Equity Research Report

EQUITY RESEARCH REPORT

RENEWABLE ENERGY SECTOR

SUZLON ENERGY LIMITED

BY SHELLY BANSAL

08BS0003111A report submitted in partial fulfillment of the requirement of MBA Program of

ICFAI Business School

Date of submission: 9th Sept 2008Distribution list: Prof. Monica Chopra Faculty in charge (IBS-G)

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INTRODUCTION The objective of this report is to analyse the credibility of an investment into Suzlon Energy Limited. In order to achieve this we will focus carefully upon the organisation’s strategic and financial information whilst also focusing the industry factors which may alter the position of the company. A SWOT analysis will evaluate the potential strengths, weaknesses, opportunities and threats facing the business, whilst valuation models will also test the viability of such an investment. Recommendations will then be provided on the evidence gathered.

This equity research report deals with the valuation of Suzlon Energy Limited, India and its anticipated future value. To begin the valuation process, The Economic Analysis is the first step, here economic variables are used to measure the health of the economy. It assesses the economic climate from an investment perspective.

The second part is the study of the industry variables, to determine how well an industry would perform in the current economy.

And finally the last part holds valuation variables of the company within the industry to determine how best the investment would be. This logical progression has been used to make value judgments on company value.

To accomplish the detailed analysis of the Suzlon stocks the analysis has been divided in two different aspects i.e fundamental analysis and technical analysis.

FUNDAMENTAL ANALYSIS

Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.As with the analysis of fixed income securities, equities may be analyzed on an expected future cash flow, or benefit, to the shareholder basis. When reading the financial papers one often encounters the term "intrinsic value". This concept is what is considered to be the corner stone of fundamental analysis. The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).

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The proper order in which to proceed in fundamental analysis is . first to analyze the overall economy and securities markets. Second, analyze the industry within which a particular company operates, finally analysis of the company should be considered. The above analysis involves making careful estimates of the expected streams of benefits and the required rate of return (this depends on risk) for a common stock. The intrinsic value can then be obtained through the present value analysis- i.e. the dividend discount model. An alternative method of valuation is p/e ratio or earnings multiplier approach.

FRAMEWORK OF FUNDAMENTAL ANLAYSIS

1. ECONOMIC ANALYSIS

2. INDUSTRY ANALYSIS

3. COMPANY ANALYSIS

4. TECHNICAL ANALYSIS

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ECONOMIC ANALYSIS

India's economy grew 6.1% in the second three months of the year compared with the same period last year, which was slightly better than had been expected. The official gross domestic product figure was down from the 7.8% growth seen in the second quarter of 2008. Although growth has slowed from last year, the economy is still expanding faster than most other countries.

Industrial growth:While the Indian economy registered an average growth of 8.8% during the 5 years ending 2007-08, its growth is slacking today this is because the global economic crisis is getting even deeper than before. Latest IIP numbers for February 2009 shows negative 1.2% growth as against plus 9% growth recorded by the industry in the same month of previous year.

Trends in InflationThe recently adopted measures by the government, including reduction in fuel prices has brought the WPI based inflation under control. The average inflation for February 2009 was 3.45%. However, disaggregated numbers raise concerns over the price rise of the essential commodities like the primary food articles.

India's annual rate of inflation rose marginally to minus 0.95 percent for the week ended August 15 from minus 1.53 percent the week before, according to official data released on Wednesday.

The rate turned negative for the week ended June 6 for the first time since the new wholesale price index (WPI) series started in 1995.The inflation rate had last turned negative in 1977. Negative inflation implies that the average wholesale price level was lower during a given week, than it was in the corresponding week a year ago. It does not necessarily reflect retail prices.Both the price indices for primary articles and manufactured products rose.

While the index for primary articles rose 2.1 percent to 268.4 (provisional) from 262.9 (provisional) the week before, the index for manufactured products rose 0.1 percent to 206.4 (provisional) from 206.1 (provisional). However, the price index for fuel and power remained unchanged at its previous week's level of 338.2 (provisional).The final data for the week ended June 20 showed that the revised annual inflation rate actually stood at minus 1.30 percent.

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Stock Market TrendsWith the main economic indicators off the growth track the stock markets seems to appear unattractive for the FIIs. The exit from the markets have has an impact on the overall economy as the country’s forex reserves got affected. The Sensex shuttled between 10K and 8K, which is indicative of the continued weakness in markets.India's population continues to grow at about 1.8% per year and is estimated at one billion. While its GDP is low in dollar terms, India has the world's 13th-largest GNP. About 62% of the population depends directly on agriculture

As the economy grows and expands with increase population and urbanization the scope for renewable energy company like Suzlon Energy Limited increases.

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IMPACT OF BUDGET 2009 ON RENEWABLE ENERGY SECTOR

Concessions for Renewable Energy Sector

As an incentive for development of the Renewable Energy Sector, the Central Government has reduced the Basic Customs Duty (BCD) on import of Permanent Magnets, a critical component for wind operated electricity generators from 7.5% to 5%. The aforesaid partial exemption is subject to the following conditions:

• Permanent magnets are used for manufacture of PM synchronous generators above 500KW for use in wind operated electricity generators.

• Importer should furnish a recommendation certificate from Ministry of New and Renewable Energy for entitlement to the exemption and usage of the goods for the specified purpose.

• Importer should also furnish an undertaking for end use of the goods. On failure to use the imported goods for specified purpose, importer will be liable to pay differential duty.

Further, the Central Government has also reduced the BCD on bio-diesels (i.e. alkyl esters of long chain fatty acids obtained from vegetable oils) from 7.5% to 2.5%.

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INDUSTRY ANALYSISANALYSIS OF RENEWABLE ENERGY SECTOR

ABOUT INDUSTRY

India has a vast supply of renewable energy resources, and it has one of the largest programs in the world for deploying renewable energy products and systems. Indeed, it is the only country in the world to have an exclusive ministry for renewable energy development, the Ministry of Non-Conventional Energy Sources (MNES). Since its formation, the Ministry has launched one of the world’s largest and most ambitious programs on renewable energy. Based on various promotional efforts put in place by MNES, significant progress is being made in power generation from renewable energy sources. In October, MNES was renamed the Ministryof New and Renewable Energy.Specifically, 3,700 MW are currently powered by renewable energy sources (3.5 percent of total installed capacity).The key drivers for renewable energy are the following:

The demand-supply gap, especially as population increases A large untapped potential Concern for the environment The need to strengthen India’s energy security Pressure on high-emission industry sectors from their shareholders A viable solution for rural electrification

The breakdown of energy sources for power production of India in 2005. India is a large consumer of coal, which makes up more than 57% of its total consumption. However, more than 1/3 of energy consumed comes from renewable resources, predominantly from large hydropower.

Energy is a major input for overall socio-economic developement. Use of fossil fuels is expected to fuel the economic development process of a majority of the world population during the next two decades. However, at some time during the period 2020-2050, fossil fuels are likely to reach their maximum potential, and their price will become higher than other renewable energy options on account of increasingly constrained production and availability. Therefore, renewables are expected to play a key role in accelerating development and sustainable growth in the second half of the next century, accounting then to 50 to 60% of the total global energy supply.

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Following is a table of the actual plants and installations for producing power based on to renewable energies. We will show that only a small fraction of the potential capacity ofrenewable energies is currently being tapped. Capacity exists to shift towards morerenewable energy, since only a fraction of the available renewable energy potential has beentapped.

ACTUAL INSTALLED RENEWABLE - BASED PLANTS IN INDIA

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Global Wind Energy Industry Industry performance section covers the current & future prospects for global wind energy market. Top 10 markets in wind energy industry accounts for 87.29% of global wind energy installation. Rising energy demand & environment challenges remains the major driving forces for wind power. Regional spread section covers the regional and national markets for wind power. European market remains the leader in regional section at global level but now it is growing at a low rate as compared to rapid growth in Asian market due to developing countries.

Key Issues and Facts Analyzed The research report also addresses the issues and facts that are critical for your success, like:

Factors leading to success of wind energy. Opportunity areas for the players of this industry and challenges to sustain in the future

in global wind energy industry Potential future market in global wind energy Ongoing trends in potential wind energy markets

Key Findings

Wind energy market is growing at the fastest rate among the other renewable energies. Although wind energy is growing at the fastest rate among renewable energies, still it

is not self sufficient for future growth. It largely depends on the government policies. UK & US wind energy markets are the best examples of this.

China will be the biggest potential market for wind energy in future. Australia, India & China has the competitive advantage over other countries, as these

are hubs for manufacturing wind equipments. Australia, due to its quality products and China & India due to their cost advantages, are on a higher rank.

Trends in Germany (biggest wind market in world) are shifting from smaller wind turbines to larger ones.

Key Players This section provides an overview of key players in this industry, like Vestas Wind Systems, Enercon GmbH, Gamesa Corporacion, Suzlon, REpower Systems AG & Nordex.

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Wind Energy in India

India ranks first in the developing world for installed wind capacity. With nearly 850 megawatts of wind capacity, it ranks fourth in the world after Germany, the United States, and Denmark. Most of this development occurred in 1995 and 1996, when capacity expanded by an average of several hundred megawatts per year. Among the States, Tamil Nadu has the most capacity&approximately 75 percent of India’s total in 1996& while Gujarat and Andra Pradesh have most of the remainder.

India is surpassed only by Germany as one of the world's fastest growing markets for windenergy. By the mid 1990s, the subcontinent was installing more wind generating capacity thanNorth America, Denmark, Britain, and the Netherlands.The ten machines near Okha in the province of Gujarat were some of the first wind turbinesinstalled in India. These 15-meter Vestas wind turbines overlook the Arabian Sea. Now, in2006, there is an installed capacity of 4,430 MW; however, ten times that potential, or 46,092MW, exists.

With electricity demand pressing, the government favored wind projects because they had a short gestation period and no air emissions. Efforts were made to develop a domestic manufacturing industry partnered with overseas companies. Denmark, Germany, and the Netherlands were instrumental in providing assistance.

Nevertheless, it is reported that the projects have been dogged with poor performance due to the turbines being improperly sized for European-type high wind speed conditions, whereas India’s wind speeds are lower. In 1997, the slow economy, tight credit, and change in government resulted in total additions of less than 50 megawatts, despite the number of support mechanisms in place to support development, described below.35 Guaranteed Prices. Tamil Nadu and several other State electric boards have agreed to purchase wind power at about 6.4 cents per kilowatthour.

Tax Benefits. Five-year tax holidays on income from sales of electricity Accelerated depreciation of 100 percent on investment in capital equipment in the first year Excise duty and sales tax exemptions for wind turbines Import duties on a variety of components waived

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Moving towards a production tax incentive to encourage performance

Project Financing. India Renewable Energy Development Agency (IREDA) was formed in 1987 to provide assistance in obtaining loans from the World Bank, the Asian Development Bank, and the Danish International Development Agency (DANIDA). This included acting as a conduit for World Bank Loans totaling $78 million specifically for wind.

Planning and Resource Assessment. India has a large wind assessment program with over 600 stations in 25 States to provide information about the best sites for development.

Grants/Demonstration Projects. By the end of 1996, some 50 megawatts of demonstration capacity had become operational.38 This capacity was concentrated in the States of Tamil Nadu and Gujarat.

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GOVERNMENT REGULATIONS

India is one of the countries most involved in developing the use of renewable energiesand is trying to make the opportunity for investors more attractive than costly. IREDA is playing a significant role in promoting Renewable Energy Projects, in general and Wind Energy Projects in particular:

a) Financing Sources and IncentivesTo promote renewable energy technologies in the country, the government has put in placesome subsidies & fiscal incentives. The Indian Renewable Energy Development Agency hasbeen set up under Ministry for Non-Conventional Energy Sources and is a specialized financing agency to promote and finance renewable energy projects. Following is a short list of new measures:• Income tax breaks• Accelerated depreciation• Custom duty/duty free import concessions• Capital/Interest subsidy• Incentives for preparation of Detailed Project Reports (DPR) and feasibility reports

More details are as follows: 100 percent income tax exemption for any continuous block of power for 10 years in the first 15

years of operations. providers of finance to such projects are exempt from tax on any income by way of dividends,

interest or long-term capital gains from investment made in such projects on or after June 1, 1998 by way of shares or long-term finance

accelerated 100-percent depreciation on specified renewable energy-based devices or projects accelerated depreciation of 80 percent in the first year of operations interest rate subsidies to promote commercialization of new technology lower customs and excise duties for specified equipment exemption or reduced rates of central and state taxes.

FUTURE

Renewal energy is expected to create maximum impact in the production of electricity. Projections indicate that by the end of the first decade of the new century, it would be cost effective to generate and supply renewable electricity, aggregating to several thousand megawatts, as it's effeciencies and costs are decreasing, while the costs of conventional electricity are increasing. Besides grid supply augmentation, renewable electric technologies

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offer possiblities of distributed generation at or near points of use, which can reduce peaking loads and save on costly upgradation and maintenance of transmission and distribution networks growing demand. No other renewable energy based electricity producing technology has attained the same level of maturity as wind power. There are no major technical barriers to large scale penetration of wind power.

As per projections made by Ministry of Non-Conventional Energy Sources, 10% of the 2,40,000MW (i.e 24,000MW) installed capacity requirement by the year 2012 A.D. will come from renewables. It is envisaged that 50% of this capacity or 12,000MW may come from wind power. India has now gained sufficient technical and operational experience, and is now on the threshold of "taking off" in wind power. It offers a viable option in the energy supply mix, particularly in the context of the present constraints on conventional sources. It also offers an attractive investment option to the private sector, in the context of the recently announced policies and drive towards private sector generation.

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COMPANY ANALYSIS

SUZLON ENERGY LIMITED

ABOUT THE ENTERPRISE

Suzlon Energy Limited (Suzlon) is a wind power company. The company along with its subsidiaries engages in designing, developing and manufacturing of wind turbine generators and related components such as rotor blades, control panels, nacelle cover, tubular towers, generators and gearboxes. Further, the company also provides consultancy, design, manufacturing, installation, operation and maintenance services as well as is involved in wind resource mapping, identification of suitable sites and technical planning of wind power projects. The company principally operates in India, China, The Americas, Europe, New Zealand, South Korea, South Africa and Australia. Suzlon, a major force in Global Wind Industry (Ranked 5th Worldwide) by installed capacity. It provides end-to-end power solutions.

The company holds nearly 10.5% share in the global market. Now, the company has the total production capacity of over 3000 MW. The company currently has a combined manufacturing base of 2,700 MW of annual capacity, and is undertaking an aggressive expansion program to expand its base to 5,700 MW of capacity in FY2009.

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Aggressive growthThe company has emerged as a formidable force in Mergers & Acquisitions. In March 2006, it acquired Hansen Transmissions, the world's second largest turbine gearbox maker, for US$585m.In June 2007, Suzlon finally saw off French nuclear group Areva in a hardfoughtbattle for Repower, paying US$1.9bn for its German rival.

Milestones: The Company obtained the official non-exclusive, nontransferable license for the manufacturing, marketing, dealing and servicing of APX-60 type blades from the trustee of Aerpac B.V upon its liquidation, for consideration of Euro 200,000 vide an agreement that was entered into between the trustee of Aerpac B.V and the Company dated June 4, 2001. This license is valid for an indefinite period. The growth story so far as follows:

1998: Company installed first wind turbine in Maharashtra Satara district.2000: Commissioned 50MW wind turbine generator at Vankhusavade in Maharashtra.2001: Formation of subsidiaries Suzlon wind Energy Corp, USA and Suzlon Energy.2002: First export order, its First Wind Turbine in the USA.2003: Representative office in Beijing, China.2005: Korean Order for a 150 MW for the Jeju Wind Farm Project.2006: 200MW Wind Farm Project for Australia Gas & Light Company.2007: 400 MW deal with PPM Energy of Portland, USA Acquired German wind turbine company RE Power.2009: Market entry into Sri Lanka with an order to supply 10 MW of wind turbine capacity to a project developed by Senok Wind Power Pvt. Ltd.2009: Looking at the option to start business operations in the Canadian market in 2010.

Order Book:Suzlon’s order book position is a reflection of its strong market position and consistency in delivering to their customers. Its order book stands at around USD 4,335 million. The domestic order book position is for a capacity of 441 MW and international orders for 3,726 MW.

Products:_ Wind Turbines_ Components_ Rotor Blade_ Gearbox_ Control Panels_ Nacelle Cover

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_ Tubular Towers

Services:_ Wind Resource Mapping_ Identification of Suitable Sites_ Technical Planning of Wind Power Projects_ Services and Maintenance_ Project Development_ Wind Farms Development

Competitors:Gamesa(Spain)Vestas(Spain)Enercon(Germany)GE Wind(USA)Global Wind Energy ETF(USA)Nordex(Netherlands)GoldWind(China)Clipper Windpower(UK)Bhel(India)GE Wind Energy(US Subisidiary,India)Enercon (India) Ltd.Vestas Wind Technology India Pvt. Ltd.

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SWOT ANALYSIS

Strengths: Skill Amalgamation

Cost Reduction---It has blended the best resources across the globe. It has competitive R&D in Europe. The Manufacturing Units in India and China proves to be cost effective. Suzlon has continuously reduced capital cost per unit of power generation and also has maintained a consistent new product launch schedule. Reverse outsourcing----The Company has international head offices in Aarhus, Denmark where it has wide base of wind energy expertise and large network of components suppliers. The skilled workforce is available to the company. Globally renowned wind energy companies’ presence like Vetas and NEG Micon makes it a hub of talented workforce and technology.

End to End Solutions---Planning of Wind Farm Systems, Land Acquisition, Development and Technical Design., Infrastructure and Equipment, O&M services. Suzlon offers customers' endto- end wind energy solutions, including wind resource mapping, site development and installation, and finally operations & maintenance services in India. This allows Suzlon to offer Indian customers economies of scale, and eliminates the need for customer involvement in the complex process of wind farm development.

Vertical Integration and Amalgamation-- Suzlon is a vertically integrated wind turbine manufacturer – with manufacturing capability along the full value chain – ranging from components to complete wind turbine systems.

Market leadership in India and Global Presence- The industry's outlook to turn favorable by 2010 as easing credit and lower costs boost demand from the U.S., Europe, China and India.

Growth-Growing at 29% CAGR for past 10 years, higher than industry rate.

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Integrated Business Model-The Company plans to enter in to Solar and Bio-fuel Business. The company is conducting feasibility study for the further approach in this business. This will help the company to produce 10-20 MW additionally. It has become global/ world-wide sponsor for CNN International innovative capsule on environment preservation.

Innovation- Suzlon’s R&D effort includes a highly successful practice of leveraging skill and knowledge pools in the industry and allied areas the world over. This has resulted in a R&D network located across geographies.

Human Resource-Suzlon’s true strength is seen not only in its technology, quality and market share – but also its people. TheSuzlon Group boasts one of the largest teams in the wind energy business, totaling over 13,000 people from over a dozen nationalities in operations around the world. Suzlon in its vision for future growth aims to rank among the top three wind turbine manufacturers worldwide, maximizing growth while maintaining margins to generate maximum value for all stakeholders.

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The Electricity Act, 2003, specifies that a minimum percentage of power generation should come from non-conventional energy sources. For example, the Karnataka government has mandated 5% from non-conventional sources, and the Madhya Pradesh government 0.5% This reflects the government’s intention of reducing the dependence on fossil fuels and cut down carbondioxide emission. Moreover, perennial power shortages assure a sustained growth in demand for power generation.

Weaknesses:

Management Structure-The Company is fully dependent on promoter Tulsi Tanti. In fact the board of directors have only two Tanti brothers as executive directors. Three other board members are non-executive independent directors.

Capital Intensive-Wind power projects require high upfront capital investment per kWh of energy. So demand will be sensitive to interest rates.

Overseas Business-Suzlon Energy is expanding overseas, where major players have established markets. The advantage of new markets and new orders may take time, while marketing, personnel and other initial costs could jump. Hence, this may put pressure on the margin in the short run. Risks involved in overseas business are also higher, Company is facing liquidity crunch to pay its debt recently promoters had sold their holding in the company. So expansion plan may further increase the burden on the company balance sheet.

Operational Risk

Cash Conversion-Company revenue mostly comes from the International clients that involves exchange rate risk.

Growth in Assets overweighting Growth in Profits- Root cause analysis shows cost overrun due to retrofitting in winter which is an operationally challenging season results in low productivity and inefficiencies. As it is a rate sensitive sector reduction in commodity prices, logistics costs, inventory, and overall project costs affects the business as a whole.

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Basic Infrastructure: Disruptions in telecommunications and basic infrastructure could harm our ability to provide O&M services, which could result in client dissatisfaction and a reduction of our revenues.

Local Units- The construction and operation of wind power projects has faced opposition from local communities and other Parties.

Financial Performance:

Profitability- The Company faces foreign exchange loss of nearly Rs 435 crore because of that 500 million zero coupon convertible foreign Currency Convertible Bond(FCCB) which is still pending are due in 2012. The blade retrofits and consequentially availability charges of nearly Rs 307 crore is another concern area and the third is the mark-to-market (MTM) loss of nearly Rs 215 crore which is on account of foreign exchanges forwards options contract which the company has taken to hedge.These are the three important areas – the foreign exchange loss, blade retrofits and MTM loss which can affect the company’s profitability in coming time.

Leverage-The total debt on the company’s book stands nearly Rs 14,860 crore .The Redemption of 500 million Zero Coupon Convertible which are due in 2012 is nearly Rs 273 cr.

Ratings—CRISIL has downgraded the rating of the Company to BBB/P3 from A-/P+2.It reflects the significant delays in Private equity infusion into Suzlon resulting in a sharp deterioration in its gearing, in contrast to the expected improvement.

Net Income- The allocation of Equity Shares pursuant to Employee Stock Option Plan will result in a change to income statement and will adversely impact company net income.

Opportunities: Environmental and Government initiatives- The projections of Ministry of Non-Conventional

Energy Sources says10% of the 2, 40,000MW (i.e. 24,000MW) installed capacity requirement by the year 2012 A.D. will come from renewable. It is envisaged that 50% of this capacity or 12,000MW may come from wind power. India has now gained sufficient technical and operational experience, and is now on the threshold of "taking off" in wind power.

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Favourable tax exemptions-The Wind Energy industry enjoys special tax benefits from government and subsidies from regulatory bodies. Better tariffs, policy support and optimistic outlook are driving investment in this sector.

Untapped offshore Market-According to the estimate the demand for power is still high in India even during the recent global slowdown. The gap between supply and demand is increasing .According to the CEA estimates by 2012 the energy demand is expected to increase by 44%.

Steady source of demand- In US by 2030, 20 % of the electricity would be generated by wind energy as compared to today's 1%. In Europe, wind is expected to account for 34% of new generating capacity. It'll account for 46% from 2020-2030.

Mexico is investing more than half a billion US dollars and plans to build a wind farm of 250 MW within ten years. Kenya plans to erect a wind farm that will provide up to 30 percent of its electricity needs.

Green Power: The existing power sector emits around 40% of global carbon dioxide emissions and there are only three options to substantially reduce these emissions between now and 2020: energy efficiency, fuel switching, and renewable, predominantly wind power. Wind power could produce 12% of the world’s energy needs and save 10 billion tones of CO2 within 12 years. Thus addressing the environmental concerns all over the world.

Threats:

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Intense competition- The Indian wind industry was placed third in terms of total installed capacity of wind electricity in the world some years back. It suffered a great setback when this rank shifted down to fifth after the United States, Germany, Denmark, and Spain in later years. The fastest growing wind markets are Turkey, Mexico, Brazil, China, and Poland.

Over dependence on US- USA accounts for 50% sales for Suzlon. Recent economic slowdown results affects the States wind energy sector which results in liquidity crunch and investment setback in India.

Foreign Exchange Risk-Fluctuation in the value of the Rupee against other currencies could adversely affect the cost of our borrowings and repayment of indebtedness, the costs of our raw materials and revenues from exports.

Technology Risk- The failure to keep technical knowledge confidential could erode company competitive advantage.

Decreasing Price of crude- There is a direct correlation between Crude prices and Wind energy demand. If the crude suffers from low prices which indicate the overall fall in demand in infrastructure and energy demand then it would affect the growth of the Sector.

Interest rate increase-Company agreements with wholly owned overseas subsidiaries are subject to transfer pricing regulations. These agreements may be subject to regulatory challenges, which may subject to higher taxes and adversely affects the earnings.

Further Cancellation of orders- The construction and operation of wind power projects is subject to regulation, including environmental controls and other regulations , global slowdown may hamper the demand for the energy in the host countries which are most affected by the recession further blade quality issue in China and Australia is a concern for the company

RATIO ANALYSIS OF SUZLON

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Profitability ratios Dec ' 09 Dec ' 08 Dec ' 07 Dec ' 06 Dec ' 05

Operating margin (%) 11.92 23.09 23.14 24.75 24.20Gross profit margin (%) 10.55 21.85 21.78 23.54 22.17Net profit margin (%) -6.34 20.09 19.41 21.28 18.62Adjusted cash margin (%) 8.66 20.99 21.18 22.51 21.26Adjusted return on net worth (%) 8.35 20.06 29.17 29.25 45.67Reported return on net worth (%) -7.23 20.39 28.53 29.19 44.19Return on long term funds (%) 9.15 18.09 32.63 31.89 43.24

Operating Margin

A ratio used to measure a company's pricing strategy and operating efficiency. It gives an idea how much company makes before interest and taxes. The higher the margin, the better. The operating ratio has been stable over the years except last year, keeping an average of 23.5%.

The company has made 29% profit in relation profit. While the net profit margin is approx -6.34% of sales. The company is not in a good position to pay fixed costs and profits generated from revenues.

Leverage ratios Dec ' 09 Dec ' 08 Dec ' 07 Dec ' 06 Dec ' 05

Long term debt / Equity 0.52 0.29 0.03 0.07 0.27Total debt/equity 1.13 0.44 0.30 0.12 0.53Owners fund as % of total source 46.94 69.25 76.56 88.90 65.05

Fixed assets turnover ratio 8.91 9.65 10.36 10.53 9.44

The company’s leverage ratio has drastically increased in the previous year. This shows the high interest or fixed cost burden on the earnings of the company.

Liquidity ratios Dec ' 09 Dec ' 08 Dec ' 07 Dec ' 06 Dec ' 05

Current ratio 2.62 2.73 3.37 2.98 2.32Current ratio (inc. st loans) 0.81 1.46 1.49 2.47 1.43Quick ratio 2.19 2.12 2.40 2.05 1.59Inventory turnover ratio 5.45 4.71 3.96 3.56 3.96

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The company’s liquidity position is sound depicting the efficient management of the liquidity position of the company. Also the inventory turnover ratio has increased constantly over the years which is a good sign.

Component ratios Dec ' 09 Dec ' 08 Dec ' 07 Dec ' 06 Dec ' 05

Material cost component (% earnings) 64.13 63.79 61.96 63.51 62.36Selling cost Component 6.99 5.53 6.08 4.43 9.25

Exports as percent of total sales 56.69 40.87 33.03 5.61 0.14

Import comp. in raw mat. consumed 65.58 57.42 58.81 54.80 50.16

Long term assets / total Assets 0.44 0.43 0.19 0.14 0.14

Bonus component in equity capital (%) 84.04 84.12 87.52 87.59 89.74

The above ratios indicate that the major part of the revenues of the company come from exports implying that the market of the company is not restricted to only domestic market but global market. Thus the company gets affected by the global trends and incidents.

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VALUATION OF THE STOCK

Quantitative Assessment

To my knowledge the 2 stage dividend discount model and FCFE MODEL will be applicable to the wind energy gaint, Suzlon Energy Limited.

FCFE VALUATION

Cost of Equity = 15.45%

Proportion of Debt: Capital Spending (DR)= 0.44%Proportion of Debt: Working Capital (DR)= 0.44%

Current Earnings per share= 8.74

(Capital Spending - Depreciation)*(1-DR) 0.76

Change in Working Capital * (1-DR) 22.69

Current FCFE (14.71)

Growth Rate in Earnings per shareGrowth Rate Weight

Historical Growth = -25.00% 10.00%

Outside Estimates = 14.05% 40.00%

Fundamental Growth = 17.91% 50.00%

Weighted Average 12.08%

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Growth Rate in capital spending, depreciation and working capital

High Growth

Stable Growth

Growth rate in capital spending = 20.00%

Do not enter

Growth rate in depreciation = 20.00%

Do not enter

Growth rate in revenues = 18.00% 6.00%

Working Capital as percent of revenues = 163.75%

(in percent)

The FCFE for the high growth phase are shown below (upto 6 years)

1 2 3 4 5

Earnings $9.80 $10.98 $12.30 $13.79 $15.45 - (CapEx-Depreciation)*(1-DR) $0.91 $1.09 $1.31 $1.57 $1.88 -Chg. Working Capital*(1-DR) $3.52 $4.16 $4.90 $5.79 $6.83

Free Cashflow to Equity $5.37 $5.73 $6.09 $6.43 $6.74

Present Value $4.65 $4.30 $3.96 $3.62 $3.29

Growth Rate in Stable Phase = 8.00%

FCFE in Stable Phase = 13.18 Cost of Equity in Stable Phase = 15.45%

Price at the end of growth phase = 176.88

Present Value of FCFE in high growth phase = 19.82

Present Value of Terminal Price = 86.24

Value of the stock = 106.06

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Estimating the value of growth

Value of assets in place = (95.19)

Value of stable growth = (118.01)Value of extraordinary growth = 319.26


Using the FCFE model , the correct fundamental valuation suggest that the price should be Rs. 106.06 and the current market price is Rs. 102.6. So short term gains can be made by the investors who are looking for short term benefit.

Moreover, the company has good future prospects as it has started reviving its order in in Q2 2009. The dearth of non renewable resources makes this sector a high growth though it is going through tough stage due to lack of investment and capital in the market.

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TWO STAGE DIVIDEND DISCOUNT MODEL

For the two stage growth model;

P=nt=1[D0(1+g1)t/(1+ke)t]+ t=n+1[Dn(1+g2)t-n/(1+ke)t]

where: P = intrinsic value D0= expected initial period dividend Dn= expected dividend during mature period ke = appropriate discount factor for the investment g1 = expected dividend growth rate for initial growth period g2 = expected dividend growth rate for mature period

The two stage model allows for greater flexibility in the testing of scenarios for the investor looking at a firm in its infancy or in a new industry.

Cost of Equity = 15.45%

Current Earnings per share= 8.74

Growth Rate in Earnings per share

Growth Rate Weight

Historical Growth = -25.00% 40.00%

Outside Estimates = 14.05% 40.00%

Fundamental Growth = 33.30% 20.00%

Weighted Average 2.28%

Payout Ratio for high growth phase= 12.36%

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The dividends for the high growth phase are shown below (upto 10 years)

1 2 3 4 5

Dividends 1.10 1.13 1.16 1.18 1.21

Growth Rate in Stable Phase = 8.00%

Payout Ratio in Stable Phase = 145.00%

Cost of Equity in Stable Phase = 15.45%

Price at the end of growth phase = 205.66

Present Value of dividends in high growth phase = 3.81

Present Value of Terminal Price = 100.27


Estimating the value of growth

Value of assets in place = 7.57

Value of stable growth = 9.39

Value of extraordinary growth = 87.12


Growth Rate ExtraordinaryGrowth period Value

: First phase Growth 0 166.75 -7.72% 46.13 1 146.84 -6.72% 49.53 2 129.19 -5.72% 53.09 3 113.56 -4.72% 56.80 4 99.71 -3.72% 60.66 5 87.44 -2.72% 64.69 6 76.57 -1.72% 68.88 7 66.94 -0.72% 73.25 8 58.40 0.28% 77.79 9 50.85 1.28% 82.52 10 44.15 2.28% 87.44

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3.28% 92.55 4.28% 97.86 5.28% 103.38 6.28% 109.11 7.28% 115.06 8.28% 121.23

According to this model also the target price is coming out to be Rs. 104 (approx.), which means that the current price is the correct valuation of the stock as per the fundamental analysis.

TECHNICAL ANALYSIS

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ANALYSISThe chart shows that the stock price was highest in oct-08 and then fell in subsequent years and then was highest in jun-09 and currently id floating around Rs100.

CANDLESTICK CHARTS

ANALYSIS

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The stochohastic chart also show that the price is floating around Rs 100 and the candle stick chart show that the quantity traded for the stock the subsequent years.

FLAG CHARTS

The chart show the last open and closing price of suzlon stock over previous months and also that the reference line where it cuts the bars is the optimum price to buy the stock.

INVESTMENT RATIONALE: Qualitative Assessment

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Full integration of RE Power acquisition will affect the EPS of the company positively. It will give it immediate access to mature European market. European market is largest WTG market in terms of volumes. RE Power is considered strong technology company. RE Power margins are lowest in industry as it is only working as assembler. With its acquisition a vertically integrated Suzlon can improve upon its margin.

As world is looking alternative source of energy to sustain the growth, harvesting energy through wind is the best alternative. Suzlon is better positioned to capture the opportunity. People are very much now concerned about the environment. The demand for pollution free source of energy is gaining ground. Harvesting energy through wind is good alternative as most of the regions have good wind, specially the coastal region. Energy produced from wind mills are low cost as compared to the energy produced through any other sources.

The wind energy demand is directly correlated with the crude oil prices. As global economy is expected to revive by the FY2010 .We expect the demand for crude oil will be back as and prices will be once again shoot up from the current levels. The demand for crude will be there for the revival of economies especially in Emerging markets like India and China. This scenario would urge the demand for other alternative energy resources on demand-Supply concerns.

The industry's outlook is expected to turn favorable by 2010 as easing credit and lower costs boost demand from the U.S., Europe, China and India. The slowdown in the renewable energy sector is likely to be temporary. US is expected to approve $150b to support the US renewable energy sector with large government incentives. The US policy will likely boost the global renewable energy market as well.

Conclusion

The fundamental analysis framework has been utilized to arrive at the correct valuation of the Suzlon stock so that a recommendation to investors can be made.

If we go in completely for the fundamental prices that would not provide investors with the correct decision because the market prices not only reflects the company’s fundamentals but also the market sentiments, economic growth, growth of sector are reflected through it.

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In the long run the market prices are expected to reach around Rs. 200/-, that will be the peak price. This price is actually the value of the stock at the end of the growth stage. The company will continue to have high growth for 5 more years.

In short run speculative gains can be made in this stock as it is showing an upward trend from the last quarter. If the company is able to achieve supernormal growth for more than 5 years then its prices will increase.

According to me Two stage Dividend Discount Model was applicable because the company is in high growth phase right now and will continue to remain in it for further 5 years and it will then grow at a sustainable rate i.e. the forecasted GDP rate of the country i.e. 8%.

So, for both short term and long term investors the recommendation is “ BUY ”

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Documents

Equity Research Report