Suzlon stock is risky,but a good ‘buy’

After five years,we estimate in FY12,India will once again be the primary market for Suzlon.

After five years,we estimate in FY12,India will once again be the primary market for Suzlon. The shift has positives.

First,India wind additions is likely to be 3-3.5 gw/year given favourable regulatory changes,pick-up in IPP investments in wind and positive steps towards trading in renewable energy. Second,Suzlon remains the dominant player in 1mw+WTG market and has around 45% overall market share in India.We forecast sales volume of 1.5GW from India. Lastly,logistics-related variable expenses could fall by around Rs 1-1.5 million/mw.

We forecast a domestic market-led recovery in sales volumes to 2,250 mw in FY12 (750 mw overseas),coupled with stable fixed costs and flat employee expenses. We forecast a capacity utilisation-led Ebitda margin improvement to around 12.8% in FY12. The Street could be underestimating this,in our view. We raise our FY12 estimates by around 30%.

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Wind stocks have strong positive correlation to oil prices (0.73x historically for Vestas versus Brent crude prices). JP Morgan Global Commodities Research expects crude oil prices on a spot basis to breach $100/bbl in 1H 2011 (up 35% yoy) and to reach $120/bbl by 2012-end.

Suzlon has underperformed Sensex by around 21% since August 2010.

With a moratorium for debt repayment through FY12 and absence of capex needs,we think Suzlon has time to mend operations. Risks to our contrarian call include famine of overseas orders,only 330 mw overseas over last six quarters and step up in domestic competition.

JP Morgan