stock Exchange on 16 May. The yield to maturity on the bonds is 7.60%, lower than the 8% interest rate at which the company was planning to raise debt. On Thursday, the Suzlon share closed at Rs1,135.30, up 0.05% from its previous close.
Following the announcement of the bond issue, several brokerages revised the stock’s target price downward. Mumbai-based brokerage ASK Securities downgraded the target price for the stock to Rs1,380 from its recommendation of Rs1,480, issued six weeks ago. CLSA said that the stock was expected to underperform the market. Emkay, another brokerage, said it was planning to revise its recommendation to neutral.
However, Edelweiss Securities had a different view. It expects a 20% growth in Suzlon Energy’s stock price. Shriram Iyer, head of research at Edelweiss, said, “We foresee a 30% earnings growth over the next couple of years and a 20% upside in the stock, despite lower margins and disappointing results for last year.” Suzlon Energy reported a 3.36% decline in its net profit for the quarter ended 31 March 2007.
In its report, ASK said the effect of the Repower acquisition “would burden Suzlon’s balance sheet” and bring down earnings in the short to medium term. It has revised its earnings estimate for next year by 9% (down) to Rs52.50 per share. Mehul Mukati, energy analyst at brokerage Emkay, said he was revising the recommendation on the stock from ‘buy’ to ‘neutral’, given the overall negative impact of the bond issue as well as the Repower buyout.
“Although Repower in the long run will provide good synergies, in the short term it will put pressure on Suzlon’s balance sheet which is already fully leveraged. Though the company will save about Rs98 crore on interest cost because of the bond issue, the overall impact of equity dilution would be negative and we expect earnings per share would go down by Rs2-3,” he added.
Analysts who did not wish to be named said the equity dilution could have been prompted by concerns regarding the level of Suzlon’s debt. Following the bond issue, Suzlon’s debt-equity ratio will come down marginally.
The company’s spokesperson said the money being raised would fund Suzlon Energy’s plans to set up additional manufacturing capacity at Mangalore and Coimbatore. The estimated cost of these plants is Rs3,500 crore. He maintained that the overall impact on earnings would remain positive due to the savings on interest costs. Analysts, however, pointed out that Tulsi Tanti, chairman and managing director of Suzlon Energy, had recently said the money for these plans had already been tied up.