Buy Suzlon Energy for target of Rs 1650: DSP ML

Broking house, DSP Merrill Lynch is bullish on Suzlon Energy. It has recommended buy rating on the stock with a target price of Rs 1,650.

The DSP Merrill Lynch report on Suzlon Energy:

“Suzlon Energy is the fifth largest wind-turbine manufacturer in the world with 6% global and over 50% market share in India. Its global delivery model, market leadership in India and focused approach to globalization are some of the key competitive advantages. The company enhances its competitive advantage by focusing on R&D in Europe, production in low cost countries such as India/China and focusing on sales in countries with high growth potential.”

Suzlon – World’s largest market cap. Wind story!

“We are initiating coverage on Suzlon with a buy and price objective of Rs 1,650 (+25%). The PO is based on our assumption that sales would quadruple and earnings would grow at 46% CAGR over FY06-09E. Suzlon could potentially become the world’s third largest (volume terms) wind turbine company by FY09E versus fifth currently.”

Key investment arguments

Multifold expansion in addressable market

“With Suzlon’s entry into the global markets, its addressable market has expanded by 4.5x. Its initial order wins from the US, Brazil, China, Australia and EU led to 2.3x growth in its overseas order book YTD. MLe 63% of Suzlon sales in FY09E from overseas.”

Maintain its >50% share in India

“India is the world’s fourth largest wind market, and Suzlon should be able to maintain its share, given its access to ‘windy’ sites, vision to create capacity ahead of demand, concept-to commissioning model and control over component supply.”

Global delivery model

“Suzlon has R&D set-up in Europe, production in the low-cost India/China and focus on three of the world’s top 5 future wind markets for sales. This drives Suzlon’s top-tier profitability (RoE 40%) and growth versus peers.”

Strong macro tailwind

“Global wind capacity is likely to grow at 20% CAGR until 2010. We believe the trend towards wind energy is led by global concern on climate change (CO2) and energy security and not the mere ‘anti-oil’ play.”

We are buyers with PO Rs1650 and ahead of consensus

“Our PO is based on 22x 1-yr forward earnings, which is 10% discount to its current multiples, 5% discount to DCF and 5-10% discount to its peers despite Suzlon’s superior growth and returns.”

Risks

“Withdrawal of PTC in the US, competition, unexpected headwind for wind and potential stock overhang.”