HDFC securities Institutional Research’s Abhinav Sharma and Raahil Shah released a note on Suzlon Energy today with a Buy rating and a Rs 34 price target. The analysts gave four driving reasons for the rating:
1. Suzlon will utilise Rs 90 billion (raised via Senvion sale and DSA equity infusion) to cut its debt by Rs 60 billion to Rs 77 billion and also utilize the remaining amount (Rs 22 billion, ex capex) to fund its working capital requirements. With working capital funds available, we believe the company can easily ramp up volumes in the rapidly evolving Indian wind power market.
2. Our confidence stems from primary customer feedback which suggests that Suzlon has the best overall product offering and it lost market share primarily owing to funding constraints. The Indian wind energy market is also set for a big leap as accelerated depreciation (AD) and generation based incentives (GBI) have been re-introduced. The NDA government has ambitious plans of adding 38GW over FY15-22.
3. As 25% of Suzlon’s expenses are fixed in nature (FY16E), we expect a quantum jump in profits as volumes ramp up. We expect Suzlon to achieve PBT break-even in FY16E (1,250MW of sales, 150% increase over FY15E), which implies 35% market share. This looks plausible, given the company’s order book of 1,147MW. With a capacity of 3.6GW, Suzlon can further ramp up volumes without incurring significant capex.
4. We initiate coverage on Suzlon with a target price of 34/share, based on 14x FY17E EV/EBITDA. Our assigned multiple is at a premium to European WTG companies which we believe is justified given better growth prospects of the Indian market and Suzlon’s abnornally depressed earnings.
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