During Q1 FY10, Suzlon registered WTG sales volumes of 123MW, significantly lower due to a delayed budget. As a result gross revenues of SEL were lower by 44% y-o-y to Rs11.6 billion.
However, this drop was offset by Rs20.7 billion revenues from REpower during the quarter against Rs2.6 billion last year.
Hansen revenues remained flat at Rs9.3 billion against Rs9.1 billion last year. The Hansen management has guided for a flat revenue this year, with H2 FY10 being better.
With the global economy not showing any signs of reviving any time soon, we remain concerned over the company’s shrinking order book.
However the management is confident of a pick up in order inflow from Q3 FY10 onwards and that it should be able to achieve its volume target of 2,500-2,700MW for the year.
During Q4 FY09 the management had indicated that it was in dialogue for ~1,000MW of international orders, of which it won 499MW of orders and has a 225MW framework agreement with EUFER, JV between ENEL Green Energy and Union Fenosa for Spain.
It bagged orders from Australia (245MW), China (199MW), USA (42MW) and Europe (13MW).
Suzlon’s (consolidated entity) operating margins reduced to a paltry 0.3% as volumes remained low during the quarter. As a result its fixed costs continued and the company reported a low operating profit.
Despite this, SEL’s gross profit continued to remain firm at Rs27 million/MW, better than the corresponding period last year.
Suzlon intends to expand its margins by 1) increase its order intake, 2) tighten its working capital cycle and 3) savings in costs.
Some of the key levers identified by the company to reduce costs are 1) renegotiating contracts with suppliers, 2) lower freight costs, 3) identifying cost reduction areas in the manufacturing and marketing SBU’s and 4) maintaining stringent quality checks to avoid related costs and LDs.
We believe Q1 FY10 was a one off quarter and the company will rebound from Q3 FY10 onwards, given increasing order book.
We consider the sequential increase in Q1 FY10 order book as the first indicator for the future order inflow.
We expect that the company’s cost containment measures will pay off well, the effects of which will be seen from Q3 FY10 onwards.
Also, funds raised from the GDR and ZCCB along with reduction in its working capital cycle should allow the company to maintain its debt service coverage ratio, one of the key covenants.
Factoring in for the Q1 earnings, weaker guidance given by its subsidiaries and minor dilution via the GDR, we reduce our target price to Rs109/share, re-iterate MARKET PERFORMER rating.