The US-led the world in wind power installations for the third year in a row in 2007 and accounted for 5,244 MW out of the world installations of 20000 MW. However, following the credit crisis in the US, there has been some slackness observed in development of new wind farms.
The Suzlon management confirmed that the US market (36% of revenues and 49% of order book) has slowed down appreciably in the previous three months on account of the freezing of credit markets.
The company does not have variable speed drive turbine in its portfolio, which keeps a portion of the US market out of its reach. Suzlon now has plans to market REpower’s turbine to address the variable speed turbine market in the US.
Following the liquidity-crunch in the Chinese market, the company is witnessing delays in installations of wind turbines. To avoid bad debts, the company is controlling deliveries of turbines to customers.
The management has scaled down the volume target for Chinese market by 40% for the current year. Over the last few months, Suzlon has ramped up its order booking from the Chinese market. As a result, at the end of H1 FY09, while China accounted for 7% of revenues it had a share of 20% in the order book.
At the end of H1 FY09, Suzlon had gross debt of Rs93 billion and cash of Rs14 billion. In Q3, the company has received Rs4 billion through placement of stake in forgings venture to IDFC Pvt Equity.
Furthermore, it has repaid Rs8 billion towards debt and would be paying Rs3.9 billion as part payment to Martifer in December. Thus on balance, we expect significant reduction in cash on hand.
Suzlon has sharply reduced its capex plan for FY10 to Rs500 million from Rs9.5 billion in FY09. In view of the lower order backlog, the company intends to shift part production to new locations.
On account of the stagnant order backlog revenue visibility for FY11 has shrunk appreciably. There have been significant earnings downgrades as volumes were adjusted downwards.
The stock is trading at 7.3x and 7.3x FY09 and FY10 earnings respectively. We maintain cautious stance on the company and recommend ACCUMULATE on the stock.