India Equity Research- SUZLON ENERGY

SUZLON ENERGY
INR 251
BUY
* Areva exercised its put option for Repower; positive for Suzlon

Suzlon Energy (Suzlon) in a recent development confirmed buying out 30% stake in Repower; put option for which rested with Areva. After Suzlon won the bidding for Repower, Areva as well as Martifer had put option to sell their stakes of 30% and 25%, respectively, in Repower to Suzlon. There were apprehensions of Areva exercising its put option and at a much higher price in case of exercise, given the recent upward price movement of Repower shares. With news of Euro 350 mn of capital gains for Areva, the exercise option is expected to be much lower than the current market price, removing any overhang of debt raising for Suzlon to fund the acquisition. Post acquisition of Martifer’s stake in 2009, Suzlon will have a controlling stake of 89% in Repower. As per the German law, a controlling stake in a particular company is defined after achievement of 75% stake in it.

*Robust performance for Repower; Suzlon’s strategy working well.

Repower, without any meaningful sourcing from Suzlon, still has maintained robust performance in the past year. Its revenues grew 47% Y-o-Y in 2007, to euro 678.1 mn. EBITDA margins for the company also improved 180bps, to 6.0% in 2007. Further, the company is likely to continue to perform robustly, going forward, backed by its order backlog of 1,500 MW (euro 1.5 bn). In addition, there are further fixed frame contracts of another 1,500 MW and negotiations for 1,900 MW in the pipeline. Its EBITDA margins are also expected to improve to 10% in 2009- 10.

*Outlook and valuations: Risk-reward favorable; upgrading to ‘BUY’

We do not see immediate possibility of consolidation of Suzlon’s 66% stake in Repower, since the German law allows domination only post acquisition of 75% stake; the option is, however, still being evaluated as per the Indian laws. Upon consolidation, we will revise our numbers for the company upwards. With no more concerns on the company’s higher cost of acquisition of Repower and inability of technology transfer, we do not see any overhang on the stock now. The volume growth is expected to be robust at ~50% and the stock is trading at 28.7x and 16.3x
FY09E and FY10E earnings. We put our recommendation on the stock to ‘BUY’.

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