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Suzlon Energy (SUEL In, Buy) - Wind With Chance of Sun
Suzlon Energy (SUEL In, Buy) - Wind With Chance of Sun
NS
SUEL IN
6 April 2015
Rating
Starts at
FY15F
Old
FY16F
New
Old
New
INR 26
Research analysts
India Capital Goods
Amar Kedia - NFASL
amar.kedia@nomura.com
+91 22 4037 4182
FY17F
Old
New
Revenue (mn)
204,029
N/A 201,538
N/A
95,036
-34,679
N/A
-84,415
N/A
-804
N/A
9,372
-29,806
N/A
-22,004
N/A
-804
N/A
9,372
-8.02
N/A
-4.86
N/A
-0.14
N/A
1.57
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
16.9
EV/EBITDA (x)
N/A
N/A
27.4
N/A
23.8
N/A
11.2
Price/book (x)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
ROE (%)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
FD normalised EPS
Closing price
1 April 2015
+43.7%
Nomura vs consensus
Our TP is in line with the Street,
but we note that the stock is not
well covered.
Actual
INR 38
Anchor themes
Suzlon Energy is a play on the
emerging wind power sector in
India. It has been India's market
leader in this segment but has
suffered multiple crises mostly
related to an overstretched
balance sheet. It is now a
potential turnaround story.
pure play set to refocus on new order wins and execution, and well placed
to win back 50% market share in the domestic wind equipment market.
Year-end 31 Mar
Target price
Starts at
Potential upside
After the financial restructuring and Senvion sell-off, SUEL is now an India
Currency (INR)
Buy
N/A 124,670
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
6 April 2015
Notes:
Performance
(%)
Absolute (INR)
Absolute (USD)
Rel to MSCI India
1M 3M 12M
-2.9 81.8 134.1
-4.0 84.5 125.5
0.1 82.1 110.0
M cap (USDmn)
Free float (%)
3-mth ADT (USDmn)
1,573.8
70.0
27.4
Year-end 31 Mar
EBITDA
Change in working capital
Other operating cashflow
Cashflow from operations
Capital expenditure
Free cashflow
Reduction in investments
Net acquisitions
Dec in other LT assets
Inc in other LT liabilities
Adjustments
CF after investing acts
Cash dividends
Equity issue
Debt issue
Convertible debt issue
Others
CF from financial acts
Net cashflow
Beginning cash
Ending cash
Ending net debt
FY13
-12,965
2,750
-20,376
-30,591
-3,404
-33,995
616
FY14
-890
23,681
-20,969
1,822
-9,226
-7,404
-6,710
FY15F
9,476
-20,196
-23,031
-33,751
0
-33,751
7,067
FY16F
9,572
-8,032
-8,093
-6,553
-1,500
-8,053
0
FY17F
19,628
-3,048
-8,217
8,363
-2,500
5,863
0
3,093
1,522
-28,765
0
1,895
715
-11,504
0
0
444
-26,241
0
-7,381
23,175
7,741
0
0
1,710
7,573
0
27,441
1,422
14,719
1,830
15,515
5,168
-78,595
0
-1,890
-5,410
252
1,062
22,031
16,393
18,406
-6,734
4,889
-7,834
26,325
19,591
24,480
19,591
24,480
16,646
132,317 127,163 150,512
68,166
-5,262
2,480
16,646
19,126
69,437
0
-1,890
5,683
19,126
24,808
61,864
FY13
FY14
FY15F
19,591
24,480
16,646
357
7,067
0
63,819
59,455
52,500
52,638
40,329
38,500
31,837
31,795
33,978
168,242 163,126 141,624
0
0
0
46,544
48,001
39,108
77,276
91,479
31,576
FY16F
FY17F
19,126
24,808
0
0
27,339
34,156
26,037
30,741
14,100
14,100
86,602 103,805
0
0
15,150
13,900
0
0
FY13
FY14
FY15F
189,135 204,029 201,538
-143,801 -152,123 -144,990
45,335 51,906
56,548
-44,377 -38,251 -33,232
-21,327 -22,314 -22,734
-20,370
-8,659
583
-12,965
-890
9,476
-7,405
-7,769
-8,893
FY16F
FY17F
95,036 124,670
-63,090 -80,542
31,946
44,128
-17,358 -18,745
-8,640
-9,504
5,947
15,879
9,572
19,628
-3,624
-3,749
-20,370
-18,549
-8,659
-20,700
583
-19,095
5,947
-8,093
15,879
-8,217
1,522
-37,397
-3,493
-40,890
80
715
-28,644
-1,444
-30,088
282
444
-18,068
-3,589
-21,657
-347
1,341
-804
0
-804
0
1,710
9,372
0
9,372
0
-40,810
-6,430
-47,240
-29,806
-4,873
-34,679
-22,004
-62,411
-84,415
-804
0
-804
9,372
0
9,372
-47,240
-34,679
-84,415
-804
9,372
na
na
-1.2
-1.9
na
na
na
na
na
53.9
5.2
na
na
na
na
na
24.0
25.4
-6.9
-0.4
-10.8
-4.2
-25.0
-17.0
na
na
na
na
na -1,303.4
na
-3.1
na
-3.5
na
na
na
na
27.4
445.2
28.1
4.7
0.3
-41.9
na
na
194.3
0.2
na
-189.9
na
na
na
na
23.8
38.3
33.6
10.1
6.3
-0.8
na
na
1.3
4.3
16.9
16.9
16.9
na
18.9
na
11.2
13.9
35.4
15.7
12.7
7.5
0.0
0.0
-25.5
18.1
7.9
na
na
na
-1.2
na
na
na
-52.8
1.0
na
na
31.2
105.1
na
na
Growth (%)
Revenue
EBITDA
Normalised EPS
Normalised FDEPS
Source: Company data, Nomura estimates
As at 31 Mar
Cash & equivalents
Marketable securities
Accounts receivable
Inventories
Other current assets
Total current assets
LT investments
Fixed assets
Goodwill
Other intangible assets
Other LT assets
Total assets
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
Long-term debt
Convertible debt
Other LT liabilities
Total liabilities
Minority interest
Preferred stock
Common stock
Retained earnings
Proposed dividends
Other equity and reserves
Total shareholders' equity
Total equity & liabilities
292,061
28,347
48,511
91,280
168,138
94,189
14,388
5,486
282,200
781
302,605
35,234
54,956
91,801
181,991
105,924
10,485
7,381
305,781
584
3,555
5,526
4,976
-8,735
11,974
-53,412
11,974
-44,040
9,080
-3,759 -83,122 -41,438 -32,066
292,061 302,605 212,307 101,751 117,705
Liquidity (x)
Current ratio
Interest cover
1.00
-1.1
0.90
-0.4
0.91
0.0
0.85
0.7
0.94
1.9
na
na
1,457.2 -3,383.0
15.88
-181.1
7.25
-167.6
3.15
-192.9
Leverage
Net debt/EBITDA (x)
Net debt/equity (%)
Per share
Reported EPS (INR)
Norm EPS (INR)
FD norm EPS (INR)
BVPS (INR)
DPS (INR)
-26.58
-22.96
-22.96
5.11
0.00
-16.27
-13.98
-8.02
-1.51
0.00
-28.67
-7.47
-4.86
-24.43
0.00
-13.93c
-13.93c
-0.14
-6.92
0.00
1.57
1.57
1.57
-5.36
0.00
0.0
110.3
111.5
124.1
97.7
101.4
99.2
139.2
61.4
153.7
187.2
253.1
87.9
90.0
128.7
151.6
67.1
Activity (days)
Days receivable
Days inventory
Days payable
Cash cycle
6 April 2015
It has agreed to a recapitalisation of the balance sheet by way of issuing new shares
to Dilip Shanghvi & Assocoiates, which has brought in fresh equity of INR18bn apart
from new working capital lines (over and above its existing banking facilities).
2)
It has also sealed a deal in January 2015, to sell its 100% stake in German wind
equipment maker Senvion that it had bought in 2008. This move will bring in 1bn
for the company. As per the announcement, the deal is likely to have been closed by
31 March 2015.
Both moves are likely to yield ~INR90bn to the company, which will go towards
repayment of its INR170bn debt and thus provide a much needed boost to repair its
balance sheet.
As highlighted earlier, with these initiatives, the company is back on track to execute and
source orders as it has in the past.
Fig. 1: Build-up of shares issued due to dilution
(mn shares)
(%)
7,000
1,584
6,000
5,000
4,000
5,987
100%
80%
1,000
3,403
Tanti family
48%
60%
40%
1,000
20%
DSA
FCCB
Conversions
Diluted
Public
37%
54%
22%
23%
12%
17%
31%
Current
Lenders
17%
3,000
2,000
DSA
24%
18%
Fully Diluted
0%
Current
Source: Company data
As the charts above show, apart from the money from DSA, Suzlons existing FCCB
holders (current outstanding at USD330mn) will also likely convert their bonds into
shares as they are deeply in the money now (conversion price of INR15.64).
While SUEL will surely see significant dilution in its shareholding structure, we note that
the alternatives for SUEL are limited at this stage. In our view, following this financial
restructuring, SUEL will be better placed to tap the opportunities on hand.
6 April 2015
Total Consideration
Upfront Cash
1 bn
50 mn (subject to conditions)
6 April 2015
(x)
INR mn
EBITDA
0.8
100,000
0.4
50,000
0.2
FY20F
FY19F
FY18F
FY17F
FY16F
FY15F
FY14
FY13
(50,000)
FY12
(0.2)
FY11
FY10
FY20F
FY19F
FY18F
FY17F
FY16F
FY14
FY15F
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
EBITDA declined
sharply in
domestic business
due to withdrawal
of AD and GBI
0.6
(5)
Net Debt
150,000
FY09
200,000
FY08
10
1.0
FY07
FY06
15
6 April 2015
incentives for the sector and supportive government policies are likely to drive a
resurgence of demand for wind equipment.
Moreover, Suzlon has historically been a very strong player in the Indian market with
over 50% market share. It still operates and manages (on behalf of its customers) ~38%
of the total installed wind capacity in India. Thus, it has a rich experience of working with
the local authorities, securing land, working with the often difficult state electricity boards
or distribution companies (discoms), and managing difficult logistics/transportation
requirements in India. As per our feedback from the industry not only for the wind power
equipment market but even for other capital goods components, foreign companies have
often found the conditions in India difficult when related to managing local authorities,
land issues, transmission or logistical issues, etc. As such, we think SUEL is best placed
to win back its 50% market share within a short span of time.
Its order backlog of ~1.15GW (bulk of this in India) already implies ~40% market share of
potential installations in India in FY16F.
Fig. 6: Suzlons timeline of major events
(INR)
500
Start of Repower
(Senvion
acquisition)
450
400
Withdrawal
of tax
incentives
for new wind
installations
in India
leading to
debt default
350
US blade
incident
300
250
200
150
100
Share price
50
Senvion sale
and new
equity
infusion by
DSA
Mar-15
Sep-14
Apr-14
Oct-13
May-13
Nov-12
May-12
Dec-11
Jun-11
Dec-10
Jul-10
Jan-10
Jul-09
Feb-09
Aug-08
Feb-08
Sep-07
Mar-07
Sep-06
Apr-06
Oct-05
6 April 2015
6 April 2015
India has potential for wind capacity of over 100GW based on current technology
While the availability of suitable sites for wind installations is a key criterion and often the
key consideration for determining a countrys wind capacity, we summarise below
various surveys by the Centre for Wind Energy to determine potential wind capacity in
India. Note that the defined capacity assumes certain technologies and hub heights.
However, with constantly evolving technology and increasing hub heights now possible,
the below numbers are under constant upward revision as is evident in the table itself.
For example, the numbers below assume a maximum 80 metre hub height, while the
new S97 and S111 product available from Suzlon has a 120 metre hub height, which can
offer higher generation for the same installed capacity. Moreover, as the older wind
installations come up for renewal, even those could be replaced with newer and higher
hub height wind installations that could also raise overall capacity.
As per the surveys summarised below, India has potentially 103GW of identified wind
potential currently at an 80 metre hub height, with only <25% of the identified wind
potential developed so far, thus leaving ample scope for future growth.
Fig. 8: Indias wind power potential, assuming that suitable wind site availability is not a constraint
(MW)
Cumulative wind power potential in India (MW) Current wind capacity in Untapped potential
50m hub height
80m hub height
India (MW)
(MW)
Andhra Pradesh
Gujarat
Karnataka
5,394
14,497
748
13,750
10,609
35,071
3,454
31,617
8,591
13,593
2,324
11,269
Kerala
790
837
35
802
Madhya Pradesh
920
2,931
423
2,508
5,439
5,961
4,086
1,875
Maharashtra
Rajasthan
5,005
5,050
22,802
2,248
Tamil Nadu
5,374
14,512
7,273
7,239
Others
Total
7,008
10,336
10,332
49,130
102,788
21,149
81,640
What it means
Under this benefit, developers are allowed to depreciate 80% of the wind project cost in the first year of installation
for tax purposes, subject to the project being commissioned before 30th September of that fiscal year (50% benefit
Accelerated Depreciation
if commisioned beyond 30 Sep). As such, it helps developers recover almost entiore equity investment in the first
(AD)
year itself given that typoical D/E for such projects is 75/25 or 70/30, while the tax benefit if 24-27%. AD is thus a
beneficial tool for high-networth individuals as well as small corporates for saving tax.
Under this incentive, developers get an incentive of INR 0.50 per kWh of actual power produced with an overall cap
Generation based
of INR10mn/MW ove rthe life of the project. This benefit is useful for IPPs and private equity players who seek
incentives (GBI)
profits from actual running of the windmill.
RPO is a concept prevalent globally which makes it mandatory for distribution companies as well as other
captive/open acces customers to buy a certain fixed share of power from renewables sources such as
wind/solar/others. However, given the poor financial health of the states this norm is not being strictkly followed and
Renewable purchase
the Government is now considering to bring in renewable generation obligations (RGOs), which will put the onus of
obligations (RPO)
meeting a fixed share of renewable generation on the power developers rather than on the buyers. This way the
developer can, in turn, offer a bundled price for its power directly to the buyer.
FiT is a concept prevalent globally, which offers a preferential tariff for wind power producers. This tariff is such that
Feed-in-Tariffs (FiT)
it allows for recovery of investment by the develoepr as well as a reasonable IRR on the same.
Source: Nomura research
6 April 2015
Our discussions with the MNRE suggest that the government is working for further
changes in this domain such as complementing the renewable purchase obligations with
renewable generation obligations for the power developers.
Re-introduction of accelerated depreciation (AD) benefit for developers under this
incentive, developers are allowed to depreciate 80% of the project cost in the first full
year of operation for tax purposes. This incentive is thus very useful for high-net-worth
individuals and captive corporate customers from a tax saving perspective. As we have
highlighted before, AD clientele used to be a mainstay for Suzlon until FY12, when this
incentive was withdrawn.
Re-introduction of generation-based incentives (GBI) through the GBI, the
government offers a INR0.50 per unit cash subsidy to developers for promoting actual
generation of power rather merely setting up wind projects. This incentive is particularly
useful for IPPs and private equity developers who have been using it for sustainable
cash flow from the project and to boost their IRRs. The cap on this incentive is 10 years
or INR10mn/MW, whichever comes earlier.
Preferential feed-in tariffs in 12 states for wind power ranging from INR3.51 per kWh
(Tamil Nadu) to INR5.92 per kWh for Madhya Pradesh.
Favourable provisions for wheeling, banking and third-party sale in many states.
Wheeling is the facility to transmit power from one place to another using the utility grid,
while banking is the facility to bank energy generation for a certain period with a utility
so as to utilise the same on requirement. The utility charges a fee for providing both
these facilities to users.
National-level dynamic renewable portfolio standard of 5% (2009/10) increasing 1%
every year to 15% by 2020 mandated under the National Action Plan on Climate
Change (NAPCC).
Renewable purchase obligation or renewable purchase specification (RPS) announced
in 28 states and Union Territories as mandated by the Electricity Act, 2003. However,
we note that currently the actual monitoring of the RPO norms in various states is not
being fulfilled completely due to poor financial health of the state discoms.
Renewable Energy Certificate mechanism introduced for inter-state trading of
renewable power (solar and non-solar power separately).
Electricity duty exemptions and concessional levy of cross-subsidy surcharge in the
case of third-party sales.
Below, we highlight the feed-in tariffs offered by various states and the RPO standards
laid out by a few states that have been pro-active in promoting renewable energy.
Fig. 10: Preferential tariff offered for wind power by various states
(INR per Kwh)
State
Wind Tariff
Andhra Pradesh
Madhya Pradesh
Maharashtra - I
Maharashtra - II
Maharashtra - III
Maharashtra - IV
5.64
5.57
5.93
6 April 2015
Fig. 11: Renewable purchase standards/obligation norms laid out by various states
(% of overall electricity procured by the state discom)
State
Rajasthan
Gujarat
AndhraPradesh
MadhyaPradesh
Maharashtra
FY16
7.3%
7.0%
4.8%
FY17
7.8%
7.8%
4.8%
8.5%
As per our discussions with the MNRE, several state discoms are already taking the
benefit of RPO norms while stating their cost of electricity procurement at the time of
filing their Annual Tariff Petition with their respective state electricity regulator. However,
during the course of the year, most discoms are not actually purchasing the required
power from renewable sources. Thus, there is a need for stricter monitoring of actual
implementation of these norms at the discom level.
Average project size is increasing over the years
The average wind installation size in India has also been going up over the years as the
customer base is shifting to IPPs from individuals. This is beneficial for suppliers such as
Suzlon as order sizes are rising due to this trend. As per Inox Wind, project sizes of
50MW and above are becoming the norm especially for IPPs now in India. The figure
below shows the shift in project sizes and customer profile in the Indian market.
Fig. 12: Average project size is increasing for wind power in India
(MW per customer installation)
8
Average size of wind installations (MW)
7
6
5
4
3
2
1
0
Upto FY09
FY10
FY11
FY12
FY13
10
6 April 2015
Therefore, even though the overall manufacturing capacity in India has grown to
~10.5GW pa, we note that ~88% of total annual capacity installations were attributable to
just the top-6 manufacturers in FY14, according to the WISE Report. Among the newer
entrants, Gamesa India, Inox and ReGen have gradually established themselves as
market-share gainers, while overall Gamesa and Suzlon were the leaders with 19%
market share each in FY14. For FY13, Wind World India was the leader with 26% market
share.
As we have highlighted in the next figure, Suzlon consistently maintained strong market
share in wind power installation in India until FY12, (ie, before its company-specific
problems emerged and before the AD incentive was withdrawn).
With these incentives now being restored and Suzlon itself undergoing a major financial
restructuring and recapitalisation, we think the company is well placed to recapture 50%
market share in the years ahead.
Fig. 13: Wind equipment manufacturing capacity in India for large players
(MW per annum)
Manufacturer
Gamesa
1,500
GE India
450
Inox Wind
800/850/2000
1500/1600
1,100
2000
Kenersys India
400
2000
Leitner Shriram
250
1350/1500
ReGen Powertech
750
1500
Suzlon
3,600
600/1250/150/2100
Vestas
1,000
1650/1800/2000
WinWinD Power
1,000
1000
Total
10,050
11
6 April 2015
Curtailing overseas ambitions near term but leaving the doors open
While we are currently not forecasting SUEL to win any orders from overseas markets,
we note that in order to fill its capacity utilisation level, SUEL might at times take up
orders from markets such as the US or LatAm or others. As per our discussion with the
company, unlike in the past when it actively sought orders from these geographies,
currently it is focusing on domestic orders first and only if capacity is available will it take
overseas orders and only if those orders meet the minimum margin threshold.
Offshore wind power project is a long-term opportunity
As per its licensing agreement with Senvion, Suzlon will have the technology for
developing equipment for offshore wind projects in India. However, we do not see
commercial development of offshore wind projects in India in the medium term as it is
very expensive (~2x the cost of onshore wind projects).
Expect Suzlon to regain 50% market share in domestic WTG market
In the WTG segment, we expect Suzlon to recapture 50% of the Indian market by FY17F
on its inherent market strengths: it has a strong domestic market footprint across all
major wind power friendly states, experience in dealing with the respective state
government machinery, the largest and most integrated manufacturing facility among all
of its competitors, a Top-3 technology offering for low wind speed sites, a strong
customer base due to its experience of more than two decades in India (which helps in
repeat orders), etc.
12
6 April 2015
Planning of
Wind farm
systems
Identifying
suitable sites
based on wind
resource data
collected by the
Government
and SUEL
Inspecting the
sites
Calculating
capacity and
sound levels
Analysing safety
and network
capacity
Infrastructure
development
and
Installation
Development
and technical
design
Land
Acquisition
Acquisition of
suitable sites
Negotiation with
the land owners
Operation
and
maintenance
services
Micrositing and
Construction and
Round the clock
identifying exact
development of
remote and onlocations where
infrastructure for
site monitoring
a WTG shall be
entire wind farms
and maintenance
Building of
installed
and repair of
approach roads,
Bringing
WTGs
evacuation facilities Preventive and
together the
and levelling of land
planned
individual WTGs
maintenance of
for WTG tower
and electrical
WTGs,
foundations
components into
transformers and
Installation and
a total solution
related structures
while taking into
commissioning of
Operational
account safety
WTGs
warranty provided
and capacity
for the WTGs
factors
Fig. 16: Historically, Suzlon has consistently maintained strong market share at >50%
and suffered market share loss only after the debt crisis
Annual installations of wind power in India by player (MW)
3,500
80%
Others share
Suzlon share
Suzlon's Market Share (RHS)
3,000
70%
60%
2,500
2,000
1,500
50%
Withdrawal of tax
incentives for wind
segment in India
leading to SUEL's
debt default and CDR
40%
30%
1,000
20%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
0%
FY06
FY05
10%
FY04
500
On the back of the end-to-end service portfolio that Suzlon provides to its customers, as
highlighted above, we believe that it is strongly positioned to win back 50% market share
in India. Interestingly, we note that the actual shrinkage of the wind installations in India
was almost similar to the decline in volumes for SUEL since FY13 (refer to Fig 15
above). Our feedback from customers suggests that with the withdrawal of AD benefits
(where SUEL was a very strong player), that segment has collapsed. Now with the reinstatement of AD benefits and revival of Suzlon, that segment is likely to come back and
that would imply better market share potential for Suzlon when it does.
As discussed earlier, feedback from our broader capital goods coverage suggests that
foreign companies have often found it difficult to manage EPC work execution in India
and this is also evident in the almost negligible presence of foreign companies in the civil
construction segment in India. Most foreign capital goods manufacturing companies are
interested only in product sales in India due to difficulty in project execution and this is
where players like Suzlon step in and gain an advantage, in our view.
13
6 April 2015
We think SUEL is best placed to win back its 50% market share within a short span of
time. The successful execution of its current order backlog of ~1.15GW (bulk of this in
India) would already imply ~40% market share of potential installations in India in FY16F.
Exploring hybrid solar and wind power projects as a commercial option
Suzlon has an effective customer base of ~8.5GW of wind installations in India. With
land availability and grid connectivity being key bottlenecks for incremental renewable
energy installations, Suzlon is currently considering hybrid development of wind and
solar at the same site. For this, Suzlon is likely to approach its existing customers for
renting out the existing wind sites for installing solar panels at the same sites, which can
thus have synergies in terms of O&M cost, grid infrastructure and land. Hybrid parks will
also qualify for feed-in tariffs by discoms, unlike solar power which is not allowed feed-in
tariffs. However, the proposal is still at the initial stages and will likely commercialise
towards the end of FY17F. Meanwhile, Suzlon itself does not plan to take up
manufacturing of solar equipment but will play the role of an EPC and O&M player only.
Our discussion with the MNRE confirmed that this model is viable and even the MNRE is
thinking in similar directions. However, there are certain challenges with respect to water
availability for solar panels at wind sites. We currently do not forecast any contribution
from Suzlons proposed venture into hybrid development of solar and wind parks.
Joint venture with DSA for 450MW wind farm
Suzlon has also entered into a JV with DSA for joint development of a 450MW wind
farm. As per our discussions with the company, the entity will invest in a ready inventory
of 450MW of wind power projects. This entity will, in turn, sell the rights to capacity from
this wind farm to individual customers. At any point of time, the JV expects to maintain
an inventory of 450 MW of wind projects such that customers can buy wind power
projects without any waiting period. While this model will entail working capital
involvement at the JV level, we see this concept as a value addition for Suzlon 1) it will
boost order flow for the company in the near term (with the JV being its captive
customer); and 2) it will strengthen market share for Suzlon as customers will likely
choose projects from this wind farm given its ready inventory vs competitors who might
take 6-18 months to deliver projects.
In our view, this concept is more inclined to attract customers seeking to invest in wind
farms from a tax incentive perspective or even private equity players who are not in the
business of running power projects but want to benefit from the project IRRs.
Fig. 17: Proposed structure of Suzlons JV with DSA for 450 MW wind farm
14
6 April 2015
Financials
Return to business-as-usual scenario to drive 27% revenue
CAGR over FY15-20F
Suzlon has suffered from liquidity constraints over the past few years that have affected
its execution and have dried up its order pipeline after 2012 when the government
withdrew AD and GBI benefits from the wind sector. However, with both these concerns
now behind the company, Suzlon looks well placed to return to business as usual.
Market-share gain in WTG segment
As we highlighted earlier, Suzlon has historically enjoyed a very strong market share in
India (over 50%) due to its strong execution track record and complete EPC and OMS
offering. We believe these advantages remain in Suzlons favour even now and this
should help it regain market share in India. We estimate a 40% market share over FY1620F. Also, the re-introduction of the AD and GBI benefits for wind installations along with
the governments focus on reaching 60GW cumulative capacity in India by 2022 are
likely to drive sector growth.
This spells strong growth in WTG revenues for Suzlon over FY15-20F, on our estimates.
We forecast a 30% CAGR in WTG revenues over this period. We note that realisations
in the WTG segment have consistently been rising over the past few years mostly owing
to improvement in technology. Even as capex cost/MW has increased, we note that
efficiency of the wind mills has increased even more over the years leading to lower unit
cost of electricity produced.
Fig. 18: Suzlon could regain 50% market share by FY17F
Fig. 19: which will likely drive strong WTG revenue growth
(MW)
3,500
(INRmn)
3,000
60%
120,000
50%
100,000
40%
80,000
120%
WTG
% y-y growth
100%
80%
2,500
2,000
30%
1,500
20%
1,000
60%
60,000
40%
20%
40,000
0%
20,000
-20%
10%
500
FY17F
FY16F
FY17F
FY15F
FY16F
FY14
FY15F
-40%
FY13
0%
FY12
15
6 April 2015
revenues for Suzlon Wind to grow at a CAGR of 15% over FY15-20F and contribute
~17% of overall revenues for the company.
Not only does the OMS segment provide stable and secure stream of revenue, it also
has high margins built in given the service nature of this business. As per our
discussions with the company, it has a typical gross margin of 50-55% as against ~30%
for the WTG segment.
Fig. 20: Suzlon has a strong existing wind installation base
Fig. 21: that will drive strong annuity revenues from OMS
(MW)
INR mn
40,000
41%
35,000
30,000
40%
30,000
39%
20,000
30%
OMS
% y-y growth
25%
25,000
20%
20,000
15%
15,000
38%
10,000
37%
10%
10,000
5%
5,000
FY20F
FY19F
FY18F
FY17F
FY17F
FY16F
FY16F
FY15F
FY15F
FY14
36%
FY14
FY13
0%
FY12
(INRmn)
(% of sales)
40%
180,000
WTG
160,000
Gross Margins %
OMS
140,000
35%
120,000
100,000
80,000
30%
60,000
40,000
25%
20,000
FY20F
FY19F
FY18F
FY17F
FY16F
FY15F
FY14
FY13
FY12
20%
FY14
16
6 April 2015
over the past few years; for example, it has cut its headcount in India from >10,000 in
FY13 to ~6,600 now.
Fig. 24: Other expense as % of sales falling
30,000
Other expenses
Other expense as % of sales
25,000
20,000
Higher due to
Liquidated
damages
15,000
35%
14,000
30%
12,000
25%
10,000
20%
8,000
15%
6,000
10%
4,000
5%
2,000
0%
Staff cost
16%
14%
12%
10%
8%
10,000
5,000
0
FY14 FY15F FY16F FY17F FY18F FY19F FY20F
6%
4%
2%
0%
FY14 FY15F FY16F FY17F FY18F FY19F FY20F
(INR mn, %)
35,000
(MW)
EBITDA
EBITDA Margin %
20%
30,000
15%
25,000
10%
20,000
2,000
5%
15,000
0%
10,000
-5%
5,000
-10%
0
-5,000
Total sales in MW
EBITDA Break-even installation
Capacity
2,500
-15%
-10,000
-20%
-15,000
-25%
1,500
1,000
500
FY13
FY14
FY15F
FY16F
FY17F
17
6 April 2015
Fig. 28: Inox Wind (peer in wind equipment market) also makes 15-20% EBITDA margin
Inox Wind's financial ratios compare favourably with our assumptions for Suzlon
FY12
FY13
FY14
Dec-14
Gross Margins
30.5%
27.9%
22.6%
25.5%
Other expenses
5.4%
6.1%
9.1%
7.4%
As a % of sales
Employee exp
2.3%
2.4%
2.5%
2.2%
EBITDA margin
22.8%
19.5%
11.1%
15.9%
ROCE
44.8%
31.2%
19.3%
16.7%
Inventory days
59
27
63
64
Receivable days
43
172
165
257
Payable days
64
79
98
118
INR mn
INR mn
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
-
80%
Net Debt
40,000
70%
Share of debt in Enterprise
Value
60%
50%
25%
30,000
20%
15%
20,000
40%
30%
10%
10,000
5%
20%
(20,000)
FY20F
FY19F
FY18F
FY17F
FY16F
FY15F
FY14
(10,000)
FY13
FY20E
FY19E
FY18E
FY17E
FY16E
FY15E
FY14
FY13
0%
FY12
10%
0%
-5%
-10%
18
6 April 2015
vacant open land in existing as well as new wind sites for installing solar panels to
effectively utilise the available land bank as well as scarce grid infrastructure.
Fig. 31: PAT breakeven likely by FY17F
20,000
(10,000)
(20,000)
(30,000)
Source: Nomura estimates
(8)
(20,000)
FY20F
FY19F
FY18F
(2)
(6)
(10,000)
(4)
10
10,000
0
FY15F FY16F FY17F FY18F FY19F FY20F
FY16F
20
FCF
4
10,000
30,000
FY15F
20,000
FY14
FY13
30,000
FY17F
(INRmn)
-10
-20
(30,000)
-30
(40,000)
-40
19
6 April 2015
Valuation
Suzlon is a turnaround story with its current financials not yet reflecting how the future
will look like, especially in light of recent corporate actions taken by the company.
Therefore, comparison with regional peers does not make much sense, in our view.
Fig. 33: Regional valuation comparison (1)
P/E (x)
EV/EBITDA (x)
P/BV (x)
Price Mkt Cap
(local) (Bn USD) FY15F FY16F FY17F FY15F FY16F FY17F FY15F FY16F FY17F
Com pany
Rating
Ticker
Suzlon
BUY
SUEL IN
Gamesa
Not Rated
GAM SM
12
3.5
31.7
Vestas
Not Rated
VWS DC
295
9.5
24.5
Nordex
19
1.7
36.6
BUY
002202 CH
20
8.1
31.5
Not Rated
MY US
0.3
5.4
11
1.8
26
1.6
NM
NM
16.9
27.4
23.8
11.2
NM
NM
NM
20.4
17.4
10.1
7.9
7.2
2.4
2.2
2.0
19.0
19.3
7.9
7.4
7.7
3.8
3.3
2.9
24.6
19.5
10.9
8.6
7.6
4.0
3.5
2.9
21.7
17.8
21.7
15.4
12.2
3.6
3.2
2.8
6.2
4.0
4.3
3.4
2.3
0.5
0.4
0.4
75.5
41.1
28.5
30.5
22.2
17.8
4.5
3.9
3.4
Overall Average
34.2
22.2
17.6
16.1
12.7
9.4
3.1
2.8
2.4
Average ex-Suzlon
34.2
22.2
17.7
14.2
10.8
9.1
3.1
2.8
2.4
Source: Bloomberg consensus, Nomura estimates for SUEL. Note: Pricing as of 1 April 2015
Com pany
Rating
Ticker
Suzlon
BUY
SUEL IN
26
1.6
NM
NM
NM
5%
10%
16%
NM
NM
Gamesa
Not Rated
GAM SM
12
3.5
8.4
11.4
12.1
11%
13%
13%
12%
22%
Vestas
Not Rated
VWS DC
295
9.5
19.3
18.6
16.0
14%
14%
14%
1%
8%
Nordex
19
1.7
11.1
15.7
17.0
7%
8%
9%
13%
23%
BUY
002202 CH
20
8.1
12.1
15.3
16.1
15%
16%
18%
21%
21%
Not Rated
MY US
0.3
10.7
7.8
9.8
7%
8%
10%
23%
10%
11
1.8
7.4
10.7
12.4
20%
22%
22%
20%
38%
Overall Average
11.5
13.2
13.9
11%
13%
15%
15%
21%
Average ex-Suzlon
11.5
13.2
13.9
12%
13%
14%
15%
21%
Source: Bloomberg consensus, Nomura estimates for SUEL. Note: Pricing as of 1 April 2015
20
6 April 2015
However, all of this came to an abrupt halt with the global financial crisis, when the
governments started ignoring the high-cost renewable commitments. In fact, capex,
overall, went downhill and remains soft.
In the meantime, emerging markets have continued to grow on the back of their rising
demand for energy and shortage of fossil fuels. We believe India therefore fits in
perfectly well in this story as the next driver of renewable energy, though supported by
government incentives. As such, we think India offers a much better growth profile for
companies as compared to global economies particularly Europe, which in our view, has
already matured in terms of renewable sources of energy.
Therefore, we think SUEL deserves to trade at a higher premium compared to global
players where the growth outlook is weaker as compared to a pure play India story in
SUEL.
O&M revenues provide solid financial support
As we highlighted earlier in this report, Suzlons O&M revenues are set to grow and
provide strong financial support to the company. Notably, even during the past few
years, Suzlon continued to benefit from its strong installed base of ~8.5GW across India
and the associated O&M revenues from the same. Not only is this segment a good
annuity revenue source for the company, but it will also keep growing as the installed
wind base for SUEL ramps up further. O&M is also a higher-profit business and one that
provides greater visibility and stability in revenue/profits.
Sales
% grow th YoY
EBIT
Add Depreciation
EBITDA margins
Net taxes
Adjusted NOPLAT
(Increase)/ Decrease in w orking Capital
FY14
FY15F
204,029 201,538
0.1
(1.2)
(8,659)
583
7,769
8,893
-0.4%
4.7%
(552)
(1,442)
9,476
23,681
(20,196)
811.0%
9,226
0%
13,014
(10,720)
FY16F
95,036
(52.8)
5,947
3,624
10.1%
9,572
(8,032)
7.5%
1,500
-1%
40
FY17F
FY18F
124,670 148,825
31.2
19.4
15,879
20,754
3,749
3,999
15.7%
16.6%
19,628
24,753
(3,048)
(6,891)
FY19F
FY20F
159,281 170,151
7.0
6.8
22,563
24,460
4,249
4,499
16.8%
17.0%
26,812
28,959
(7,993)
(1,895)
FY25F
232,017
6.0
34,802
5,927
17.6%
(6,960)
33,769
(2,519)
-10.3%
-28.5%
-76.5%
-17.4%
-19.2%
2,500
2,500
2,500
2,500
3,283
8%
14,080
12,575
10%
15,362
12,253
24%
16,319
11,625
23%
24,564
15,629
25%
27,967
10,112
21
6 April 2015
12.0%
20.2
6.0%
111,143
496,781
179,613
290,756
69,437
221,319
5,987
37.0
Investment risks
Indias wind power market is highly sensitive to incentives offered by the government
and any reduction in the same could be detrimental to the wind equipment makers as it
would lead to a slowdown/decline in orders.
The working capital cycle is long and could delay FCF generation at times.
Land acquisition, grid infrastructure and state discoms financial health are key
bottlenecks for rapid growth of wind business in India. Removal of these bottlenecks
would be key positives, while continued problems might delay the growth of the sector.
22
6 April 2015
Annexure
Comparison with China wind equipment sector
We compare Indias wind power market with that of China and note that Chinas wind
power market has developed in a similar fashion as Indias is currently. China, as of Dec
2014 had an estimated >90GW of installed wind power capacity and is adding ~18GW of
incremental capacity every year. The cumulative wind power installed power capacity in
China is still well below the world average and even that of India, although arguably we
believe China has built far more thermal power capacity than required. In comparison,
we forecast India will add 2-3GW pa over the next two years.
Fig. 37: China: Grid-connected wind power capacity
estimates (2014-20F)
Wind power capacity (LHS)
Annual addition (RHS)
20
30%
210
15
20
25%
189
15
168
148
61
30
46
0%
2020F
2019F
2018F
2017F
2016F
2015F
2014F
2013
2012
2011
0
2010
5%
6% 4%
3% 3% 3% 3% 2%
2%
Canada
China
75
7%
10%
France
93
Australia
10
112
50
17%
15%
130
100
20%
India
18
34%
US
18
35%
Italy
14
13
19
25
United
Kingdom
150
18
17
21
Germany
200
21
40%
Spain
250
(GW)
Denmark
(GW)
23
6 April 2015
Fig. 39: China: Status of UHV projects (in operation, under construction and
planning)
Type
Voltage
Length (km )
COD
GW
AC
1000kv
645
5,000
Coal-fired
2009
Xiangjiangba - Shanghai
DC
800kv
1,907
6,400
Hydropow er
DC
800kv
2,059
7,200
Huainan - Shanghai
AC
1000kv
656
7,900
DC
800kv
2,210
DC
800kv
1,680
2015F
Hebei
11.0
8.0
8.0
7.6
Ximeng - Zaozhuang
2010
13.0
11.1
Ximeng - Zaozhuang
Hydropow er
2012
Jilin
6.0
3.8
Coal-fired
2013
Gansu
11.0
7.1
8,000
Wind pow er
2014
8,000
Hydropow er
2014
Xinjiang
10.0
6.1
AC
1000kv
603
6,800
Nuclear pow er
2015
AC
1000kv
759
7,000
Coal-fired
2017
Yaan - Wuhan
AC
1000kv
1,297
7,000
Hydropow er
2017
Ximeng - Zaozhuang
AC
1000kv
993
7,500
Wind pow er
2017
DC
800kv
1,722
8,000
Wind pow er
2017
Jiuquan - Hunan
DC
800kv
2,413
8,000
Wind pow er
2017
Jiangsu
6.0
2.6
Shandong
8.0
5.5
Heilongjiang
Total
6.0
4.0
79.0
55.8
Fig. 41: China: UHV grid expansion plan before 2020F and the location of the nine large-scale wind power bases
1000kV UHVAC completed
1000kV UHVAC under construction
1000kV UHVAC planned
800kV UHVDC completed
800kV UHVDC under construction
800/1000 kV UHVDC planned
Heilongjiang
Jilin
East Inner Mongolia
Xinjiang Hami
Jilin
Xinjiang
Gansu Jiuquan
Inner Mongolia
Beijing
Hebei
Gansu
Hebei
Tianjin
Shandong coastline
Shanxi
Ningxia
Shandong
Qinghai
Jiangsu coastline
Shaanxi
8 Jiangsu
Henan
4
Tibet
1
Sichuan
Shanghai
Anhui
Hubei
Zhejiang
Chongqing
3
1
7
6
Hunan
Jiangxi
Fujian
Guizhou
Yunnan
Guangxi
Taiwan
Guangdong
Hainan
24
6 April 2015
Fig. 43: China: Grid connected vs. total capacity for wind
power (2007-13)
An upward trend on the grid connected vs. total capacity for wind power
since 2009
Zone
Regions
% of renew able
energy
Zone I
15%
10%
(GW)
100
80
75.2% 74.5%
74.1%
100%
80.5% 82.6%
80%
62.5% 66.1%
Zone II
8%
Zone III
4%
60
60%
Zone IV
2%
40
40%
20
20%
0%
2007
2008
2009
2010
2011
2012
2013
25
6 April 2015
Appendix A-1
Analyst Certification
I, Amar Kedia, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.
Ticker
SUEL IN
Price
INR 27
Price date
Stock rating Sector rating Disclosures
27-Mar-2015 Buy
N/A
Closing price
19.20
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We value Suzlon at 15x FY17F EV/EBITDA to arrive at our TP of INR38/share.
Risks that may impede the achievement of the target price 1) Indias wind power market is highly sensitive to incentives
offered by the government and any reduction in the same could be detrimental to the wind equipment makers as it would lead to
a slowdown/decline in orders. 2) The working capital cycle is long and could delay FCF generation at times. 3) Land acquisition,
grid infrastructure and state discoms financial health are key bottlenecks for rapid growth of wind business in India. Removal of
these bottlenecks would be key positives, while continued problems might delay the growth of the sector.
Important Disclosures
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email grpsupport@nomura.com for help.
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are
not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to
26
6 April 2015
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subject to limited management discretion. An analysts target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated
target price, defined as (target price - current price)/current price.
STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia exJapan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.
SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as
'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.
Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that
potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A
'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price
have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is
acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled
as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should
not expect continuing or additional information from Nomura relating to such securities and/or companies.
SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks
under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average
recommendation of the stocks under coverage is) a negative absolute recommendation.
Target Price
A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the
company's earnings differ from estimates.
Disclaimers
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6 April 2015
This document contains material that has been prepared by the Nomura entity identified on page 1 and/or with the sole or joint contributions of
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This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poors.
Reproduction and distribution of third-party content in any form is prohibited except with the prior written permission of the related third-party.
Third-party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and
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