Stock Analysis – Suzlon Energy Limited

Rising Seas

The following is my views on disruptive innovation in general and renewable sector in particular which is disrupting the world. There is not much of a need to mention that the world is shifting towards renewable energy from the traditional sources of energy ranging from oil to batteries, coal to solar, from electricity generation by power companies to household electricity generation. The effects can be seen everywhere.

It doesn’t take much effort to think about sequence of events which had lead to the Tipping Point for any revolution/innovation (disruption) to take and and how the consequential events leads to downfall of the previous empire industries and gives rise to another. For ex: Tesla is disrupting the existing car companies with its premium electric sedans and SUV’s and similarly power companies are being disrupted. (Tesla is worth more than Ford and GM, despite having just 1 percent of their sales.) An innovation may not be disruptive at the beginning but at the right time. 

[Disruptive innovation is a term in the field of business administration which refers to an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leading firms, products, and alliances.] -Wikipedia

Innovations happen all the time but, not all innovations lead to disruptions. For ex: Computers were present in the fifties and sixties but they were not disruptive enough. They were innovations but not disruptive to the other existing companies. Same is the case with alternative sources of energy. They were present long before but they were not disruptive enough. Now is the time they have gained attention with the countries and it seems this shift is more of a 11th hour call than a voluntary act. The shift has started, only the pace is needed which in my opinion is happening at a much faster rate.

Almost 150 years after photo-voltaic cells and wind turbines were invented, they still generate only 7% of the world’s electricity. Yet something remarkable is happening. From being peripheral to the energy system just over a decade ago, they are now growing faster than any other energy source and their falling costs are making them competitive with fossil fuels. BP, an oil firm, expects renewables to account for half of the growth in global energy supply over the next 20 years. It is no longer far-fetched to think that the world is entering an era of clean, unlimited and cheap power. About time, too.


Bottom Line:
The era of long company life cycle that has not been challenged is now being challenged. Consequently, the way we have been analyzing companies from investment perspective also have to be changed. Most of the metrics that we use for analyzing companies are based on established companies that are now becoming obsolete if not already half of it is irrelevant. Every new force has to measured in some way, but the question is how do we measure. How do we measure artificial intelligence company or a data driven company. Data, artificial intelligence and renewable energy is the new oil.

(Here is an excerpt from the book ‘Sapiens- A brief history of humankind‘ by Yuval Noah Harari: Industrial Revolution has been a revolution in energy conversion. It has demonstrated again and again that there is no limit to the energy at our disposal. Or, more precisely, that the only limit is set  by our ignorance. Every few decades we discover a new energy source, so that the sum total of energy at our disposal just keeps growing.

Why are so many people afraid that we are running out of energy? Why do they warn of disaster if we exhaust all available fossil fuels? Clearly the world does not lack energy. All we lack is the knowledge necessary to harness and convert it to our needs. The amount of energy stored in all the fossil fuel on earth is negligible compared to the amount that the sun dispenses every day, free of charge. Only a tiny portion of the sun’s energy reaches us, yet it amounts to a 3,766,800 exajoules of energy each year ( a joule is a unit of energy in the metric system, about the amount you expend to lift a small apple one meter straight up; an exajoule is a billion billion joules – that’s a lot of apples). All the world’s plants capture only about 3,000 of those solar exajoules through the process of photosynthesis. All human activities and industries put together consume about 500 exajoules annually, equivalent to the amount of energy earth receives from the sun in just 90 minutes. And that’s only solar energy. In addition, we are surrounded by other enormous sources of energy, such as nuclear energy and gravitational energy, the latter most evident in the power of ocean tides caused by the moon’s pull on the earth.” 

I would like to put my views here on Suzlon Energy Limited, one of the largest wind power suppliers in the country and would like to come to a conclusion about the future of the company. Here is the video that i got on the company website.

Since the company is engaged in wind power hence it didn’t mentioned that solar power is in more abundance and less capital intensive than the wind power. There can be no denying that solar power will be winner of all the other sources of energy (in terms of deployment). A company that doesn’t deal in solar power will be behind other companies that does deal in it. This doesn’t mean that wind has no good future, its only relative to solar.

Following is the another video from The Economist channel posted on Sep 20, 2016 which shows what is happening in the renewable sector and how value of oil and gas companies has halved during the last 8 years. What needs to be understood from the video is that : the next reduction in valuation by half won’t take eight years, its gonna get faster a lot. 

While everywhere only the benefits of the renewales are being counted very few are aware of the fact that its impossible to run our world only with renewables energy (at least as of now). If all the capacity of the world is to be used today then also the contribution will be much less. Wind and solar has got their own limitations and of which storage of energy is another. But the advancement in tech mainly due to need of the hour and plain advancement of the same will keep companies on their their toes to keep inventing.

Suzlon Energy Ltd. is a company engaged in Sale of Wind Turbine Generators and related components of various capacities which comprises 94% of the total turnover of the company the rest comes from the solar energy business in which the company has recently forayed. It also provides service and maintenance to the towers it installs. From the outset it seems to be a turnaround company. At one time the company used to be the fifth largest supplier of renewable energy company but now it has slipped out of the top 10 ranking and now ranks 67th in world.

History: The Suzlon Energy Ltd IPO opened on 23 September 2005 and closed six days later, oversubscribed by more than 40 times and raising $340 million (around Rs.2,213 crores as of today). Shares of the wind turbine maker listed at Rs.510 at the upper end of the price band, then surged to Rs.1,407.60 in six months before the stock split, turning founder Tulsi Tanti into a billionaire. At the height of the company Tulsi Tanti once said in his interview (which sadly, i couldn’t locate) that to grow a company one has to do one thing: take loans and invest in the company, that’s how a businesses grow. Didn’t realizing that good and bad times doesn’t stay for long. (I have skipped the part of the origins of the company for the sake of mentioning it here.)

By 2009 the company had drowned in debt so much that it seemed inevitable to come out of it and hence it has to go for CDR (Corporate Debt Restructuring) to take it out of the ocean of debt. It is almost always bad to take on debt when the it fells like taking on debt is good.

If you are not ready to hold a company for six or seven years, don’t even think about it for one year.     -Peter Lynch

Industry: According to a new report from the World Energy Council, renewable energy now accounts for over 30% of the total global installed power generation capacity, and 23% of total global electricity production. Specifically, over the last decade, wind and solar PV have seen a meteoric rise, representing 23% and 51% respectively in terms of average annual growth in installed capacity — although, to temper that somewhat, their combined contribution to the global electricity production is only around 4%. This 4% means that total contribution till date from this sector has been this much only, mainly because during the initial years installed capacity was very less. Wind and solar share a major chunk of the invested amount each year, for 2015-16 it was 76%. The combination of improving technologies and reduced cost of production are the major factor behind declining capital expenditure and operational & maintenance costs of variable renewable energy technologies, with solar PV being a prime example.

The report also concluded that by the end of 2015, 164 counties had renewable energy support policies in place, with 95 of them identified as developing countries — not bad, considering that number was only 15 developing countries in 2005.

Below is the investment in assets and and growth in 2016 over 2015 all around the world:

Renewable Industry

                                                                                      (Source: Annual Report 2016-2017)

The above graph demands an inevitable question, since there is a reduction in investments, do we have to fear that it will affect the future investments? A plausible answer would be that only the growth in investments would fluctuate, investments wouldn’t. The fall can be attributed more to the reversion of mean than to the uncertainty involved in the sector. It is clear from above that China is the biggest investor in renewable sources of energy  India being the 6th largest investor and other countries following the lead. The investment is so much in this sector that in some countries, specifically in China, that the traditional thermal power companies are lobbying the government out of worry to stop providing subsidies to the renewable sector. The recent downfall can partially be attributed to the uncertainty regarding Donald Trump policies and balance to the government heeding to the company’s pressure to minimize the subsidies. Globally, (CY) 2016 witnessed a record Renewable Energy (RE) capacity addition of 138.5 GW up from 127.5 GW in 2015. Following is from the annual report :

The capacity addition in 2016 was equivalent to 55% of all the generating capacity added globally and investment in new renewables capacity was almost double that in fossil fuel generation for five years in succession….There was a record acquisition activity in the clean energy technologies in 2016 which totaled to USD 110.3 billion up by 17%.
Assets acquisition in solar and wind parks reached a record figure of USD 72.7
billion. Corporate takeovers reached USD 27.6 billion; 58% more than 2015….Solar attracted a new investment of USD 113.7 billion down 34% from 2015 due
to significant cost reductions and also due to slowdowns in China and Japan.
This was followed by Wind which attracted an investment of USD 112.5 billion,
down by 9%…. However, investments in RE excluding large Hydro fell by 23% to USD 241.6 billion. This decline in investment was primarily due to sharp reduction in the capital costs for Solar PV, Onshore and Offshore wind.’ 

Hydro is simply the hydro power from water. As mentioned in bold above the reduction in other renewable sources is due to the increased investments and subsidy in solar capacity and wind power than other sources of energy. Other RE sectors comprise of very small fraction of the overall renewable market. Bio fuels (USD 2.2 billion), Bio Mass and Waste (USD 6.8 billion), Geothermal (USD 2.7 billion), Small hydro (USD 3.5 billion) and marine saw a mixed fortune in terms of investment.

Very recently the government has decided to firm up plans to increase bidding of wind power contracts as much as 33 GW over two years. The Centre auctioned two GW of wind power contracts in October 2017. A total of five GW of wind projects will be put up for bids by March 2017. This will be followed by bids for 10 GW each in 2018-19 and 2019-20.

An insight : Wind power is more capital intensive than solar power. Hence, a company involved in the solar sector is more likely to grow faster than wind. Also, India being more a solar country than a wind country, if a company has to grow it needs to enter into solar. Since, investments in both the sources are at nascent stage both are growing at good speed. Suzlon would have doomed itself if it hasn’t realized that solar is important to be profitable and sustainable. 

There’s another hitch in the green energy sector. The more it is deployed, the more it reduces the pricing power from all other sources. That makes it hard to manage the transition to a carbon-free future, during which many electricity generating technologies, clean and dirty, need to remain profitable if the lights are to stay on. Unless the market is fixed, subsidies to the industry will only grow.

Company: 94% of the turnover of the company comes from sale of Wind Turbine Generators and related components of various capacities (this includes Operation and maintenance) and the remaining 6% comes from solar business in which the company has forayed last year only. For the solar part business, the company is in the turnkey projects business, wherein it creates a company and after completion sells the same company. Here is the list of work done in 2016-17:

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Figure below shows solar delivery volume of wind and solar for the first quarter of 2017-18 taken from the investor presentation:

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Coming to the wind part, below is the total wind capacity additions during the CY 2016-2017 for whole world.

Gloabal Wind Capacity Additons

Cumulative global total at the end of CY 2016 stood at 486.8 GW. That turns out be market growth rate of 12%. India continued to be the second largest wind market in Asia and now ranks in top 5 markets of the world. In FY 2017 the company installed all time high of 1,779 MW, taking its cumulative installations to over 11 GW in India and 17 GW globally. The company achieved 100% growth rate in annual installations. The  Indian market grew @ 61% to touch an all time high of 5.5 GW. The company has increased its market share during the year from 19% in 2015 to 35% in 2016. Also the renewable market grew by 48% in India but Suzlon grew by 98%. A company that is growing at double speed than the market is worth considering. Last year has also been exceptional year because for the first time in the history of India capacity additions from renewables surpassed installations from fossil fuels technologies.

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On the product and technology front the company has three types of wind mills S97, S111 and S128 each successive tower is better than the previous one. The last one being the latest one to be launched in the market. Talking about the risks, there are two types of risks operational risks (every company has to manage this) and financial risks (foreign exchange risk, interest rate risk, credit risk and commodity risk) which history suggests company is lousy in maintaing, but it has come to its senses and now is reducing its debt. Recent measures taken by the government is  already charted a strong programme to do a five-fold ramp up in renewable energy of 175 GW by CY 2022. It includes ramping up the Solar to 100 GW, wind to 60 GW, and biomass/small hydropower to 15 GW. French president Macron and Indian prime minister Modi are likely to be launching the International Solar Alliance (ISA) in full at Re-Invest to be held from December 7-9. India’s new power minister R.K. Singh has said that India’s power needs will double in the next 6-7 years, while India is committed to reaching 40% renewables in its energy mix by 2030. Further, the tariffs has been reducing to record lows. The tariff-based competitive bidding for 1 GW wind projects brought down the tariff to a record low of Rs 3.46 per unit in February this year which further dropped to all time low of Rs 2.64 per unit in a similar auction in October.

Before coming to the numbers of the company we need to keep in mind that : just like better companies can be found in good industry, good companies can be found in lousy industries. For example: textiles is a lousy industry yet the industry will exist and some companies will flourish. Except that, in the renewables industry there are not that many companies which increases our chances of finding better companies. 

Peers: None of the listed peers are in situation to be compared because their financial conditions are not sound and they trying to get some leg space in this segment. In my view, these are still not viable to hold. Major listed peers are:

  1. ORIENT GREEN POWER COMPANY LTD
  2. Indo Wind Energy Limited
  3. SURYACHAKRA POWER CORPORATION LTD
  4. NEPC INDIA LTD

Numbers:  I wouldn’t be digging deeper into the numbers because as i already said there are some special situations where numbers are not as much of help as much as a story. In those cases we need more than ratios and numbers.

One thing that has to be understood is that the usual metrics that we apply to the companies doesn’t apply to the companies like Suzlon (turnaround or asset plays). Also its very difficult to analyze a company if they are in the turnaround phase. A better way to understand this is by looking at companies like Symphony. Yesterday’s weeds that has become today’s flowers. Means companies that we are willing to buy today, we wouldn’t have touched yesterday. Thought experiments are a better way to understand a complex situations like this:

Price of Symphony Limited (turned around company) as on 13-Oct-2010 was 57 and as of writing this (13-Oct-2017), it has increased 25 times in exactly 7 years. If we were to go back in 2010 (not knowing about the future) and look at the report, would we be still confident about buying the stock as we are now. Seven years is a long period to estimate about the future of a company. The answer is we wouldn’t. 

Now think about Suzlon. If we were to stand 7 years down the line and its 2024, we need to answer some of the questions:

  1. Does the renewable sector will be up or down? Will the companies be up or down?
  2. Which companies are in the sector and which of those will be in advantages position to take first-mover advantage?
  3. And how to find those companies?
  4. If we were to use the multiplier of Symphony (25 times), is Suzlon not in a position to make at least 25 times money in the next 7 years? Can it not reach market price of 379 (=15.55 X 25 times)?

Answering these questions is very important to know about the future potential of the company and the returns (of course).

Financial Highlights

Observations: The revenues of the company has been decreasing for the last 7 years except 2017. The significant reduction in 15-16 is due to the sale of Senvion business to reduce debt which contributed almost half of the revenues. It is commendable that revenues has increased by almost half over 2015-16 after selling which contributed half of revenues. Conversely, EBITDA has been increasing. In fact, in 2017 it has the highest EBITDA on revenues of 12,714 when compared to 1,821 on revenues of 21,082. Interest has more or less been stable. But now the management has said that it is coming out of CDR which was to happen in 2017 but it didn’t and now it aims to exit in 2018. What’s more important here than the year of exit is the intention of the mangement to exit it. This is what the Tulsi-Tanti the founder promoter, chairman and managing director of the company said in an interview :

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Extract from the financials mentioned about this is:

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In addition to that its valuable to know, how the company is going to increase its revenues from the increase in wind capacity (its core product) not to mention that it has entered into solar power too. Again from the interview:

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The Net Profit row shows that the company is now turned to profit from a loss of  479 crores to 1,000 crores of profit. Net worth of the company that has been very much in negative is now reducing with the company turning into profit. Another aspect is that Net fixed assets of the company has reduced significantly in 2015-16. This is due to the sale of its one of the biggest acquisition Senvion in 2015-16 to pare some of the debt (See above in image). The EPS has been increasing and EBITDA margin is at near to its all time high of 20% the level last seen in 2005-06 (before the crisis).

SEForge is one of the best performing units of the company. Full description as per the company report is as here:

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The good thing about SEForge is that it has exited CDR last year and is growing @ 25% organically. It’s key focus is now on exports mainly to the European and North American markets. Its portfolio includes prestigious customers such as General Electric Company (GE) USA, GE Jenbacher Austria, GE Transportation USA, SKF, Kaydon USA, Max Boegl Germany, IMO Germany.

R&D: This is the only company in India that does R&D and at such level. If there are others also doing, then its difficult to find them if not possible. Certainly none of the peers are doing this. Here are some of the latest ones being done by the company. R&D for the current year is 0.79% of turnover compared to 5.13% of last year.

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Service Business:  The silver lining in the business is that every turbine sold by the company till date is under its service fold and the good thing is, OMS (Operation, Maintenance and Service) contract is for the whole life of the tower. This is because the company is able to persuade the buyer that the tower which is so complex will be best serviced by the manufacturer than third party. Also value added services are being launched like Quick Climb (to help engineers to climb quickly and safely to the towers)  and Quick Sense ( to identify the wind direction).

Bottom Line: Moat can come in any form. It can be monopoly, service, patent protection, better product, economies of scale etc. Suzlon is having moat by scale of operations and R&D. Only Suzlon is in the manufacturing and R&D of wind mills, all others are buyers from it in whole of India. Considering the option of importing mills from abroad is a costly affair as of now. Also, other than competitors who operate wind farms as a business everyone else is under the OMS contract of the company. Because it has a huge scale of operations, it is in a strong footing to drive out its competitors by reducing costs. Recently the company has realized that solar is less capital intensive business and government is putting more focus on solar auctions, hence it entered into this business. Question: If any opportunity comes up, how Suzlon is not able to grab it?

Others: The company has been merging and demerging various subsidiaries within it which has lead to increase in authorised number of shares. The paid up capital of the company has been increasing due to the conversion of convetible bonds issued by the company in the past. A company that keeps on increasing its share capital is not good for a company. Below is the details:

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Accordingly, the paid-up share capital of the Company as on the date of this Report is Rs 1058.16 Crore divided into 529,07,99,122 equity shares of Rs 2/- each. Promoters holding in the company as on 31-March-2017 is 20.82. The holding has been getting less not due to selling of the holdings but due to conversion and allotment made to non-promoters. Of all the reasons not to invest in the company, this is the major reason and important one. This is usually a sign of danger (Tanti must have learned his lesson).

IndebtnessTotal indebtness of the companys been reduced during the year and as said by Tanti himself, he intends to reduce it further. As of 2016-17 total indebtness is 6,096.42 crores which is approximately $1Bn.

Remuneration: Tulsi Tanti has been authorised in the shareholder meetings to remuneration fully allowed by the Companies Act 2013 from 2014 to 2017 which is 3 crores. However, due to losses the management decided to restrict their payment to Rs.1,70,50,000/- in the respective financial years, as approved by the Central Government. Considering adequate profits for financial year 2015-16, the differential remuneration of Rs.1,29,50,000/- for that financial year was paid to him post finalization of accounts during the next financial year, i.e. 2016-17. Similarly, the differential remuneration related to financial year 2016-17 has been paid in financial year 2017-18. This is not a very good sign of management having receiving balance payment when he could have said that, it’s okay if he didn’t want his payment just because the company turned into profit. Tulsi tanti is taking almost 3% of the profits as remuneration. If remuneration of MD,WTD, Manager and other KMP were to be added total comes to be 14.43 crores out of which 9.8 crores is to the outsiders other than promoters. On the flip side what is good is that other than the two promoter,the median remuneration of each director is almost equal to the remuneration of employees.

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What is interesting to find is that there has been no increase in remuneration of the KMP’s during the year. It remains to be seen whether this increases in the next year substantially or not. In-fact there is reduction on remuneration.

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Bottom Line: There is no familiar cases against any management personnel. They have been focused all these years on only wind and related services, only recently they have forayed into solar business. Only aspect that i didn’t like about is that Tanti have agreed to take previous years salary when the company was not in profits when he could have said that he didn’t needed that (he was getting part of salary).

Now to conclude in the end, i’ll be answering the questions raised above:

  1. After reading about almost any report on the future of renewable energy it doesn’t much time to convince me and anyone by me that things are changing fast. The capacity installation that took in the last 10 years won’t take another 10 years, it will take almost half of it. Consequently, when an industry goes up some are going to be lifted up. Some due to actual reasons and some due to rise of the tide.
  2. Since we are talking about energy, not only solar and wind, all other industries related to this are also going to up. For example, battery companies, car companies, power transmission companies, battery charging station companies (now in nascent stage in US), companies that we couldn’t conceive of. If all other companies are below Suzlon in all respects, the probability that Suzlon will be the winner is higher that other companies. This doesn’t mean other companies won’t be successful, it means we are betting on higher probability than lower.
  3. If we were to use the multiplier of Symphony (25 times), is Suzlon not in a position to make at least 25 times money in the next 7 years? Can it not reach market price of 379 (=15.55 X 25 times)? I would answer the question in two ways: Those who think 25 times is not possible for a company like Suzlon and those who think it is possible. First, if Suzlon is not the company then which else company can it be? A good analysis would be preferred, for or against, is preferred. It’s better to be openly wrong than privately right about my analysis and valuations. Second, for those who think it is possible, 7-8 years is long period especially when the prices doesn’t show any movement in the first 2-3 years. Hence, its very easy to loose patience and exit very early. Do simple mathematics, 15000 shares @16.50 amounts to 2,47,500. If you have enough money then leaving 2,50,000 is not a such big deal. And, if turns 25 times the amount would be 62,50,000 in 7 years, that’s a CAGR rate of 58%. Recently, a news has gone viral about a person becoming crorepati because of 20,000 shares purchased in 1990 by his grandfather now worth 130 crore. A little surprising fact would be, only if the grandson had known about the stock earlier, he would have sold it much earlier than this much late.

It would be beneficial if we take help from one of the management guru ‘Michael Porter’. He said,”Would you be willing to invest in the company if you didn’t own the company right now?” A little improvisation will do a better job for us ‘How would you be analyzing the company if you didn’t already know about the company.’ Because what happens more often is that we compare ourselves with others by looking at the Instagram photos of ourselves and not in the mirror in front of us.

The Disruption Machine

The New Yorker: Battle Of The Strategy Titans

Understanding Disruption: Insights From The History Of Business

Disruptive innovation

Reinventing-Your-Business-Model

What is Disruptive Innovation?

World Energy Resources 2016

Renewable Energy Now Accounts For 30% Of Global Power Generation Capacity

New Indian power minister invites partner countries to ‘Make in India’ for renewables

Govt mulling 2-3 tariff-based auctions for wind projects

Suzlon on the verge of exiting corporate debt restructuring

Clean Energy’s Dirty Secret 

Tesla is worth more than Ford and GM, despite having just 1 percent of their sales

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