Wednesday, February 18, 2015

Winds of Change @ Suzlon

DSA Investment
  • Dilip Sanghvi Family and Associates (DSA) to invest Rs. 1,800 crores for 22.7% stake in Suzlon. DSA will be offered 100 crores shares on preferential allotment basis.
  • Sanghvi's investment firm - Lakshdeep Investment and Suzlon will also form a wind farm joint venture (50:50)
  • JV will focus on development of 450 megawatt (MW) of wind farms within period of 12 months.
  • Both the parties will invest Rs. 400 crores to JV.
  • This JV would provide credit enhancement to lender's group and working capital to Suzlon
  • In addition - provide incremental project specific non-fund based working capital facility for execution of the wind farm project.
Senvion Sale
  • Suzlon to receive Rs. 7,200 crores from sale of 100% stake in its wholly owned subsidary Senvion SE.
  • There are no tax implication of this transaction
Order book
  • Order book 1,147.50 MW for Rs. 7,250 crores. All orders to be executed in India and schedule delivery by Mar'16 (Also, includes part of order that will be executed by Mar'15)
  • Large players accounts for 70-75% of order book
  • Order cycle: 12 months
  • Next 2 years - focus on domestic market
Global Market focus
  • Only 5 countries - USA, China, Brazil, Mexico & Turkey
  • Reflected in order book in FY16, execution after FY 2016 -17.
  • Order book cycle - 24 months

Debt Management
  • Total outstanding debt - Rs. 16,500 crores. 
  • Proceeds of Senvion Sale - Rs. 6,000 crores to be used to repay debt. 
  • Of balance loan Rs.2,500 crores are FCCB loan in nature of quasi equity
  • Balance Rs.8,000 crores comprises of rupee denominated loan and working capital facility
Business Model
  • Gross Margin: 30 - 35% (blended)
  • Breakeven EBITDA: 450 MW
  • To follow Hybrid Model - Wind (2/3) + Solar (1/3)
  • High utility - 50% feed into grid for hybrid model (20% for wind; 30% for solar)
  • Hybrid model - cost saving of 7 - 8%
  • Does not plan to manufacture solar panel.
  • Solar project cost for 1 MW of energy Rs. 7 crores - 
    • Panels, modules to be purchased approx Rs. 4.5 cr 
    • Project cost balance borne by Suzlon
  • Cash Utilization 
    • Rs. 200 crores for Capex in Madhya Pradesh, Andra Pradesh & Rajasthan with objective to reduce logistic cost
    • Rs. 200 crores for technology
    • Rs. 400 crores towards DSA JV
Industry Concern
  • Strong Alignment between centre and state
  • Grid Infrastructure by government to unlock site values
  • Uncertainty in Rates for feed in traffic
Other Points
  • Macro Factors 
    • Renewable energy - wind turbine generators & solar energy qualifies for CSR 
    • Fast tracking of Green corridor by the Modi government
  • Incentive
    • Accelerated depreciation
    • Increase in per unit generation based incentive
    • removal of 4% Special additional Duty on parts & raw material for Wind Turbine Generator manufacturer
Heard on the street
  • Suzlon Energy in talks with Dilip Shanghvi's son, Aalok Shanghvi, for a possible merger or stake purchase with the latter's company, PV Powertech, which makes solar energy panels
Re Invest Summit 2015
  • 2.08 Gw committed by major private players & public sector companies
  • $200 billion to be invested in renewable power development
  • PSUs such as NTPC, Coal India, NHPC etc, commit 8,000 Mw
  • SBI to finance 15,000 Mw, other financing bodies - 11,500 Mw
  • Manufacturing draws 41 Gw of investment - both solar cells and wind turbines
  • Suzlon commitment - Suzlon has committed 11,000 megawatt of clean power to the government, of which it plans 5,000 from solar energy
Recommendation
  • Dilip Sanghavi has business acumen of turning around debt ridden companies. However, Tanti family will retain management control by the virtue of pooling arrangement for voting.
  • Suzlon has unique technological capability that makes low wind sites viable. Also, its capable for high energy generation at lower cost
  • Suzlon has unique capability to provide end to end solution
  • Good land bank – around 30,000 acres of land acquired by group since last 3 years
  • Favorable government policies and incentive – to boost sector growth
  • Post sale of Senvion - Consolidated Revenue would fall by 65% (For FY14, Senvion contributed Rs. 13,759 crs or 65% of the consolidated revenue). Also, cash outflow in form of Interest cost and debt repayment would also fall. 
  • Fully diluted holding – Tanti family – 17.5%, DSA – 16.7%, Lenders – 12.2% & Public – 53.6%
  • Financials statement may be improved and position strong position in around 12 - 15 months
  • Assuming full conversion of FCCB and infusion by DSA, the debt / equity ratio = 3.75 approx.
    •  Equity: Rs. 5,113 crores (Rs. 813 crores - Sept 2014, Rs.2,500 crores – FCCB conversion, Rs.1,800 crores – DSA Infusion)
    • Reserves & Surplus: Rs. – 2,981 crores (Rs. - 2,571 crores - Sept 2014, Rs. - 410.8 Crores) 
    • Net Equity: Rs. 2,132 crores
    • Debt after all restructuring and conversion: Rs. 8,000 crores (approx.)

Conclusion

With balance sheet position improving, stock is good buy at current valuation


Disclaimer
I am value equity investor in Suzlon


Source: Financials, Conference call, leading newspaper