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Turnaround at Suzlon continues, but sustainability concerns remain

According to reports, Suzlon Energy Ltd’s turnaround story continued for the third straight quarter, as it posted a net profit at the consolidated level, but concerns remain on its sustainability.

While the firm reported a net profit of Rs. 58.6 crore in the September quarter (against a loss in the year-ago period), the number was boosted by one-off income of Rs. 219 crore. That was due to a reversal of provisions made towards diminution in investment and profit on sale of investment.

Secondly, the company’s huge debt burden means that it has to shell out almost Rs. 300-350 crore every quarter towards interest expenses. So, while it posted earnings before interest and tax of Rs. 262 crore, it was dwarfed by interest payments of Rs. 357.6 crore. That said, Suzlon did post a 34% rise in revenue over a year ago.

The firm’s order book is stable at $6.5 billion (around Rs. 32,500 crore today), or 4,734 megawatts, about the same as three months ago, when it reported its June quarter results. While the order book inflow in the first half of this year has been impressive, it has been no more than Suzlon’s revenue growth.

Suzlon’s management is confident that order inflow would be strong in the coming quarters despite a slowdown in the US and Europe, but things may not be that hunky-dory.

The Financial Times reported that growth in China, the world’s largest wind turbine market, was slowing at a time of global overcapacity. Tax breaks in the US are about to expire. In India, a 10-year tax holiday and accelerated depreciation for wind power projects get over in March.

While that is a potential headwind for order book growth, the debt problem remains. Net debt at the end of September stood at Rs. 11,101 crore, a tad more than Rs. 10,544 crore in the previous quarter. Net working capital stood atRs 5,043 crore at the end of September, much above the Rs. 3,806 crore at the end of fiscal 2011. That translates into 90 net working capital days at the end of September (based on annualized sales) compared with 77 days at the end of the previous fiscal. That metric is much worse for Suzlon’s stand-alone numbers.

Still, the company says it has started reducing the debt on its balance sheet even as Rs. 2,000 crore of foreign currency convertible bonds come up for redemption next year. The stake sale in Hansen Transmissions International NV will help, as will squeezing out the minority shareholders of REpower Systems AG, which will allow it to access some Rs. 1,700 crore from the latter’s balance sheet. While that has allowed the stock to marginally outperform the BSE Power index this fiscal, order book growth and execution are what will sustain that trend.

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