Soaring over 1,544 percent from its COVID-low of ₹1.56, hit in March 2022, the two decades crown of debt-laden business and sagas around Suzlon Energy seems to have now come to an end. The stock has given impressive multibagger returns to its investors, especially since 2020.
In a recent note, brokerage house Purnartha Research initiated coverage on the stock with a buy call.
"The business has witnessed change due to various debt restructuring activities along with sectoral tailwinds and government push towards renewables energy. The company with 33 percent market share in the wind segment, wind and solar being the lowest cost-optimal solution for a decarbonised grid as per the Ministry of Power; Suzlon Energy became the natural beneficiary of the tailwinds," it rationaled. It further stated that reduced interest costs, enhanced efficiencies, consistent OMC business cashflows, up-to-date technology, and constant deployment in R&D are some other key positives for the firm. Suzlon is well equipped to leverage the market opportunity arising from the energy transition, it added.
Stock Price Trend
The stock has been consistently giving multibagger returns in the recent past. It has surged 206 percent in the last 1 year and over 142 percent in 2023 YTD. The stock has gained almost 5 percent in September so far, extending gains for the sixth straight month since April. Between April and September, the stock has jumped over 225 percent, rising the most in May (41.5 percent). However, it was in the red in the first 3 months of the year, down over 25 percent between Jan and March.
The stock hit its 52-week high of ₹27 on August 31, 2023. Currently trading at ₹24.77, it has advanced over 275 percent from its 52-week low of ₹6.6, hit on October 13, 2022. However, the stock is still over 94 percent away from its record high of ₹430.90, hit on January 9, 2008.
The Second Innings story
The brokerage house pointed out that since 2000 the company’s growth was on the back of steroids: - raising money, growing capacities, and acquiring companies. However, post the global financial crises, Suzlon saw a decline in installations, project cancellations, and deferrals leading to working capital challenges and huge losses, it informed.
"After FY15, Suzlon decided to focus on the domestic market and exit from all international markets. The company initiated its first stage of debt reduction in FY15-17 by selling its subsidiary Senvion SE to Centerbridge Partners generating ₹7200 crore. Shift from a feed-in tariff regime for wind projects to an e-reverse bidding mechanism led to a sharp reduction in wind installation. Thus, the company continued to report losses between FY20 and FY22. In the second stage of its debt restructuring, it reduced its debt from ₹13,000 crore to ₹1,900 crore between FY20-FY23 by converting its debt to equity and raising ₹1,200 crore through rights issue. The company continues to reduce debt through selling non-core assets," explained the brokerage.
The company also recently approved a ₹2,000 crore QIP to complete its final stage of debt-reducing strategies to become a net cash business.
Key investment thesis
1. Rarely do we see businesses do well once they have been overburdened with debt. Suzlon is one of the rare businesses that has showcased a comeback, noted the brokerage. During the entire debt saga for Suzlon, its OMS Business segments provided a strong cushion, and maintained cash flow generation capability throughout the misfortunes of the wind turbines segment. Approx ₹1,800 crore revenue has been generated from the OMS segment consistently in the past 5+ years and consistently growing at 4-5 percent, mentioned the brokerage.
2. It also informed that the company would move from 1 GW to 3GW capacity in the WTG over the 3 years which would be the highest market share within the Indian wind energy space. With reduced financing costs, these additions would increase earnings over the next 2-3 years over and above the OMC segment. Forging and Foundry businesses receive maximum business from outside the Suzlon group. Thus, WTG growth coupled with OMC and forgings business would lead to high PAT growth, said the report.
3. India continues to be one of the cheapest in terms of cost per unit of electricity. As we witness these going up, along with continuous capacity addition and technology upgradation, the realisation per unit should see an uptick, it further stated.
4. The company has been constantly investing in R&D and has kept up with global innovations at its R&D center in Germany. It launched a 3MW turbine with a hybrid lattice tubular tower which will have higher realisations per MW (than earlier versions) and will have a wider rotor diameter, delivering higher energy output at a lower cost. Out of the current order book of 1542MW, 780MW is for the new 3 MW series. The company continues to introduce improved machines that can operate at sites with low wind speed, the report showed.
5. Suzlon has 14 GW of wind power plant capacity under O&M services. The company’s service business contributes 30 percent of the total revenue and has been growing at a steady rate. Suzlon’s services business yields higher margins than pure turbine manufacturing and offers steady long-term growth. Suzlon has retained 100 percent of its existing O&M contracts that come up for renewal each year vs 75 percent each for competitors like Vestas and Gamesa, the global wind turbine manufacturers, it highlighted.
Outlook
The company is poised to witness revenue growth of around 30-35 percent for the next two years, improving EBITDA margins inching 16-18 percent, from the existing 13.9 percent, thus reporting PAT north of ₹1100 crore and ₹1300 crore for FY24 and FY25, respectively, predicted the brokerage. The stock is trading at 25X FY25 EPS, thus well placed to capitalise on the tailwinds, deleveraged balance sheet and robust order book, it added.
Recommendation
Over the years, Suzlon sold its foreign businesses and has decided to focus purely on the domestic market. Government policy and the business environment for wind capacity are looking up after a long time. Suzlon, being the market leader in the domestic market, is expected to be the natural beneficiary, rationaled the brokerage.
It expects Suzlon to add additional capacities to the extent of 3GW in the next 2-3 years, coupled with strong OMC and forgings business. Higher revenue growth along with reduced debt burden, would also lead to higher PAT growth, it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
