Suzlonís Q2 performance indicates liquidity crunch ó with asset sales in India likely to be challenging in the current economic environment, the companyís turnaround may be delayed.
Also, banksí reluctance to release incremental working capital loans is affecting volume ramp-ups at the company, resulting in higher losses during H1FY14 than we expected. However, Suzlonís cost-cutting efforts have been effective, with Ebitda margin up c7% q-o-q during Q2FY14.
We value Suzlonís German subsidiary, REpower, at cEuro 1.3 billion, equivalent to two-thirds of Suzlon Windís current net debt. Given the improvement in investor sentiments on the European wind sector, we see increased possibility of Suzlon monetising REpowerís performance.
We cut our India market wind installation forecasts for 2013-14 due to the delay in release of details on the Generation-Based Incentive scheme and the slowdown in the Indian economy.
This also hurts Suzlonís revenues in the short term. For FY14, we now forecast a loss of R3,000 crore vs our old as well as consensus forecast of R1,200-crore loss. In our model, we now assume a 20% stake sale in REpower by Suzlon during FY15 to generate R200 crore in cash.
Using the DCF valuation, the stockís fair value is R1,350. However, given (a) the lack of visibility on FCCB restructuring; (b) asset sale schedule; and (c) decision on monetisation of REpower, we apply a 25% discount to our DCF fair value to arrive at our target price of R10 per share (same as before). We maintain our neutral (V) rating.