SUZLON’S 3QFY17 result was a beat on all counts with volumes of 462MW (+80% YoY) and EBITDA margins of 22.5% (+490bps YoY) – leading to a higher-than-expected APAT of Rs 3.0bn. Improvement in EBITDA margins was led by operating leverage benefit and a favourable revenue mix (lower EPC). Higher commissioning margins are expected to normalise in 4QFY17. However, the company expects FY17E margins to be higher at ~17% (15-16% guided earlier). The mgmt reiterated its volume guidance of ~1.5 GW for FY17E. Bid-based projects are expected to substantially widen the horizon of WTG to non-windy states, thereby providing volume visibility going ahead. The mgmt expects international order inflows to pick up FY18E onwards. Additionally, SUEL is actively pursuing value unlocking in subsidiaries (SE Forge and Services business) for a sizeable reduction in debt. Consequently, we reiterate BUY on Suzlon wit a TP of Rs 24/share (10x Dec-18E EV/EBITDA).
Highlights of the quarter
- With the execution of 1,019 MW in 9mFY17, SUEL is well placed to achieve volumes of 1.5GW in FY17E. In addition, it would also book revenues from solar projects in 4QFY17E.
- Considering 1GW of bid-based projects, the company expects the wind industry to grow by 10- 15% in FY18E. The mgmt expects order inflows (for FY18E revenue booking) to pick up from 4QFY17. The current order book stands at 1,231MW.
- The new model (S111-120) has registered a PLF of ~38-39% in the last 10 months. SUEL has already bagged a ~100MW order for this model and expects further improvement going ahead.
- The 128 meter turbine is expected to be launched in FY19E (reduction in LCOE by 5%), which would also cater to the international markets.
- Increased installations also augur well for the OMS business, which has been flat over the last 2-3 years. We expect growth of ~6% over FY17-19E.
- Near-term outlook: With improving volumes and profitability, we have a positive bias on the stock.