CLSA Research has maintained outperformer rating on Suzlon Energy with a 12-month target of Rs 1434.

CLSA Research report on Suzlon Energy:

Suzlon’s plans to grow at double the market growth rates of 20-25% over next few years and will be investing US$1.4bn over next three years (USD 820m in next 2 years) to treble its manufacturing capacity. While component shortages will continue to plague the sector in medium term, a couple of bearing manufacturers have agreed to set up facilities in India to supply to Suzlon. The company may list Hansen over next couple of years, which should help de-risk the balance sheet. This should provide support to valuations. Maintain O-PF.

Aggressive expansion plans

Suzlon expects the world wind power market to grow at 20-25% for next few years and the company is targeting to grow at double the market growth rates. To achieve this the company is planning to increase the turbine manufacturing capacity from 2.7GW to 5.7GW by FY09 and the gear box manufacturing capacity from around 3.6GW to 9.3GW over next two years. Suzlon is likely to spend US$1.4bn over next three years on capex. Suzlon is also planning to expand the manufacturing capacity of REpower from current 500MW to 1,000MW by 2008 and to 2,000MW thereafter.

Execution will remain the key

With presence in all key markets, access to world-class technology and a fully backward integrated supply chain, Suzlon is well placed to capitalise on the growth opportunity in wind power sector. The key to its success will remain execution as the company embarks on an aggressive capacity expansion and integration of Hansen and REpower with itself. Suzlon believes that the component shortages in the industry will continue for next few quarters. A couple of bearing companies have agreed to set up manufacturing facilities for bearings used in turbines and gear boxes for Suzlon. Suzlon will supply the forgings to these bearing manufacturers from its own forging plants. This should help address the component shortages in the medium term.

 Listing of Hansen could help deleverage the balance sheet

Responding to the rumours on listing of its 100% subsidiary Hansen, Suzlon management said no final decision has been taken on this issue. The company may consider listing Hansen over next couple of years. This should be positive for the stock. One of our major concerns on Suzlon is high level of net gearing (1.76x) and negative cashflows over next few years. Hansen listing should help de-leverage the balance sheet and improve the company’s capability to withstand any failures in execution. Suzlon’s valuations are broadly in line with global majors Vestas and Gamesa. Maintain O-PF.