Indian Wind Energy Company Suzlon – Fallen Angel or Falling Knife

Suzlon History

Suzlon,the Indian Wind Turbine making company has languished in red ink since the beginning of the Global Financial Crisis in 2008.The company started by Tulsi Tanti in 1995 was a shining example of Asian CleanTech with a 10% global marketshare and ranking amongst the top 5 Wind Turbine Makers .Suzlon buoyed by its success had bought controlling equity stakes in Turbine Gears producer Hansen Transmission and European Wind Turbine producer Repower.Suzlon wanted to leverage Repower’s technological expertise to enhance its own product offering.Like other Indian companies with global ambitions like Hindalco,Tata Steel and Tata Motors,it took on a lot of debt to buy these companies at the peak of the global economic cycle.The GFC resulted in a twin whammy for Suzlon.On one hand its end markets collapsed as project financing disappeared and on the other hand its huge debt burden became unsustainable.The company has failed to recover from the GFC as competition in the Wind Turbine industry has increased with the rise of Chinese players like Sinovel,Goldwind and A-Power.With the 2 biggest markets of USA and China dominated by domestic players,Suzlon has become a shadow of its former self.While other Indian companies have recovered strongly with the Global Economy,Suzlon continues to lose huge amounts of money.Its recent 2Q10 results were quite bad resulting in the share shedding 6% to Rs 50.This is almost 90% below its peak price in the heady days of 2008 .So is Suzlon a Fallen Angel which could turnaround to become a multibagger or a Falling Knife luring investors into further losses.Here are the pros and cons of the argument.

Pros

1) Company still has valuable assets in the form of equity stakes in RePower and Hansen Transmission.Their have been reports that the company might have to sell them to pay off the huge debt on its books

2) Orders recovering – The Group along with RePower has an order book worth $5 billion.Its Indian orders have started to recover with 580 MW worth of orders booked which is the highest in company history.India has enacted a policy to promote Renewable Energy recently mandating  a 10% target by 2015.

3) Debt restructured – The company has managed to restructure debt of $250mm with its bank and has reduced  working capital requirements.

4) Focus on Emerging Markets – Suzlon has focused its energies on the Emerging Markets like Brazil,South Africa,China etc.It has recently set up a plant in Brazil to leverage the sharp growth of the wind market.

Cons

1) Suzlon’s revenues and losses continue to deteriorate with losses of $200mm in the current 2Q10 quarter.With no manufacturing or technological strengths,its hard to see Suzlon recover its preeminent position

2) Blade Problems – The company has had problems with blades cracking in its turbines.This has resulted in huge losses as the company was forced to replace the faulty blades.Orders were also cancelled as reputation took a plunge

3) US market in doldrums in 2010 – The US Wind Energy Market has been in the doldrums in 2010 with lower gas costs and dwindling financing.With the USA being Suzlon’s biggest market this is a big blow.2011 might not be better if the Congress does not extend the tax credits for wind farms.

4) The Group is still heavily indebted with $250mm in loans and $500mm  in convertible bonds

5) Industry growth to slow from 29% CAGR in the last 5 years to around 15% CAGR in the next 5 years.Chinese competitors expanding internationally using low cost advantage will create additional headaches.

Summary

The company continues to operate at a below breakeven level despite order book improving slowly.RePower is a bright spot with a good order book and gaining strong traction for its larger turbines.It has a marketcap of ~$2 billion which gives it an enterprise value of ~$2.75 billion.This is not cheap considering it has been losing money for the last several quarters.The stock is trading at a 52 week low of Rs 51 which is less than half of its 52 week high price.The stock might offer some  short term profits  for high risk traders on a dead cat bounce,but it is definitely not a fundamental pick.Unless the company really makes significant progress on the revenue and orders front,it is not a buy in my book.