Suzlon Energy: Could Dilip Shanghvi’s cancellation of agreement mean an eventual exit?

JM Financial initiated coverage on Suzlon Energy, issuing a 'Buy' call with a target price of Rs 30 per share.

Suzlon Energy shares were in focus on September 27, falling as much as 3.6 percent to Rs 25.05 apiece after Sun Pharmaceutical Industries promoter Dilip Shanghvi terminated a shareholders' agreement. However, brokerages said there are enough positive cues for them to be bullish on the Suzlon stock.

Although Shanghvi cancelled the agreement – first signed in 2015 and revised in February 2020 – he and his associates will remain invested in the wind turbine manufacturer, collectively holding a 12.72 percent stake as of now.

“While we will continue as investors in the company, we have taken a decision to terminate the formal shareholders agreement signed in 2015. We continue to be excited about the future and prospect of wind energy and its importance in achieving the net-zero objectives of our Prime Minister and the government,” Shanghvi said.

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When the agreement was first signed, Shanghvi purchased a 23 percent stake in Suzlon for Rs 1,800 crore. In February 2020, Shanghvi signed an amended and restated shareholders agreement after a debt restructuring plan.

According to the plan, the company issued equity shares and convertible debentures to the tune of Rs 400 crore and approved a resolution allowing Suzlon to issue additional equity shares of up to Rs 1,000 crore.

Investor sentiment

Independent analyst Ravi Singh said while the management is confident that the termination of the agreement by Shanghvi and associates will not impact the company's operations, the stock may decline in the coming days. Singh advised staying away from the stock till investor sentiment stabilises.

"The potential exit of a big investor can make an impact in the short term," said Vaibhav Kaushik, a research analyst at GCL Broking. However, he is bullish on the green energy sector, with a specific focus on wind energy stocks.

Analysts said despite Shanghvi’s exit, there are a slew of reasons to be bullish on Suzlon.

The stock has been on a tearaway rally, jumping over 250 percent in the past six months. Ace investor Mukul Agrawal’s entry as a shareholder in the company, its debt-reduction plans, and mutual fund buying prompted investors to reconsider the earlier-struggling stock.

As the June quarter closed, traders spotted Agrawal's name in Suzlon’s shareholding list, holding a 1.05 percent stake. That prompted further buying and the shares rallied 5 percent, hitting the upper circuit on July 22.

Some brokerages initiated coverage on the stock with ‘buy’ calls in the past few months amid an optimistic outlook on the company’s future.

On August 16, Suzlon Energy raised Rs 2,000 crore through a qualified institutional placement. As much as 75 percent of the funds raised were utilised to repay loans, making the company net debt-free.

"[Suzlon Energy is] in fact, net debt free after a sort of hiatus of 15 years, so we wouldn't in fact be cash surplus without any debt on the balance sheet," Himanshu Mody, group CFO of Suzlon Energy, told CNBC-TV18.

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Additionally, CRISIL upgraded the company’s debt to 'CRISIL BBB+/A2' from 'CRISIL BBB-/A3' with a positive outlook for the long-term and short-term facilities on September 26.

"We believe reduction in its debt levels along with continuous winning of new contracts and favourable wind energy policy is keeping the counter outperforming the index. Renewable energy sector is in focus and Suzlon would be tracked on top as the order book has jumped from 652 MW as on March 2023 to 1,542 MW as on June 2023," said Prashanth Tapse, a senior VP at Mehta Equities.

Fund buying

The wind of change at Suzlon caught the attention of large fund houses, which bought into the company’s growth story. According to Trendlyne data, 63 new funds bought the scrip in August, taking their total holding in the company to 4.98 percent from 0.74 percent in June.

According to Nuvama Institutional Equities, Suzlon was one of the hottest stocks for mutual funds, which bought Rs 124 crore of shares in the company in August, taking their holdings to 63.83 crore shares. The funds with the largest holdings are Bandhan Flexi Cap Fund Growth and 360 ONE Focused Equity Fund Regular Growth, each with over 4.7 crore shares.

The promoter shareholding in Suzlon fell to 13.3 percent on August 15 from 14.5 percent in the quarter ended June. While the general public pared their stake to 64.9 percent in August from 71.8 percent in June, domestic and foreign institutional investors increased their shareholding. Both DIIs and FIIs hold 10.9 percent each in the company, up from the 5.9 percent held in June by DIIs and 7.6 percent held by FIIs.

Analysts are bullish on Suzlon Energy.

JM Financial initiated coverage on the scrip in August with a ‘buy’ rating, setting a target price of Rs 30 per share. Crediting the company’s leading market share of 33 percent, depth of manufacturing of 4.5GW, most credible O&M services and its technology superiority, JM Financial said Suzlon is ideally placed to add to its order book while enhancing project execution.

“As the company is on its way to become net-debt free, we expect Suzlon to deliver revenue and EBITDA CAGR of 31 percent and 38 percent respectively over FY23-26E. We expect Suzlon’s EPS to reach INR 1.4 in FY26,” JM Financial said.

Kotak Institutional Equities said the Indian electricity sector has outperformed, based on expectations of rising demand for electricity; the sector is expected to grow 5.7 percent over FY23-28 versus a 4.2 percent CAGR over FY13-23. Based on Suzlon’s market capitalisation, Kotak estimated the company will need to deliver 5-8 GW of annual wind turbine capacity to justify its current stock price.

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“The market seems to be indicating that [BHEL and Suzlon Energy] may alone conquer India’s power equipment market,” added Kotak, which did not issue a call on the scrip.

Purnartha Investment Advisers initiated with a ‘buy’ call on Suzlon without specifying a target price. Government policy and the business environment for wind capacity has begun to show positive indicators, it said. Suzlon, being the market leader in the domestic market, is expected to be the natural beneficiary.

“We expect Suzlon to add additional capacities to the extent of 3GW in the next 2-3 years, coupled with strong OMC and forgings business, higher revenue growth along with reduced debt burden, would lead to higher PAT growth,” Purnartha said.

“After giving investors multi-fold returns, Suzlon Energy is looking bearish on the daily charts,” said AR Ramachandran of Tips2Trade.

He noted the share’s resistance level was Rs 27 and suggested that investors book profits at current levels. Alternatively, investors could continue to hold the stock until the support of Rs 24.5 is broken on a closing basis.