Is Suzlon a turnaround story after FY16

(insanemaverick) #358

This is a classic case of yet another sector gone down the drain due to wrong government policies. This is exactly going down the way of Telecom sector and things are going to get worse here before they get any better. This has personally been a very disappointing investment for me (not because I bought it at 15 and booked out at 17) but because of the messed up government policies. For a government, which prides itself so much on ease of doing business, Make in India and providing a great environment for investments, I would say that the government is solely responsible for killing this sector with very bleak chances of recovery in the short term.

The problem is not so much the rock bottom rates, but the refusal of some of the key states to honor the old PPAs. I expected the central government to categorically state here that all the old PPAs ( even if signed at Rs.15/ Unit) need to be honored. This is what stable investment policy is all about. But most of the key state governments are behaving like school kids and saying that everything needs to be renegotiated, or else, they are not going to fulfill the promised renewable purchases. This is both hilarious and disappointing. I can still understand states like Karnataka and Tamil Nadu doing it as they are ruled by Non NDA parties. However, when states like Madhya Pradesh and Rajasthan (with strong and stable BJP governments) do it, what kind of message are you sending to investors and corporates. If the PMO steps in and says that you have to honour these commitments, no matter what, I don’t think any of these states would have renegotiated. On top of that, the power minister has changed. So, everything will be brushed under the carpet now and new policies will be framed. Back in the good old business school days, the finance profs used to teach us that we have to assign something called country risks in our valuation models. Being naive, I used to bullshit such theories. But, as my investing career progressed, I have come to really appreciate these theories.

Ok, so technically, we need to reach 60GWs by 2022 to honour our commitments, right? So that still leaves a deficit of 28 GW. And, how much have we done this financial year, 1GW, is it? The point is, if your cost of capital is extremely low and you keep extending the repayment and payback period, your NPV can theorotically be positive at even Rs.1.5/ unit. You couple this with technological advancements in module manufacturing and then , it becomes practically impossible to put a lower cap on Tarrif prices.But, Hey!! Guess what, last I checked , India did not have the lowest cost of funds in the world and India did not have the lowest cost of manufacturing in the world. So, even if we assume that the renewables party will restart next year, you can bet on who is going to make the money by funding these projects. Foreigners, off course. Its such a traversity for a country which is supposedly trying to encourage “Make in India”.

Anyways, this investment has been a costly lesson for me (in terms of opportunity cost involved) and this again reinforces that you should not go against your basic investment mental framework, no matter how attractive the opportunity. I don’t think any of us was naive enough to not foresee the fact that traiffs will decline by 30% YoY due to the factors mentioned above. However, the big bet was around explosive market growth, stable government policy and the obviously huge untapped potential. One wished that the technological advancements and an oligopolistic market structure would leave enough in the table for shareholders.

Learnings, learnings, learnings, even after spending 1 decade in this business, the markets have a funny way of kicking you so hard that makes you realise how little you know about the world.

(phreak) #359

@maverickroger - You have voiced many of my thoughts in your post. The moment I saw the govt. squandering the clean energy cess for GST compensation, I exited. That to me was the signal and there were posts way back in April itself on the topic. Now that is manifesting itself in various ways. And the point about opportunity costs can’t be stressed enough. While such policy shifts can affect any sector, a capital intensive business with a huge debt is bound to suffer the most and that is what is happening now. I don’t think it’s fully priced in yet either.

(insanemaverick) #360

@phreakv6: True That. Its a double whammy if you have a balance sheet like Suzlon. For a turnaround story to sustain , you need strong tailwinds. However, what we are are witnessing is some strong headwinds in the sector right now. I guess the only think that is preventing the stock from falling off a cliff right now is the statement given by the government that there will be auctions of around 3-5GW in the 2nd half plus its own vintage order book. I will be a buyer though if the market cap goes below Rs.6000 Crores. Almost all the negatives will be priced in at that market cap.

(pkk123) #361

Should you not be looking at EV instead of MCap because even if someone is to acquire the company at say a billion dollars, they will also get the 2 billion dollars of debt with it?

(insanemaverick) #362

Yup. The MCap ascribed takes care of the EV. If not for the debt of 2 Bn, the market cap today would be around 18000 Croes which would value it around 1.5x sales. The EV however would remain the same in both the case. So, all these ratios are interdependent on each other. You can take your pick. EV/ EBITDA, MCap/Sales, MCap/ profit…whatever you are comfortable with.

(pkk123) #363

So essentially you are saying you are comfortable buying the company for 18,000 Crore as opposed to about 20000 Crore it is trading at today?

(AmeyaD) #364

(maheshkumar) #365

Result as per the expectations
2018 losses will increase

(ajay patel) #366

(Tushar) #367

Not sure of the impact. Any views?

(Harsha) #368

Not giving salary to employee is a bad news.

(naruto) #369

FY18 Q2 would have been a loss if not for the exceptional item.

(Mukesh Amar) #370

Suzlon has clarified that the lockout is due to strained industrial relations and not due to business compulsion.

Also another interesting development.

Trimmed significant position. Rgds.

(Chandra) #371

Hopefully this will not have major impact on SUZLON.

(maheshkumar) #372

I was very lucky to exit suzlon at 16-18 range with 10% loss

With lots of headwinds will they be able to pay off their huge debt is the biggest question

And with Chinese producing low cost high quality turbines will they be able to survive

With valuations getting tempting every month

How do we calculate the fair value when there are lot of uncertainty

Could any one please throw some light

(narender) #373

i also exited sometime back although at a profit.

I think this appears to be going from bad to worse. Apart from paying debts; they need to continuously invest in technology as this game can change very quickly with entry of new players. Gamesa is formidable and there are a few others entering. Nothing to worry for now. But European windmills (offshore and digitally connected) which are at a different trajectory could be a actual reality in couple of years and suzlon might lag then. Possibly three years down the line. Before that it has a debt issue, margin contraction in industry and slow auctions to handle. I think there are easier ways to make money in market than losing sleep over this one. That one line is a summary reason why i sold.

(rskothari) #374

Very well explained. I also exited because of too much uncertainty. Only positive with the stock is that Govt has aggressive targets for Wind Power and i think that is not sufficient to hold the stock even at current levels.

(Tushar) #375

Govt. plans are still the same for 2022. Only two questions are

  1. Is Suzlon management up for it?
  2. Can you invest based on the horizon for 2022 in the current market where everyone/every script around you is doubling money in 5-6 months?

(pkk123) #376

Why would Suzlon benefit from Solar auctions? Suzlon is primarily a Wind power company plus they do not bid directly. So whoever wins these bids can import the panels from China and get them installed from any EPC company. Installing Solar panel is not very difficult that you would need big company expertise there.

(Tushar) #377

Solar is just a headline. Article gives details about renewables (Solar and Wind).