IPO - Suzlon Energy

Suzlon is by far the largest wind-energy provider in India, a lucrative and under-served market for renewable energy. It is also the sixth largest such company in the world.

What I Like

• The company holds a strong and sustainable position in a growing market where barriers to competition (need for an impeccable track record and significant capital to bid for projects) are high. Further, India is a potentially huge market for wind energy and there’s plenty of room to grow domestically. And petroleum prices are shooting through the roof, making renewable energy even more attractive
• Suzlon has captured 3.9% of the global market this year, which is much better than the 1.9% it has of the cumulative installations till date. This means it is actually increasing its share of the pie, a very encouraging sign
• Further, the company has demonstrated sales and profits growth of 54% and 47% respectively on a cumulative basis for the past 4 years, which compares quite well with the issue PE range of about 29-34

What I don't Like

• The EBITDA / EV margin is in the range of 11%-13% for the issue price band, which, unfortunately is a bit low for a relatively high-risk business. Wish the company had been able to bring it up to at least 15%
• The company has re-stated its numbers due to changes in its accounting policies. The cumulative effect of these changes has been to increase the profits for the last year by Rs. 204 mn leading to an EPS increase of about 66p, which is significant. While the accounting changes are probably all right, I’m sure the fact that they led to increases in profit was a big factor in approving these changes. Sneaky!
• The Price to Book ratio for Suzlon is around 12, whereas the same is in the range of 3-10 for its peer group companies. A P/B ratio of 12 is very high and would be an immediate disqualification for conservative investors
• Being sixth (with a tiny market share of about 1.6%) in a relatively small global market means Suzlon will have to really work at its strategy in order to grow faster than the market and move into the big league. The top player in this market has twenty-two times it market share and even the 5th largest has five times the market share of Suzlon.

In Summary

Apply if you like ‘growth’ stocks that with potentially significant upside (though at a high risk) – and even then go for the lower end of the band. Those willing to hold it for many years will definitely reap huge benefits - after all the market will really explode when the cost of wind energy comes close to that of fossil fuels.

Don’t touch it if you are risk-averse or if you have a short horizon.