The Suzlon Energy Ltd stock is back to pre-September quarter levels. As demonetization jitters hit the broader market, the stock gave up the gains it made since the company reported its fiscal second quarter earnings on 11 November.

After a subdued first quarter, the firm reported a strong second quarter. Sales volume and revenue jumped 56-57%. Margins increased on better revenue mix. This, along with strong volumes, helped Suzlon Energy generate Rs238 crore of profit, the first quarterly profit in one year.

Initially, the performance came as a relief to investors who otherwise were worried about the long period of losses. It also validates the post-June quarter (Q1) results commentary by the management that execution has gathered pace and Suzlon Energy is on track to report profits in subsequent quarters.

Order inflows picked up. The order backlog rose 4% from a year ago. According to HDFC Securities Ltd, Suzlon Energy expects most of the order backlog to be executed in the current fiscal year. With 557 megawatts (MW) already executed so far this fiscal year, the broking firm estimates the company to clock 1,500MW of volumes in the current year. That would be volume growth of almost one-third from the year gone by.

That’s not all. The management continues to sound confident about prospects. It expects the demand environment to remain strong thanks to the central government’s thrust on renewable energy purchase obligations and plan to add 1,000MW under the inter-state transmission scheme. “The management expects order inflows (for FY18E revenue booking) to pick up from 4Q FY17 onwards," adds HDFC Securities.

Is the worst over for Suzlon Energy? Several analysts say so. Some say the company is on a turnaround track and forward valuations are undemanding. Emkay Global Financial Services Ltd points out that at less than 11 times 2018-19 price-to-earnings multiple, Suzlon Energy is trading at a significant discount to its European peers.

But if the recent correction is anything to go by, not all are convinced. Some await more proof that Suzlon Energy can generate profits on a sustainable basis.

Also, the sharp rise in working capital debt is a cause for concern. Net working capital debt jumped 57% from the June quarter. Inventories, trade receivables and short-term borrowings rose significantly. Management strategy to build inventory, anticipating strong deliveries and growth in the second half of the fiscal year is said to have increased working capital. But that does not explain the rise in receivables.

Also, the rise in working capital is offsetting the progress on long-term debt. Long-term borrowings fell 4% from March this year. But the reduction is not reflected in overall borrowings as short-term debt jumped on rise in working capital.

If not addressed in a time-bound manner, this can not only raise finance costs but also revive investor concerns about the balance sheet. “Despite strong results on all parameters we remain concerned on balance sheet issues: namely deterioration in working capital levels and an increase in net debt levels," Nomura Research said in a note.

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