Buy Suzlon Energy; target of Rs 27: KR Choksey

KR Choksey's research report on Suzlon Energy

Suzlon revenue expanded by 62% YoY to INR 26762.4 mn during this qtr against our estimates of ~INR 28716 mn.  The growth was led by 326MW of execution in wind and 86MW in solar. The operational performance improved by 262% YoY to INR 4327.7 mn against our estimates of INR 3475 mn primarily owing to lower than anticipated employee cost. EBITDA margin increased by 1052 bps YoY to 16.2%.  PAT stood at INR 490.8 mn against our estimates of INR 875 mn loss. The increase in bottom-line growth was supported by robust operational performance and lower than expected depreciation.

Outlook

We have revised our estimates for FY18 given the year will be transition for entire wind sector and hence around 3 GW capacity could be added during this fiscal. Suzlon being the largest player with market share of 40-45% is expected to add around 1.4-1.5 GW during the current year. However, the growth could likely to revive post FY18 and hence incremental capacity could be to the tune of 6-7 GW. This could result in robust execution for Suzlon in the years to come. Further, this could aid O&M revenue in medium to long term perspective resulting into stable operational performance in the years to come. We expect the company’s revenue to grow at a CAGR of 19% over FY17-19, while bottom-line to aid by 26% CAGR for the same period. In terms of valuation, the stock was historically trading in EV/EBITDA band of 7-9x on 2yr fwd basis. We have assigned 8.5x EV/EBITDA multiple on FY19E and thereby arrived a target price of INR 27, an upside potential of 55% from CMP of INR 18.