Suzlon Energy - Margins, domestic orders grow

The 1Q09 result saw two positives: 1) domestic order book grew from 160MW at end-FY08 to 267MW, and 2) margins improved significantly (from 7% to 15%), giving credence to management's claim that FY08 margins were low due to capacity building up ahead of sales. Moreover, 1Q09 revenues included Rs4bn from the 'projects' part of orders for which WTG supply to the international market had already happened before 1Q09. This lowered COGS as a percent of sales. We believe negatives like lower orders from international markets and MTM losses from foreign currency borrowings are already factored in. We believe international orders will pick up once the US Senate approves the extension of PTCs. Management is confident of winning some big-ticket orders in the US and Europe, though it has not said when.

Valuation and target price
Adjusting for the revised value of holdings in Hansen Transmissions (Bloomberg: HSN LN) and REPower Systems (Bloomberg: RPW GR), Suzlon is currently trading at 14.7x FY09F and 11.8x FY10F EPS. These valuations are at a deep discount to those of global peers like Vestas (Bloomberg: VWS DC) and Gamesa (Bloomberg: GAM SM), based on Bloomberg estimates. In our view, the discount justifies the uncertainty about sales of the best-selling model, the 2.1MW S88, after cracks were detected in its blades. We maintain our earnings estimates, target price at Rs319.48 and Buy rating.