Suzlon Energy - Winds Of Change: ICICI Securities Initiates Coverage With A 'Buy' Rating

ICICI Securities Report

The Indian power grid needs more wind in its mix. The need to enhance wind capacity addition (post subdued activity in the recent past) has finally dawned upon the stakeholders. Grids are looking for a solution to meet demand effectively while containing carbon emissions.

The supply of renewables can be increased by setting up a mix of wind, solar and battery storage capacities. Optimal solutions for the grid to meet demand by using renewables includes higher wind in the mix (of ~8 giga watt per annum) led by the complementary nature of generation and cost curves of the wind. As a result, India has launched series of policy initiatives:

1. single-stage closed bidding (versus reverse e-auction),

2. 10 giga watt of wind auction per annum, and

3. wind-specific renewable purchase obligations etc.

These policies are likely to generate tailwinds for the industry and, we believe, Suzlon Energy Ltd., the market leader, is best suited to reap the benefits of the same. Also, the ‘net debt / Ebitda’ ratio on Suzlon’s balance sheet has declined to ~one time (from ~10 times in FY22). Initiate with 'Buy'.

Outlook and valuation

Suzlon Energy is getting back into shape after a ‘rollercoaster’ journey over the last decade due to a slump in industry volumes and high leverage led by acquisition of Repower in 2008. However, after a series of debt restructuring, net debt has declined sharply from Rs 130 billion in FY20 to Rs 12 billion as of March 2023. In addition, the industry is looking at a revival led by a slew of policy actions.

Company has been investing in research and development and has kept pace with innovations in Indian markets. It recently launched a three mega watt turbine with increased rotor diameter and hub height, keeping in line with the product launches from other global wind original equipment manufacturers in the Indian markets. As of May 2023, Suzlon has already booked 750 mega watt worth of orders for the newly launched three mega watt turbine.

Moreover, major positive changes on the regulatory, policy and eventually business front bode well for prospects of the wind industry. The government has decided to tender out at least 10 giga watt of wind capacity every year with pickup in demand from commercial and industrial entities for round-the-clock power supply. Suzlon, being the market leader in the wind turbine industry, is the natural beneficiary of this shift, in our view.

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