Can Suzlon Hit ₹200? In-depth analysis of Suzlon

Suzlon Energy Limited is one of India’s leading renewable energy companies, with a primary focus on wind energy. Founded in 1995 by Tulsi Tanti, Suzlon has played a pioneering role in developing India’s wind energy sector. Over the years, Suzlon has expanded its operations globally and has been involved in the design, manufacturing, and installation of wind turbine generators (WTGs). 

Business Overview 

Suzlon operates across the renewable energy spectrum, primarily focusing on the following areas: 

Wind Energy Solutions 

Suzlon’s core business lies in providing end-to-end wind energy solutions, from the manufacturing of wind turbines to the execution of wind power projects. The company designs and produces various types of WTGs that are suitable for different wind conditions. Suzlon’s offerings include: 

• Turbine Manufacturing: Suzlon manufactures a wide range of wind turbines with varying capacities (ranging from 600 kW to multi-MW capacities), suitable for different terrains and wind speeds. 

• Project Development: Suzlon handles the entire lifecycle of wind energy projects, from site identification, land acquisition, and engineering to construction and commissioning of the wind farms. 

• Operations & Maintenance (O&M): After installation, Suzlon provides long-term operations and maintenance services, ensuring maximum efficiency and uptime of the turbines. 

Product Portfolio:  

The company has the variety of products in its portfolio, they are majorly classified into three types:  

1. Suzlon S144 3 MW series: With the introduction of new 3 MW Series, Suzlon has yet again redefined the benchmark with S144, one of the largest wind turbine that will target India’s relevant low wind regimes. 

2. Suzlon S133 2.6 to 3 MW Platform: Suzlon introduced the 2.6 to 3.0 MW platform to unlock unviable sites and deliver improved energy yield suitable for all wind regimes 

3. S120 2.1 MW : Suzlon’s new S120 wind turbine generator, built on the highly successful 2.1 MW platform is set to improve the ROI for customers. 

In Addition to that:  

There are two important products and Value-added services:  

1. Quick Sense:  It is a sensor which identifies the wind direction. The new wind vane, once deployed, ensures enhanced resolution and accuracy of the wind direction. This leads to better alignment of the nacelle to the wind direction, increasing the AEP. 

2. SC Trinity: It is Suzlon’s in-house developed and userfriendly SCADA application, SC Trinity enhances asset performance. This best-in-class fleet performance analysis tool is the next-generation SCADA platform that enables a user to view the real-time performance of WTGs 

Suzlon is not only a key player in the Indian wind energy market but also has a significant international presence. The company has installed wind energy projects in several countries, including the U.S., Australia, Europe, and South America. Despite some financial struggles, Suzlon has continued to expand its footprint globally. 

Suzlon places a strong emphasis on research and development (R&D) and innovation. It has R&D centers across Germany, the Netherlands, and India, focusing on improving turbine efficiency, design, and technology. Suzlon’s technological advancements are aimed at reducing the cost of energy (COE) and increasing the competitiveness of wind power.  

Before we talk about the industry let us look at how the wind energy system works.  

What is wind energy?  

Wind energy, which transforms the power of wind into electricity. But to utilise the wind, we need the construction of wind farms, either on the land or at the sea, with numerous wind turbines.  

We need to understand the process, so that we will understand the company and its products in a detailed manner.  

Here’s a simple breakdown: 

1. Wind Blows: The wind causes the blades of a wind turbine to spin. These blades are shaped to capture the wind’s energy effectively. 

2. Rotating Blades: As the blades turn, they rotate a shaft connected to a generator inside the turbine. 

3. Generator Produces Electricity: The generator converts mechanical energy from the spinning shaft into electrical energy. 

4. Power Delivered: The electricity is then sent to a transformer, which increases the voltage for transmission over power lines to homes, businesses, and industries. 

In summary, wind turns the blades, the blades turn the generator, and the generator creates electricity. It’s a clean and renewable way to produce power! 

Industry: At COP 28 Dubai, nearly 200 governments agreed to ‘the historic goal of tripling renewable energy capacity’. 

Leaders across the globe demonstrated the ambition, an urge to transition away from fossil fuels, limit the global temperature rise and avert the worst impacts of climate change. 2023 witnessed exponential growth in new wind installation across the world. It marked the highest wind capacity installation in a year, ever in the history of wind power. In 2023, 116.6 GW of new wind capacity was added worldwide, bringing the total global wind capacity to 1 TW. New wind installations were 39 GW higher in 2023 as compared to 2022. 

Strengths:  

1. Vertical Integration 

Suzlon’s vertical integration is one of its standout strengths, giving the company control over multiple stages of the wind turbine production process. This approach enables Suzlon to streamline operations, maintain better quality control, and reduce overall costs. By owning various components of the supply chain, Suzlon can deliver more efficient and cost-effective wind energy solutions. 

• Rotor Blade Manufacturing: Suzlon produces its own rotor blades, which are a critical component of wind turbines. 

• Tower Manufacturing: Suzlon also manufactures towers that support the wind turbines. 

• Nacelle Assembly: The company assembles nacelles, which house the turbine’s critical components like the generator, gearbox, and control systems. 

By having control over various production processes, Suzlon can offer competitive prices and ensure quality control. 

2. Transformation of Financials: There is an interesting story that took part of the journey of the suzlon. They were once at a huge burden with debts. The company underwent debt restructuring about two times in the last 20 years.  

Let us discuss the story in brief and then we will discuss the remaining parameters.  

Suzlon ventured into the wind market by acquiring Sudwind Energy GmbH, a German company and raised INR 14 billion through an IPO in FY 06 for the expansion of manufacturing facilities in India.  

It then entered the US Markets and Chinese markets by acquiring Hansen Transmissions and Senvion and signed a large contract with Edison Mission Energy. 

Suzlon acquired Senvion (RE Power at the time), a German wind turbine manufacturing company for EUR1.4bn in 2007 to gain additional technical expertise and establish a presence in Europe.  

Suzlon acquired Hansen Transmissions, a Belgian gearbox and drive train manufacturer, in 2006 for EUR465mn. Suzlon made this acquisition to integrate gearbox technology into its wind turbine solutions.  

These acquisitions were funded by debt leading to the debt increasing from INR 2.4 billion in FY 04 to INR 100 billion in FY 08.  

The global financial crisis of 2008 and changing dynamics in the renewable energy sector led to Suzlon’s financial crisis. The company’s inability to service its debt eventually led to liquidity issues and operational difficulties, causing a default on loan repayments in 2012. 

To address its financial difficulties, Suzlon pursued several restructuring efforts, both with its lenders and through government-backed schemes. 

In 2013, Suzlon entered the Corporate Debt Restructuring (CDR) mechanism, under which Indian banks allowed the company to restructure its debt. This involved extending loan maturities, lowering interest rates, and allowing more flexibility for Suzlon to service its obligations. 

As part of this agreement, some of Suzlon’s debt was converted into equity, which helped reduce immediate repayment pressures but diluted shareholder value. 

One of the most significant moves Suzlon made was selling Senvion SE, its German subsidiary, to a U.S.-based investment firm for €1 billion. This sale was aimed at reducing Suzlon’s debt burden and refocusing the company on its core business in India. 

The proceeds from the sale were used to repay some of Suzlon’s outstanding debt, helping reduce its liabilities and improve its financial health, though it wasn’t enough to fully resolve the debt issue. 

In 2019, after further financial difficulties and a default on loan repayments, Suzlon initiated another round of debt restructuring. A consortium of Indian lenders, led by the State Bank of India (SBI), took over Suzlon’s debt management to work on a comprehensive restructuring plan. 

In 2020, Suzlon benefited from the Reserve Bank of India’s (RBI) one-time debt restructuring scheme, introduced in response to the economic impact of the COVID-19 pandemic. This allowed Suzlon more time to repay loans and further renegotiate terms with lenders. 

As part of its restructuring plan, Suzlon raised ₹400 crore through a rights issue in 2020, where existing shareholders could buy additional shares to infuse capital into the company. This capital helped Suzlon strengthen its balance sheet and repay part of its debt. 

Through its various restructuring efforts, Suzlon successfully reduced its debt significantly, from over ₹12,000 crore to approximately ₹3,000 crore by 2022. This reduction eased Suzlon’s interest burden and provided the company with greater operational flexibility. 

3. Experienced leader: The Group has a successful record of project execution with technical expertise, evident from the healthy market share of 30-35% in business in india over the past years and also in cumulative installed capacity.  

4. Large Installed Base: With an installed base of over 14.8+ megatonnes (MT) of wind energy capacity in India, Suzlon has cemented its position as a leading player in the country’s renewable energy sector.  

With over 14.8+ MT of installed wind energy capacity, Suzlon is one of the largest contributors to India’s wind energy market. This extensive installation footprint demonstrates the company’s ability to handle large-scale projects and cater to India’s growing demand for renewable energy. 

5. Market Leader: Suzlon has a market share of 32% in the Indian wind energy sector, Suzlon stands as a dominant force in the industry. This significant market share reflects Suzlon’s leadership position, solid reputation, and ability to meet the growing demand for renewable energy in India. 

6. Largest Order Book: As of June 30,2024, Suzlon, received the largest-ever order since 2017. They received order of 3.8 GW, and it was larger than the order they received in the year 2017, which is of 3.3 GW.  

The orders they received are a mix of orders for S144 –3.3 GW and S120 – 459 MW.  

The increase in tariffs around viable levels of ` 3 per unit provides confidence on step-up in wind turbine installation & commissioning.  

Risks:  

1. Valuation:  

• PE Ratio (121): A price-to-earnings (PE) ratio of 121 is very high, indicating that the stock is trading at a significant premium relative to its earnings. This suggests that investors are either anticipating strong future growth or the stock is overvalued. Such a high PE also implies greater risk, as the company needs to consistently meet high earnings expectations. Any slip in performance could lead to a sharp correction. 

• PBV Ratio (Price-to-Book Value): Suzlon’s PBV is also high. With a book value of ₹2.91 and a share price of ₹82.9, this indicates that the stock is trading at a multiple of nearly 28 times its book value. A high PBV means that the market values the company much higher than its net assets, which again suggests overvaluation. 

2. Reduced wind power potential: Most wind turbines are being built in southern and western India to best capture the winds of the Indian summer monsoon, the seasonal weather pattern that brings heavy rains and winds to the Indian subcontinent. The Indian monsoon is weakening as a result of warming waters in the Indian Ocean, leading to a steady decline in wind-generated power. The decline has been steepest in Rajasthan and Maharashtra whereas other regions, particularly in eastern India, have witnessed smaller or no decline.  

3. Raw Material Costs: 

As per standalone financial statement, it mentioned that company has spent around INR 2,852.13 crores for raw materials, components and consumed services.  

About 45-50% of Suzlon’s sales go toward raw material expenses. The company buys steel, epoxy, and glass fabrics, which often see price changes. Any disruptions in the supply chain for these materials could slow down or delay the delivery of wind turbines, causing potential risks to earnings and damaging the company’s reputation. 

Financials:  

Suzlon’s financial performance over the past few years has shown a dramatic turnaround, especially in terms of profitability. From FY18 to FY20, the company experienced a significant decline in sales, dropping from ₹8,116 crore in FY18 to ₹2,973 crore in FY20. This period also saw a decline in operating profit margins (OPM), hitting a low of -29% in FY20, reflecting the financial strain caused by its high debt and operational challenges. However, starting in FY21, Suzlon began to recover, with sales improving to ₹6,582 crore by FY22, and OPM stabilizing around 16%-17%. 

The company’s net profit also tells a story of recovery, moving from significant losses of ₹1,537 crore and ₹2,692 crore in FY19 and FY20, respectively, to turning positive at ₹104 crore in FY21. Though there was a minor setback in FY22 with a loss of ₹177 crore, Suzlon’s restructuring efforts and operational improvements helped it achieve a notable profit of ₹2,887 crore in FY23. The TTM (Trailing Twelve Months) figures also look promising, with Suzlon maintaining profitability, signaling a solid recovery trajectory. 

Shareholding Pattern:  

Suzlon’s shareholder pattern from March 2019 to June 2024 reflects significant shifts in ownership dynamics. Promoter holdings have consistently decreased from 19.82% in FY19 to 13.26% by June 2024, indicating dilution over time. In contrast, foreign institutional investors (FIIs) have increased their stake notably, rising from 6.25% in FY19 to a significant 21.53% in June 2024, reflecting growing confidence from global investors. Domestic institutional investors (DIIs) saw fluctuations, with their stake peaking at 16.54% in FY21, then stabilizing around 9.16% by June 2024. The public shareholding, while initially increasing, dropped to 56.03% in June 2024, likely due to rising institutional interest. Notably, the number of shareholders surged from 10.17 lakh in FY19 to over 41.96 lakh by June 2024, reflecting the stock’s growing retail popularity. This shift in ownership highlights both institutional confidence and expanding retail interest in Suzlon. 

Growth Triggers: 

1. Government Support: India ranks fourth in global wind installations, with 45 GW of installed onshore wind as of January 2024. It is the second largest wind market in the Asia Pacific region after China. Driven by the strong vision of the Government of India to make the country a developed nation by 2047 and several strategic economic growth initiatives, India’s commitment towards renewable energy remains a priority. 

But what are those initiatives:  

• National Wind-solar Hybrid Policy, 2018: The main objective of the Policy is to provide a framework for promotion of large grid connected wind-solar PV hybrid system for optimal and efficient utilization of transmission infrastructure and land, reducing the variability in renewable power generation and achieving better grid stability. 

Under the category of wind-solar hybrid power plants, Wind Turbine Generators (WTGs) and Solar PV systems will be configured to operate at the same point of grid connection. There can be different approaches towards integrating wind and solar depending upon the size of each of the sources integrated and the technology type. 

• National offshore Wind Energy Policy: The National Offshore wind energy policy was notified in October 2015 with an onjective to develop the Offshore wind energy in the Indian Exclusive Economic Zone along the Indian coastline of 7600 km.  

2. Demand for Renewable Energy:  

The Government of India’s resolve to infuse 50 GW of renewable energy capacity annually until FY28 aligns with national objective of amassing 500 GW of installed renewable energy capacity by 2030, which includes a robust thrust on wind power, aiming for a minimum of 10 GW capacity addition per year. 

ESG:  

Environmental: 

Suzlon is working towards reducing carbon and water footprint per turbine through innovations in turbine and foundation design.  

Suzlon have developed an optional in-built feature aimed at reducing bird and bat collisions for turbine orders. This feature is available upon request, providing customers with the option to minimize their ecological footprint according to their preferences 

Social: As part of its Corporate Social Responsibility (CSR) initiatives, Suzlon made the decision to address the water needs of these communities in a sustainable manner.  

Suzlon collaborated with local NGOs, government authorities, and community members to identify adequate locations for rainwater harvesting structures. These structures were designed to capture rainwater during the monsoon season, which could then be stored for use during the dry months. 

Company launched a comprehensive program named “Zero Dependency” to empower and uplift individuals with disabilities in the villages where they were present. Suzlon collaborated with local NGOs, disability organizations, and community leaders to comprehend the specific challenges faced by the disabled population and develop targeted interventions. 

Governance: 

There are some news report which is related to the statements of Desaedeleer resigned from his post citing corporate governance and transparency issues at the company.   

Corporate governance standards applied did not meet his expectations including situations where communications lacked his expectation of openness and transparency,” Desaedeleer said in a letter addressed to the chairman of the Board of Directors.   

Conclusions:  

Suzlon is a great example of a turnaround story, It has transformed it financial in a great way, it has reduced it debt and improved its finances. The company has attained great work order and right now it is having strong order book. But the major problem is with its valuations.  

The company has to focus more on improving its balance sheet and financials in order to justify its valuations. Investors must focus on the financials for the coming terms and also observe it balance sheet to draw any conclusions. Any delay in the work order and payments will impact on the financials.  

Savart is a SEBI-registered investment advisor. The purpose of this content is to educate, not advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.