Investors wait and watch as solar strategy unfolds at Suzlon Energy2 min read . Updated: 23 Jun 2016, 02:38 AM IST
Analysts expect the recovery in service revenue and further reduction in interest costs to drive Suzlon back into profit in the current fiscal year
Investors have been rather nonchalant about Suzlon Energy Ltd’s announcement that it has divested 49% stake in a venture for ₹ 73.5 crore. That particular venture is executing a 100 megawatts (MW) solar power project and has a net worth of ₹ 30 crore.
According to Pawan Parakh, an analyst at HDFC Securities Ltd, the sale amount indicates a project cost of ₹ 750 crore, implying a per MW value of ₹ 7.5 crore, a premium to the estimated cost of ₹ 6 crore per MW.
The buyer has an option to buy the balance 51% stake from Suzlon. The final sale can also cover maintenance services, which can change valuations and sale proceeds. Still, going by initial calculations, Suzlon has struck a decent deal.
It is Suzlon’s first project in the solar energy space. The transaction can set a benchmark for the rest of the solar power projects the firm won and plans to dispose of after execution.
But investors have given a guarded response to the deal, if the reaction of the stock this week is a guide. Of course, it’s possible that the deal was already discounted, as reports about it were doing the rounds for some time.
Also it is not yet clear what benefits the solar business will bring to Suzlon.
As in wind, the firm plans to execute projects and sell them to investors. But unlike wind, solar has limited scope for value addition in the supply chain (like backward integration). Most of the components will be acquired from third parties, which can mean low margins.
While analysts expect clarity to emerge in the coming quarters, it is crucial that the solar business does not become a drag for Suzlon.
Its core wind business is showing signs of revival. Order inflows and execution are picking up pace. Aided by a large land bank, it is targeting market share gains in wind projects this year.
The increased order inflows have led to higher revenues. But profitability trailed Street estimates in the March quarter, leading to a loss and miss on earnings.
Analysts expect the recovery in service revenue and further reduction in interest costs to drive Suzlon back into profit in the current fiscal year. With solar execution also gaining traction, decent margins in this business can quicken the process.
Even though the stock has moved up in the last three months, it is still lower than its January levels. That is due to low investor confidence. According to HDFC Securities’ Parakh, investor confidence will build up once Suzlon demonstrates value accretion in the solar business and a recovery in profitability in the coming quarters.