Is Suzlon a turnaround story after FY16

There is a Jatin khemani’s Presentation on ‘Wind Energy Revival & Investment Proxies’. He had put all the things nicely and joined the dots.

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May I know the rationale behind how Sterlite power is related to Suzlon and how the story fits in Suzlon thread?(genuine question, no irony) I have read the article and it doesn’t even mention Suzlon once. Except both are RE there seems to be no connection what so ever!!

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This is going to be the first Off shore wind auction in India. No body knows how many players will participate. I was thinking that probably Suzlon would get some amount of order from the initial few off shore wind auctions but it looks like the new players/Off shore wind players actively looking for foreign partners rather than local partners like Suzlon. Does Suzlon not have full capability to execute off shore wind project? I do not know about that. I am now trying to understand whether Suzlon will get any order from this first off shore wind auction or not?
I was thinking that since Suzlon is the only Indian player in Off shore wind this can help to build the order book but it seems like IPP’s are looking foreign players.
I would appreciate, If anybody can help me to understand how suzlon can benefit (untill suzlon becomes fully capable to execute off shore wind project) from these initial off shore wind auction.
If I have posted this with completely wrong understanding then I would like to learn it correctly as well. From last more than one year I am trying to understand the wind turbine industry.

I’ve gone through this thread and one on Sanghvi Movers, as well as some recent news reports on possible turnaround of Wind Energy sector.
The optimism stems from following reasons
(1) Improved regulatory regime (auction route, lower project risk etc.)
(2) Better incremental returns even at such low rates of 2.45-2.65Rs/unit (lower interest costs, better machines with higher PF etc.)
(3) Possible improvement is relative competitiveness of wind vs. solar (possibility of ADD on imported solar panels/equipment)

Its all interesting, but I still have some doubts on whether Suzlon is better placed, and would like to listen to counter views from other boarders here:

  • Whether next few years would be financially very much better than last few years for IPP players- lower interest rates, better machines and low energy auction rates now Vs. moderately higher interest rates, moderately inferior machines with lower PLF than current ones and higher energy rates (~Rs5/units) under IPP. While costs were higher, so was revenue and hence whether current situation is so much different than earlier one, financially speaking?
  • The next question is whether (slightly) better situation for IPP translate into better days for WTG players? I have my doubts due to various reasons, chief among them are: higher competition among WTG suppliers, WTG supply/demand scenario for next couple of years and vulnerability of financially stressed WTG players to arrange for higher working capital / project funds etc
  • The silver lining though, can be players like Sanghvi movers, as they may be able to improve asset utilization, and may be able to charge little premium in case of demand outstripping supply
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I have a couple of points to add

  1. possible equity dilution due to FCCB conversion in next year june
  2. why are they not paring down the debt by listing the subsidiaries ?

In the stake sale agreement, it was specified t hat suzlon will continue to have access to the offshore technology of senvion

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SECI-I faced trouble with ISTS bay allocations and now it looks like power evacuation will be an issue for all new renewable projects because of lack of bays in the substations. The article alleges MNRE/SECI are not working in sync with PGCIL/CEA. PGCIL is claiming they had no idea so many auctions will be held.

There is a lot of irony in the power sector.

  1. Power ministry claims power surplus even as there is daily load-shedding.
  2. Renewable energy auctions without transmission capacity
  3. Building power capacity without a big increase in demand (was growing at 3% between FY12-FY17).
  4. With all the grid connected capacities being built, govt. continues to distribute LED bulbs and solar pumps to save power.
  5. All villages electrified ahead of schedule apparently but I am not sure if that means all households are electrified and actually have power supply.
  6. Then there is the CEA who claims real cost of Wind/Solar is lot higher than what the auctions show and so Coal should be given preference even as MNRE continues announcing GW after GW of auctions.

I am not sure if the Rs.2.50 levels are sustainable for WTG manufacturers in terms of margins. I have seen calculations based on IRR, borrowing rates and so on but I am not sure if the IPPs will let the WTG manufacturers enjoy good margins. Another thing to look at is the receivables which have been piling up. To execute these orders, they (at least Suzlon will have to) have to take even more WC loans.

Disc: I have been very pessimistic on this sector for sometime now so pinch of salt is necessary. Things might improve on the ground going forward but they haven’t yet. Watching closely.

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Hi Ayush,

The report still does not paint a gloomy picture. If better compliance is seen on RPOs and demand by non-windy states goes up, it would augur well over-all. Suzlon’s issue has been idle capacity (apart from past mistakes) and greater volumes, even at slightly reduced margins, should be acceptable to the company.

What are your own views on Suzlon after these developments and the recent price action on the stock?

Rgds
Ankit

Overall, there seems to be a big revival happening for the wind industry after the huge collapse in FY18. If the industry starts doing 5000+ MW of annual projects…i think the entire chain will benefit as the volumes will compensate for margin pressures.

Personally i think this revival in industry along with big collapse in stock prices of several companies linked to this sector does provide a medium term opportunity. However, its individual choice to select the companies.

Regards,
Ayush

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India may not achieve its renewable energy target of having 100 GW of solar energy and 60 GW of wind power by 2022, as per a survey conducted by a consulting firm Bridge to India, reported PTI. India is expected to add total 66 GW of solar energy and 52 GW of wind power by March 2022 – which is 66 per cent of 100 GW of solar and 87 per cent of 60 GW wind targets set by the government, as per the 3rd edition of RE CEO Survey by Bridge To India said in a statement. The survey fond that the most pressing issue for the industry is safeguard duties, followed by uncertainty in overall policy environment and weak financial position of Discoms.

It said that 70 pe cent of the industry (respondents) feels that bidding in the sector is irrationally aggressive. However, it finds that despite these challenges, bulk of respondents are optimistic about the industry and overall growth prospects. Gujarat, Karnataka and Maharashtra top the list of preferred states for overall sector, open access solar and rooftop solar, respectively. The industry remains unenthusiastic about prospects of domestic manufacturing, with 77 per cent of responses indicating that India’s total integrated module manufacturing capacity will be less than 3 GW by 2022.

Speaking on the survey report Vinay Rustagi, MD, Bridge To India, said in the statement: “Indian RE (Renewable Energy) market, currently about 10 GW per annum, is rapidly acquiring scale and maturity. The survey highlights that notwithstanding some major policy issues, including safeguard duties and poor financial condition of Discoms, the industry remains optimistic about future growth prospects. Aggressive bidding environment and possible imposition of safeguard duty are major worries for the sector”.

Recent interview of management - https://twitter.com/CNBCTV18News/status/996686398575886338

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Industry structure has been distorted , unless captive power generation ( customers with lower knowledge and bargaining power ) increases, WTG and their value chain will not make money …

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Saw the interview.Very ambitious plans to reduce debt. However, the news anchors did not seem to be very convinced about the CEO’s statement.

Disc: Invested and tracking.

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https://mercomindia.com/cerc-procedural-guidelines-ists/

Last week the CERC released the long awaited transmission guidelines for renewable projects which will connect to the ISTS. While overall a positive development, I feel it will be even better if the allotment of connectivity is made based on those who have developed a wind/solar project than granting this in advance which can lead to ‘squatting’.

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Few other points I noted from the Inox Wind Q4 call regarding the execution timelines we can expect for the SECI auctions which I am reproducing in this thread as well.

SECI 1 - 18 months from LoA (May 2017) - so should get done by Aug 2018, although due to delay in the transmission guidelines, verbally SECI has extended the deadline to 21 months, i.e., Nov 2018.

SECI 2 - 18 months from LoA (Nov 2017), so needs to get done by Feb 2019, but again due to possible extension will get executed by May 2019 (so FY20)

SECI 3 - Since LoA was only sent out around Mar 2018 (you get 21 months to execute and commission), so expected only by Dec 2019

SECI 4 - LoA expected in June 2018, and commissioning within 21 months by Mar 2020.

Inox W expects to commission only SECI 1 and 2 orders (so about 600 MW of their order book of 950MW) in FY19. Obviously someone can execute sooner than the deadline, but given that power evacuation infrastructure at least in the state of Gujarat (where most of the projects are based) is available only for SECI 1 and 2, I think it is unlikely that other IPP’s will be able to commission SECI 3 and 4 any sooner.

The 1.5 GW auctioned by the windy states in FY18 do not depend on ISTS connectivity so they will also get executed this fiscal FY19.

So FY19 itself will not see the full turnaround in terms of vols and profitability for the players. But FY20 onwards the real kicker is expected.

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I am bit skeptical about believing everything they say about reducing debt. In FY17, Tanti claimed they will exit CDR but that never happened, then they said share holder will reap benefits from FY18, then auction system came around and both sales and margin went downhill. My impression is that, management makes tall claims but fails to either execute or fails to see the future. With that said, after watching suzlon for over an year, i see the price has come down and it is at attractive valuation. Looking at their manufacturing/technological capacity/capability and what is in store for FY19-22, i am much more confident now than 1 year before.

Disclosure: Interested, but not invested.

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suzlonfy18resultpresentation.pdf (2.0 MB)