The original date of publishing was 27th October 2023. This has been ported to this website subsequently.

Suzlon is the current darling of the stock market. It has run up from INR 8.5 to as high as INR 34.1. That is an incredible 4x return in just 5 months.

The reason for this are two fold:

1. Suzlon has managed to painstakingly clean up its balance sheet by converting its debt into equity and thus improved its overall PNL.
2. There are seemingly huge, and when I say huge, I mean HUGE, tail winds in the wind energy sector. Read more about it below.

The first question is: How high should it go?

I did a little modeling:

Few notes you should read to better understand the model above.

• Revenue:
  • 1 MW of installed capacity implies a revenue of 6 Cr for Suzlon
  • Their O&M business should grow at about 12% a year
    • Their O&M revenue of 1800 Cr is built on 14 GW of total installed capacity
    • If they are adding 1 GW per year for the next couple of year, that’s a growth of 7% (not including the drop in O&M of the WTG that stop functioning)
    • I have added an additional 5 % for cost of inflation
  • Their Foundry business doesn’t really make any money; its services their other two business segments and thus has been ignored
• Costs & Margins:
  • Suzlon has Fixed Cost of 500 Crores for the WTG manufacturing business as per Con Call transcripts
  • This FC implies a 16% Gross Margins for the WTG business basis FY23 financials
  • I have assumed and incremental increase to 17% in GM and a 5% rise (inflation) rise in Fixed Cost as well
  • I have assumed a 35% O&M margin basis historical performance
• Financial Leverage
  • The finance cost has been reduced as they pay back their loans
  • Depreciation is assumed to be steady (current capcity of 3 to 4.5k MW is sufficient for the foreseable future)
  • Tax rate has been introduced at 25% as eventually the back losses will stop

Now, this isn’t the most sophisticated model in the world; but directionally it is telling me that Suzlon will need to do about 1900 MW of WTG business by FY26 and EVEN then they will be at a PE of 28 basis current prices. Thus UNLESS they can continue to grow at 25% CAGR post FY26 further appreciation is now unlikely, or atleast unwarranted.

So the next question is: What do I need to believe to underwrite a growth of 25% CAGR post FY26?

At least one or more of the following statements must be true:

1. Suzlon will gain a higher market share than the current management guidance of 33% of domestic market.
2. The overall domestic market will become larger than 6 GW / year.
3. Suzlon will reopen is export market and particpate in the global wind energy market.

All three of the above statements COULD be true:

• Suzlon is the longest and most well established player in India and thus could gain market share. If Inox’s 3 MW turbines don’t work out, then the space opens up even more. However, at the same time Chinese players (e.g. Envisions) are entering the Indian market and the fall out of that is still unknown.
• India could install more than 6 GW of wind energy per year: There are huge tailwinds with the hybrid RE model, C&I demand and a potential repowering policy on the horizon. However, this has never actually happened even in the hayday (pre-reverse auction era) of the wind energy market in India. And this optimistic period has JUST begun and I think its a bit early to tell if it will have the momentum to cross 6 GW / year.
• Suzlon could start exporting their WTG, but management has shown no inclination to do so or given any guidance on such. Thus so far I have not studied their competitive advantage on the global scale.

Thus, all three sentences COULD be true, but they are froth with risks and not to mention the general execution risk that anyway overhangs this business. Thus at this point I think any further appreciation that we see in this stock (especially basis any tenders / contracts awared) will be unwarranted a mostly a bull mania. But hey, if you’re already invested, ride it out!

Happy to hear your thoughts on this; if you disagree with any of the assumptions (in the model) or the asssertions please do share your thoughts.