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Thursday, July 28, 2011

Suzlon Energy – Turnaround large cap stock

Does recent stake sale in one of it’s subsidiaries by Suzlon Energy and it’s recent financial performance makes it an attractive large cap stock to buy? Let’s have a look at the facts and numbers to figure it out.

Recently Suzlon Energy sold it’s 26.06 stake in Netherlands-based Hansen for about Rs 830 crores. No doubt this stake sale is a positive development for Suzlon Energy as it is saddled with high debt in its’ books.

Also, it is expected that Suzlon would consolidate REpower (another wholly owned subsidiary) with it. This consolidation would give Suzlon access to funds worth Rs 1,700 crore of REpower. Also expected is realization of about Rs 1,000 crore receivables from a debtor. These developments would ease some of company’s debt worries. Founder and CMD of Suzlon Group has explicitly said that this deal is in line with their strategy to optimise and strengthen the balance sheet.

With above mentioned sources of funds of Rs 3,500 crore when combined with estimated cash flow from operating activities of Rs 1,000 crore in 2011-12 will enhance cash availability to Rs 4,500 crore. This will provide good liquidity for company to meet obligations.

“Suzlon needs to raise funds for the potential redemption of legacy FCCBs of $480 million (Rs 2,100 crore, at conversion price Rs 76-98 per share) which is due in FY13/14,” as per analyst at JP Morgan. About Rs 1,770 crore are due for redemption in the next financial year.

Company has almost Rs 10,200 crore (as on March 2011) of debt. These sources of funds should certainly prove positive for profits, as it will help reduce debt levels as well as interest costs.

Suzlons’ returning to profitability?

Company posted losses for two consecutive years. Stock market analysts are expecting the company to report about Rs 500 crore worth profits in the current financial year and Rs 900 crore in 2012-13. The order book of company has also seen increments that would give it a better revenue visibility. Suzlon could be well on its way to turnaround as a profitable company again very soon.

Company is expected to grow it’s revenue almost in the tune of 30% this financial year (3400 MW wind power equipments against 2372 MW last year).

Stock Valuations
Suzlon posted net profits of Rs. 309.82 crores for quarter of Mar ‘11. Earlier in Dec.’10 quarter it had posted net profit of just Rs. 1.2 crore. This profitable turnaround would soon start translating in stock price appreciation. As mentioned above, analysts are expecting profit of Rs 500 crores this FY and Rs 900 crores next FY. If everything goes as per this, Suzlon could provide good returns to it’s investor’s in next 3 - 4 years time frame. One may buy stocks in small quantities at every dip for long term portfolio.

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