International orders remain a headwind for Suzlon

International orders remain a headwind for Suzlon

Suzlon Energy Ltd’s latest quarterly profits failed analyst expectations yet again. It reported a net loss of Rs252.3 crore for the December quarter, more than double the Street forecast. Still, investors pushed up the stock 3.5% on Monday, seemingly swayed by its improving order book.

However, that increase merits a closer look. Suzlon said it has swelled its group order backlog to 5,036MW, or $7.3 billion (Rs33,288 crore). At the end of October, the comparable numbers were 3,804MW, or $5.4 billion. However, this increase was powered by a single 1,000MW order from Caparo Energy India Ltd. Overseas project bookings are still rare for the parent wind business, but for the 218MW order from a Brazilian firm.

True, subsidiary REpower Systems AG has signed some 689MW worth of projects in the past three months, but the outlook is still far from positive. The euro zone is still in a crisis, and the US is only emerging out of a recession.

With increasing competition, it will be an uphill task for the company to book new orders outside India. It indicated as much in its analysts’ call talking about “challenges in the US and certain parts of EU", while promising to focus more on emerging markets such as China and Brazil.

Indeed, it was declining revenue of REpower, which accounts for nearly half its consolidated numbers, that brought down overall numbers. While the company managed to curb costs, especially employee expenditure, it still posted a 34% decline in operating profit from a year ago.

Though it has managed to keep interest costs stable in the three months ended December compared with a year ago, rising rates will start telling on its net profit in the coming quarters. Cost of goods as a percentage of sales increased 2.6 percentage points from a year ago and will likely go up as prices of raw materials such as steel increase.

Not only that, an increase in the orders could also put pressure on the net working capital. Though this metric has declined from a year ago by Rs1,300 crore, it is still trending upward over the past two quarters.

Suzlon also has a debt of Rs10,000 crore, which it will have to start repaying from April 2012 after debtors agreed to a moratorium. That remains the dark cloud looming on the stock despite these occasional glimpses of silver linings.