SUZLON

Post REpower Acquisition, debt overhang reduces

100% buy-out in REpower: Suzlon has acquired ~4.7% in REpower, thereby increasing its stake to 95.2%. It has initiated the process to squeeze-out minorities (i.e. acquire bal. stake) and regulatory approvals may take 6-8 months. The required ~ Rs 8 - 8.2 bn would be financed by promoters debt (Rs 1.5 bn) & FCCBs of USD 175 mn.

Synergies – short & long term: Post acquisition of 100% stake, Suzlon would have access to REpower’s balance sheet (Dec’10 cash of ~Rs 18 bn), which will aid Suzlon to meet its financial commitments. On operational front, REpower’s gross margins are ~10% lower than Suzlon, which we believe can be improved through increased sourcing from low-cost sources in Asia.

Levers available for FY13 Debt repayment: Current FCCBs and promoter loans adds ~8% to the existing debt of Rs 121 bn. Principal repayment for FY13 includes term/acq. loan of ~ Rs 7 bn & FCCBs of ~Rs 17 bn (Rs 25 bn incl. YTM; conversion price is ~Rs 94). To finance this, Suzlon will have to rely on divestures of subs (26% in Hansen - Rs 7 bn at CMP) and operating cash flows (esp collection of Rs 10 bn receivables in USA) OR potentially use REpower’s balance sheet.

Suzlon Wind biz: For FY12, management expects volumes of 2.3-2.8 GW, (incl 1.6-1.8 GW from India). For FY13, while India could be ~ 2 GW, overall visibility depends on order wins in Brazil, China, S Africa etc.

Maintain HOLD with Target Price  of Rs 60