Suzlon Energy Limited is India’s leading player in wind energy. Its Asia’s largest and the world’s fifth largest wind turbine generator (WTG) manufacturer in terms of market share and provides end-to-end wind energy solutions such as wind resource mapping, identification and procurement of sites, execution of project work, erection and commissioning of WTGs, construction of power evacuation facilities, and providing operation and maintenance (O&M) services.

This, along with its strong technological capabilities overseas and low cost vertically integrated manufacturing base in India gives it an edge over competitors. SEL is, among the first Asia-based companies to manufacture WTGs with megawatt and multi-megawatt capabilities, has comprehensive product portfolio which includes 0.35 MW, 0.60 MW, 0.95 MW, 1.00 MW, 1.25 MW and 2.00 MW WTGs (wind turbine generators). In the Indian market for wind energy products Suzlon has been the leading WTG manufacturer in terms of annual installations in the last seven fiscal years. Suzlon's strong business model in terms of in-house technology and superior design capabilities has led to a consistent increase in its market share. A bulk of Suzlon's product requirements are manufactured at its Indian facilities, providing it a significant cost advantage. Its further capacity expansion in the US and China will help Suzlon to cater to strong global wind energy demand. It is also expanding capacity of Hansen transmission, which removes concerns of gear box supply.

Company's subsidiaries viz. SEG (Suzlon Energy GmbH) and AERH (AE-Rotor Holding B.V.) focus on designing and developing new WTG models, upgrading the existing models and developing efficient and effective rotor blade technology for its WTGs. Currently, though India is Suzlon's key market it also has considerable overseas presence E.g. In United States, it has supplied 24 WTGs, each of 0.95 MW capacity, that were designed specifically for a U.S. wind farm project.

Hansen Transmissions International NV, Belgium, a step-down subsidiary of the Company proposes to set up a gearbox factory with an estimated investment of USD 220 million (INR 980 Crores) for manufacturing of gearboxes for Wind turbines in the megawatt range. The project is planned near Coimbatore and is slated to be operational by the end of 2008. It is estimated that the factory will reach its full production capacity by early 2010 with an output of 1,500 to 2,000 gearboxes per annum and would generate over 600 job opportunities in Coimbatore. The gearboxes shall be produced by using the same production equipment and process that are conducted in Hansen's Belgian plants. The gearboxes manufactured from this factory shall be supplied to Suzlon Energy Limited and other wing turbine manufacturers in Indian Market.

SEL proposed to acquire up to 100% shareholding of REpower Systems AG, Germany, a company engaged in the business of design, development, manufacturing and supply of wind turbine generators and a stock corporation listed on Frankfurt Stock Exchange through a voluntary public tender offer through one or more of its overseas subsidiary companies and / or one or more of its overseas step-down subsidiary companies, jointly with Martifer SGPS, SA. Oliveira de Frades, Portugal.

Suzlon currently has a capacity of 1500 MW in India. It plans to ramp up its capacity to 2700 MW by establishing a 600 MW rotor blade capacity in the US and 600 MW integrated plant in China. These two capacities are expected to come on stream by March 2007. It is also expanding Hansen Transmission's capacity from the existing 3200 MW to 5800 MW by October 2008. Suzlon is expected to source 3500 MW of gear box capacity from Hansen, after its expansion.

Order book

The Company has, as on (Jan 2007), an order book position of Rs. 7,716.23 Crores comprising of Rs. 1,544.31 Crores of domestic orders and Rs. 6,171.93 Crores of export orders. The aforesaid domestic order book position includes order received from British Petroleum, an international energy major, for supply of 32 numbers of 1.25 MW turbines aggregating to 40 MW capacity at Dhule site in the State of Maharashtra. Further, the export order book position includes order received by Suzlon Energy Australia Pty Ltd., Australia, the step-down subsidiary of the Company for supply of 42 units of the 2.1 MW turbines to Snowtown Wind Farm Pty Ltd., a subsidiary of New Zealand based Trustpower Limited, for installation in South Australia. Currently, it has an order book of 1642 MW as against 1443 MW in the last quarter. Domestic orders comprise 23% and international orders 77% of its order book. It recently bagged orders from British Petroleum (40 MW), Hindustan Petroleum (25 MW), and Tata Power (50 MW), to be executed in the domestic market. These types of domestic orders from the corporate sector indicates the acceptance of wind energy as an alternative source of energy and provides strong outlook for the wind energy market, going forward.

The company has registered healthy growth in its top line as well bottom-line performance in the last three years. Wind energy sector has promising future due to increasing emphasis on non-conventional sources of energy in many countries due to low cost of producing power and rising prices of crude oil. Even the Indian government has recognized the importance of wind energy and thus favorable policies have been drafted for its growth. Going forward, considering the power deficient nature of the country, continued increase in the power consumption and the limitation on conventional energy resources, the potential of wind energy in India is estimated at 45,000 MW. The company is in the process of doubling its capacity to install wind energy equipment in the coming years from Indian as well as overseas plants. Company's production facilities enjoy cost advantage in terms of capital, manufacturing and labor costs over its global competitors. The company is expanding its global presence as well as establishing in-house manufacturing capabilities for key components. These initiatives will collectively boost the company's performance in the coming years.

IPO Proceeds

The company came out with an IPO in 2005. As per the Prospectus , the IPO proceeds would be largely utilized for setting up and expansion of manufacturing facilities for components in India, USA and China, expansion of existing facilities to increase the storage capacity and also for capitalization of subsidiaries by strengthening its marketing subsidiary in Denmark and research and development at Germany and Netherlands.

Financial Performance:

The Company has posted a net profit of Rs 1762.30 million for the quarter ended December 31, 2006 where as the same was at Rs 1619.40 million for the quarter ended December 31, 2005. Total Income is Rs 11260.70 million for the quarter ended December 31, 2006 where as the same was at Rs 8632.40 million for the quarter ended December 31, 2005. The Company as part of its long-term plans of having independent manufacturing units for various components of a Wind Turbine Generator ('WTG') has realigned its operations and has commenced sale of tubular towers through one of its wholly owned subsidiary. Accordingly, the standalone results for the quarter ended December 31, 2006 do not include the sale of tubular towers aggregating approximately Rs 1169.60 million and Rs 3294.70 million respectively which have been sold through the wholly owned subsidiary. Accordingly, the sales realizations and gross margins for standalone results during the quarter ended December 31, 2006 are to that extent not comparable with the standalone results of prior periods presented. The Consolidated results are as follows: The Group has posted a net profit after Minority interest of Rs 1743.90 million for the quarter ended December 31, 2006 where as the same was at Rs 1349.40 million for the quarter ended December 31, 2005. Total Income is Rs 19392.90 million for the quarter ended December 31, 2006 where as the same was at Rs 9083.50 million for the quarter ended December 31, 2005.

Standalone revenues grew 27% Y-o-Y to INR 11 billion in Q3FY07 and net profit grew by 8.8% to INR 1.7 billion. EBITDA registered a growth of 10% Y-o-Y at INR 2.0 billion, but higher other expenses on account of increased overheads on manufacturing facility in the US and China saw margin decline by 290bps Y-o-Y. On a consolidated level, revenues stood at INR 19.1 billion and net profits at INR 1.7 billion. Despite lower tax rate, net margin declined by 590bps.

The outlook for global wind market remains robust and provides sustainability of growth for Suzlon in the coming years., Wherein volume growth has been sluggish, despite a strong order book. Q2FY07 saw margin pressure on account of 4% special duty on imports, change in product mix, and increased overheads due to international operations. In the quarter ended December 2006, the pressure continued due to insufficient volume ramp up at manufacturing facilities in the US and China, leading to un-apportioned overheads. The performance of the last two quarters has now put the onus on the company to achieve very high numbers in the fourth quarter to meet their unchanged guidance for FY07E.

Suzlon's MW sales grew 58% Y-o-Y in this quarter at 339 MW. Domestic volumes at 190 MW while international volumes stood at 149 MW . For 9MFY07, Suzlon registered volume growth of 60% at 923 MW. Domestic volume contributed 62% to the total volumes. Realizations for domestic and export volumes stood at INR 43.2 million/MW and INR 43.0 million/MW respectively. EBITDA grew by 70% Y-o-Y to INR 2.5 billion, whereas EBITDA margin declined by 370bps to 13.3% . Employee cost (as a percent of sales) also moved from 4.1% in Q3FY06 to 9.4% in Q3FY07. Interest cost saw a sharp increase of 469% Y-o-Y on account of additional interest burden due to Hansen's acquisition. Net profit grew by 29.2% Y-o-Y to INR 1.74 billion, while net margins stood at 9.0%.

Management guidance

Management has guided for 1500-1600 MW sales for the current financial year. In 9MFY07, Suzlon has achieved sales of 924 MW. On the operating margins front too, the management has guided for 20-22% of margins for the full year. In 9MFY07, Suzlon has achieved operating margin of 16%. Management has guided that the orders from international market will see a 6-7% increase in prices during January 2007-December 2007.

Market Data

CMP : Rs. 1042 (28/02/2007)

52-week range (INR) : High - 1,510 Low - 760

Share in issue (million) : 287.5

M cap (INR billion/USD million) : 346.4 / 7,833.6

Industry Scenario

Historically, the power industry in India has been characterized by energy shortages. According to the Central Electricity Authority, India, in fiscal 2005, demand for electricity exceeded supply by an estimated 8% (7.3% in fiscal 2005) in terms of total requirements and 12% (11.7% in fiscal 2005) in terms of peak demand requirements. Although power generation capacity has increased substantially in recent years, it has not kept pace with the growth in demand. As of March 31, 2005, India's power system had an installed generation capacity of approximately 115,544.8 MW. Of the installed capacity, thermal power plants accounted for approximately 69.4%, hydroelectric stations accounted for approximately 26.1% and others (including nuclear stations and wind power) accounted for approximately 4.5%. Currently in India wind energy generation is concentrated in selected states (Tamil Nadu, Karnataka, Andhra Pradesh, Rajasthan, Maharashtra, Gujarat and Madhya Pradesh) which collectively account for over 99% of wind power installations in India. As of March 31, 2005, Tamil Nadu had the highest share and accounted for 56.7% of the cumulative capacity. With 875 MW of installations in 2004, India recorded one of the highest year-on-year growth rates in installed capacity.

Recognizing the importance of non-conventional energy in the coming years, the government has already set up have an exclusive Ministry for Non-Conventional Energy Source (MNCES). MNCES and various state governments' initiatives to provide a supportive and stable policy framework for investment in wind power have contributed to the growth of the Indian wind power industry over the last four years. As a result India has made steady progress in the development of wind power and in 2004 it was the third largest country in the world with annual installations of 875 MW.

Going forward, it is estimated that cumulative installed MW capacity for wind power in India will grow from 3,000 MW in 2004 to 8,300 MW in 2009, representing a CAGR of 22.6%. The annual installed capacity is expected to grow from 875 MW in 2004 to 1,200 MW in 2008. (Source: BTM Consult ApS) The Government of India in its mission "Power for all by 2012", estimated that Indian installed generation capacity should be 200,000 MW by the end of its Eleventh Five Year Plan in 2012. Since there is limitation on conventional energy resources (due to the shortage of key inputs & their inherent polluting nature) hence, alternative sources of energy, such as wind energy are expected to play an increasingly important role in bridging the demand supply gap.

Global outlook:

International Energy Agency (IEA), in its world energy outlook, has portrayed a very promising scenario for wind energy. In World Energy Outlook 2004, IEA estimates the global electricity consumption to double between 2002 and 2030, with demand for electricity likely to increase at a much faster pace in developing countries like India and China. The IEA also estimates the share of wind power's share of total electricity generation to grow from 0.2% in 2002 to 3.0% in 2030 and that it will be the second-largest renewable source of electricity after hydroelectricity. According to BTM Consult ApS, the cumulative installed capacity for wind power is expected to grow from 47,912 MW in 2004 to 117,412 MW by 2009, representing a CAGR of 19.6%. Annual installations are expected to grow from 8,154 MW in 2004 to 17,605 MW in 2009 and thus world over also the wind energy is expected to play key role in power generation. The US market is also expected to grow significantly with extension of production tax credit from December 2007 to December 2008; the US market installed 3000 MW in 2006, taking its cumulative installed capacity to 11000 MW by the end of the year. China added 1000 MW of wind energy, taking its cumulative installation base to 2300 MW; it is expected to treble its capacity to 8000 MW by 2010, boosting the global wind energy market. It is expected that wind power will be the second largest renewable electricity source in 2030.

Contributed by our expert analyst