Spark’s Update on Suzlon Energy…

Suzlon Energy is turning out to be one interesting turnaround story. After a couple of loss-making years, it appears to be gearing up its businesses, as reflected by its financial performance in 2011 so far. In the March '11 quarter, Suzlon improvised upon its operating margins by more than 500 basis points y-o-y. The June '11 quarter also saw the company post impressive double-digit operating margins.

 
Suzlon registered more than 80% y-o-y growth in revenues in June '11 quarter while its net profit was impressive at 60 crore against a loss of over 900 crore in the June '10 quarter. The raw material cost, as a percentage to sales, also declined by nearly 1000 basis points to 64% in June '11, indicating the cost efficiencies being put in place. It has also succeeded in keeping its wage costs in check, helping it considerably improve its operating margins.

 
Suzlon has maintained its guidance of achieving 24,000-26,000 of sales in FY12, backed by its order book of over 29,000 crore.

Its acquisition of

REpower has played a major role in the turnaround.

Nearly 62% of its current order book is from REpower. Suzlon is now in the final stages of acquiring the remaining 5% stake REpower from minority shareholders for approximately 398 crore.

Even as a turnaround in visible, Suzlon's stock currently trades around 34-36 on the bourses, i.e. its near 52-week low level. Over the past one-year, this counter has returned a negative 27% against the Sensex's negative 12%.

 
Apart from its weak financials in the past, a major concern that is holding back investors is Suzlon's huge

debt which includes the foreign currency convertible bonds loan due for repayment next fiscal.

The management, however, is optimistic about meeting its loan obligation, intending to fund it through operating cash flows, receipts from the stake sale in Hansen Transmissions and also the expected recovery from one of its large US-based debtor by the second half of this fiscal. It has a cash balance of over 3,000 crore as at the end of March '11 while its total debt stood at over 12,500 crore