Buy Suzlon Energy: Edelweiss

Broking house, Edelweiss Research has recommended buy rating on Suzlon Energy.

Edelweiss Research report on Suzlon Energy:

Suzlon Energy (Suzlon), published the offer document on friendly tender offer for Repower  Systems on March 2, 2007, after approval by German Federal Financial Supervisory  Authority (BaFin). We maintain our BUY recommendation on the stock because of the  following factors:-    

Positive wind energy outlook

Global wind energy delivered 32% annual growth in 2006  after growing healthily at 41% in 2005. The USA, China and India are emerging as fast  growing markets for wind energy and Europe that still leads the global market (65% of  total) is expected to grow by 15-20% annually.    

Potential integration benefit

We believe that markets have still not factored in the strong potential integration benefits that can accrue for Suzlon in terms of access to  world’s largest market in installed capacity, superior R&D technology, established  infrastructure and customer base, and access to technology for offshore development.  Repower is the leader in the 5 MW turbines for off-shore development.    

Robust fourth quarter expected

To achieve the target of 1500 MW (55% Y-o-Y growth), fourth quarter is expected to contribute 576 MW of sales. Given the seasonality of  the business, fourth quarter generally contributes 40-45% of total annual volumes. Its  international order book stands at 1271 MW and domestic order book at 372 MW at the  end of Q3FY07. This implied volume of 576 MW in Q4FY07, which in our opinion is  achievable given the strong order book, without any requirement of substantial growth in  the domestic wind energy market.    

Valuations at lower end of trading history

Suzlon is currently trading at a PE of 18.8x  and 14.7x on our revised estimates (post Repower) for FY08E and FY09E, respectively.  Also, in the recent market correction, wherein broader index corrected by ~11%, Suzlon’s  stock was stable. This, we believe, is due to the fact that its average one-year PER since  listing has been 26.7 and has not traded below 20 PE since then. Part of the recent derating  has been due to quarterly variation in profits and downward estimate revisions.  However, given the strong growth profile (EPS CAGR of 36% over FY06-09E pre  Repower) and equally strong outlook for wind energy, we believe that the current stock  price has a favorable risk reward ratio.