SUZLON ENERGY( Stand-Alone)

EQUITY RESEARCH REPORT

COMPANY BACKGROUND:
Suzlon Energy is a wind power company based in India, headquartered at Pune having several manufacturing sites in India. It was founded by Tulsi Tanti in 1995. It is a multinational company with offices, R&D and technology centers, manufacturing facilities and service support centers spread across the globe. In terms of market share, the company is the largest wind turbine manufacturer in Asia and the 5th largest worldwide. In terms of net worth, it is the world's most valuable wind power company. Suzlon delivers end-to-end wind power solutions from assembly, installation to commissioning. The company manufactures blades, generators, panels, towers in-house, gearboxes and state-of-the-art large or offshore turbines.

INDIAN POWER SECTOR INDUSTRY OVERVIEW

Indias Energy Overview: y y y y India is the 5th largest energy consumer India has vast potential in the Exploration Sector. 54% Coal, 32% Oil, 9% Natural Gas Indian Primary Energy Sector growing at 5%

Indias robust economic growth (7.2% CAGR of GDP in 2000-10), significant inflow of foreign capital and continued development of the industrial sector have fuelled power demand during the last decade (5% CAGR in FY00-10 to 118 GW). However, power shortages continue to plague the country with peak load deficit of 13.3% in FY10, due to the historic under achievement of power capacity addition targets in successive five year plans (50% underachievement in the last three Five Year Plans). With power demand expected to grow at a robust pace (16% CAGR in FY10-17E and 13% in FY10-22E) according to the Central Electricity Authority (CEA), significant investment is required to develop the power infrastructure in India. Overall global consumption is expected to rise 50 % from 2005 to 2030. World energy consumption is projected to expand by 50% from 2005 to 2030 in the IEO2008 reference case projection.

Consequently, the government has set aggressive power capacity expansion targets for the XIth Plan (FY07-12) and XIIth Plan (FY12-17), with total capacity addition of 179 GW planned (vs. 132 GW added till the end of the Xth Plan). Majority of capacity additions will be based on thermal power (77% in XIth and XIIth Plans). ROAD AHEAD India possesses a vast opportunity to grow in the field of power generation, transmission, and distribution. The target of over 150,000 MW of Hydel power generation is yet to be achieved. By the year 2012, India requires an additional 100,000 MW of generation capacity. A huge capital investment is required to meet this target. This has welcomed numerous power generation, transmission, and distribution companies across the globe to establish their operations in the country under the famous PPP (public private partnership) programmes. The power sector is still experiencing a large demand-supply gap. This has called for an effective consideration of some of strategic initiatives. There are strong opportunities in transmission network ventures - additional 60,000 circuit kilometers of transmission network is expected by 2012 with a total investment opportunity of about US$ 200 billion.

FUNDAMENTAL ANALYSIS: STATEMENT SHOWING PROFIT & LOSS:

Particular Sales( Gross) Other Income Total Income Expenditure Cost of Materials Manufacturing and Other Expenses EBITDA Depreciation and Amortization Interest Profit before tax and prior period items Current MAT Credit Generation Deferred tax
4,226.99
4,543.85 2,263.00

2007-08
6,926.01 125.61

2008-09
7,235.58 177.14

2009-10
3,488.68 243.14

2010-11(E) 3,837.55 255.30 4,092.85 2,376.15 1,965.60 (248.91) 132.58 768.50 (1,149.98) -

(INR CRORES) 2011-12(E) 2012-13(E) 4,221.30 268.06 4,489.36 2,494.96 2,063.88 (69.47) 139.21 806.92 (1,015.61) 193.38 4,432.37 281.46 4,713.83 2,619.71 2,167.07 (72.95) 146.17 847.27 (1,066.39) 203.05

7,051.62

7,412.72

3,731.82

1,327.00 1,497.63
86.21 139.61

2,876.00 (7.13)
99.16 433.97

1,872.00 (403.18)
126.27 731.90

1,271.81 155.00 (89.00)

(23.49)

(540.26) (1,261.35)

(81.76)

175.40

184.17

Fringe Benefit Tax Tax Adjustment in Previous Years Profit After tax (PAT)

11.44

11.07

(1,208.98)

(1,269.43)

0.13 1,217.73 (469.57) (1,436.75)

(1,334.15)

STATEMENT SHOWING BALANCE SHEET:

(INR CRORES) 2007-08 Sources of Funds Shareholder Funds Share Capital Reserves and Surplus Minority Interest Net worth Loan Funds Deferred Tax Liability TOTAL Application of Funds Fixed Assets Gross Block Less : Depreciation Net Block Capital Work in Progress Capital Work in Progress(%of NB) Deferred Tax Assets(Net) 2008-09 2009-10 2010-11(E) 2011-12(E) 2012-13(E)

299.39 6638.05

299.66 6177.41

311.35 5277.24

326.92 5541.10 16.51 5884.53 7981.28 13865.81

343.26 5818.16 17.33 6178.75 8380.35 14559.10

360.43 6109.06 18.20 6487.69 8799.36 15287.05

10.22 6947.66 3084.74 10032.40

8.25 6485.32 7329.48 13814.80

15.72 5604.31 7601.22 13205.53

779.2 266.98

915.83 364.33

1355.74 438.58

512.22
134.64

551.5
286.97

917.16
10.38

93.64

399.26 175.4

133.39

1423.53 460.51 963.02 10.90 140.06

1494.70 483.53 1011.17 11.44 147.06

1569.44 507.71 1061.73 12.02 154.42

Total Fixed Assets Investment Current Assets, Loans and Advances Sundry Debtors Cash and Bank Balances Stock in Hand Loans and Advances Other Current Assets Total Current Assets Less: Current Liabilities and Provisions NET CURRENT ASSETS Misccelaneous Expenditure TOTAL

740.5
4919.48
3306.59 875.5 1483.23 1289.15

1413.13
7127.8
4745.14 212.4 1383.62 2698.75

1060.93
7592.6
2986.81 599.22 797.8 4054.4

1113.98 7972.23 3136.15 629.18 837.69 4257.12 8860.14 4080.54 4779.60 13865.81

1169.68 8370.84 3292.96 660.64 879.57 4469.98 9303.15 4284.57 5018.58 14559.10

1228.16 8789.38 3457.61 693.67 923.55 4693.47 9768.31 4498.80 5269.51 15287.05

6954.47 2582.05 4372.42 10032.4

9039.91 3766.04 5273.87 13814.8

8438.23 3886.23 4552 13205.53

FINANCIAL RATIOS:
Profitability Ratios Return on Equity
Return on Capital Employed

2007-08 18%
15%

2008-09 -7.2%
-0.8%

2009-10 -25.6%
-4.2%

2010-11 (E) -22.7%

-2.9%

2011-12 (E) -19.6%

-1.5%

2012-13(E) -19.6%
-1.5%

Gross Profit Margin Net Profit Margin Return on Investment EBITDA Margin DU Pont Analysis- ROE Decomposition

21% 17% 12% 0%

0% -6% -3% 0%

-11% -38% -11% 0%

-6% -33% -10% 0%

-2% -27% -8% 0%

-2% -27% -8% 0%

PAT/PBT (Tax Efficiency) PBT/EBIT (Interest Burden) EBIT/Sales (Operating Profit Margin) Sales/Total Assets (Asset Turnover Ratios) Total Assets/NW(Financial Leverage)

0.96 0.90 0.20 0.56 1.82

0.87 5.08 (0.01) 0.42 2.71

1.14 2.38 (0.14) 0.22 3.05

1.16 3.01 (0.09) 0.23 3.05

1.19 4.87 (0.05) 0.24 3.05

1.19 4.87 (0.05) 0.24 3.05

Additional Information Book Value

2007-08 46.41

2008-09
43.23

2009-10 35.90

2010-11 36.70

2011-12 37.80

2012-13 37.50

VALUATION RATIOS:

Price as on 31st March Market Capitalisation Debt Cash and Cash Equivalents EBITDA Sales Market Capitalisation/Sales Enterprise Value Valuation Ratios EV/EBITDA EV/Sales P/BV P/CEPS

2007-08 269 15,644 3,085 876 1,498 7,052 2.22 17,853 2007-08 11.92 2.53 5.80 0.31

2008-09 43.27 9,709 7,329 212 (7) 7,413 1.31 16,826 2008-09 -2359.90 2.27 1.00 0.20

2009-10 73.37 11,193 7,601 599 (403) 3,732 3.00 18,195 2009-10 -45.13 4.88 2.04 0.12

2010-11(E) 73.37 12,312 7,981 629 (249) 4,093 3.01 19,664 2010-11 (E) -79.00 4.80 2.00 0.12

2011-12 (E) 73.37 13,544 8,380 661 (69) 4,489 3.02 21,263 2011-12 (E) -306.07 4.74 1.94 0.11

2012-13 (E) 73.37 14,898 8,799 694 (73) 4,714 3.16 23,004 2011-12 (E) -315.35 4.88 1.96 0.11

SUZLON ENERGY RELATIVE VALUATION USING P/S Multiple:

Relative Valuation Tata Power NTPC Torrent Power Neyveli Lignite Suzlon

MARKET CAP(INR Crore) Sep-10 29,791 1,59,797 15,792 27,682 8,657

SALES(INR Crore) 2009-10 (TTM) 7,150 46,624 5,823 4,131 3,488

P/S 2009-10 4.17 3.43 2.71 6.70 2.48

Average P/S of Other Players Price by Relative Valuation Price in Market(September '10) Opinion Recommendation

4.25 Rs. 148.00 Rs. 50.05 Underpriced Buy

TECHNICAL ANALYSIS:
Intermediary Trend:
This trend lasts for 6-9 months. Data is analyzed from August 2009 to July 2010. Chart view in hourly basis for clarity.

Trend Line Analysis:

Looking at the trend line we can say that price broke the trend line during june 2010. And there is 7% rise in price curve. If we draw downward trend line it would look like

Downward Trend Line:

Observing the above chart we can say the downward trend line is also crossed by prices but not in sufficient magnitude. General Thumb rule is investor has to wait for 3%-5% after trend line is crossed by chart. So we can say though stock is not positively aggressive investor can wait for some more time before going for square off.

Volume Concept:
Below graph is divided into 6 phases: Phase 1 Rising prices ------ Falling volumes ----Result : Fall in prices Phase 2 Fall of prices ------- Fall of volumes --- Result : Fall in prices in bigger magnitude. Phase 3 -- Rise of prices ---- Rise of volumes ---- Result : Rise in prices in bigger magnitude. Phase 4 --- Rise of prices --- Fall of volumes ----- Result : Fall in prices . Phase 5 --- Fall of prices ---- Low volumes ---- Result : steady fall in prices. Phase 6 ---- Rise of Prices ----Low volumes ----Result : (Recommended ) Fall or no big change in prices.

Looking at different phases and previous analysis we can say prices are dependent on volumes. Present prices are steady but volumes are low. So investors must be cautious taking new position.

Price Patterns:

Here in above chart we try to show two types of price patterns Head and Shoulders and Rectangular price pattern. If we look at look at the rectangular price pattern in November 2009, its a upward head and shoulder pattern. Which means prices must fall after such upward HS pattern. But we see rise in prices. This is mainly because of volumes. Inverse of this can be observed in April 2010. We had again an upward price pattern but the result was fall( this goes with normal HS rule).

Considering present situation we see rectangular price pattern in the month of July. Rectangular price pattern always results in sharp rise or fall of price depending on volumes. Investors must be cautious.

Moving Averages:
This concept is completely based on prices. Moving averages does not consider volumes into account. As we can observe we had 3 incidents earlier, 50 day EMA crossing, 100 day EMA either in upward or downward direction. These indications are very clear in the below chart. But in the current scenario we cannot make any clear indication of 50 day EMA crossing and 100 day EMA with greater magnitude. So it would be better for investors to stay cautious according to EMAs.

RSI Indicator:
RSI stands for relative strength indicator. Principle of relative strength is to divide one series by other. In RSI front weights price velocity ratio for a specific security is relative to itself. It is therefore relative to its past performance. In RSI we need not take any judgment on fixing price limits. RSI has fixed limits from 30 as Lower limit and 70 as upper limit. It means if RSI is at 30, the security is over sold and if it is 70, the security is over bought.

RSI for Suzlon:

If we try to analyze the below graph we can see that whenever the RSI touched 70, market prices were falling. And most of the times, when RSI was touching 30, prices were rising, because of the over-sale condition. If we consider the current situation RSI is near 30, at oversold condition, we can expect prices to rise.

FINAL RECOMMENDATION:
Suzlon Energy is a highly risky stock. The companys financials has taken a hit due to the recent recession. But the stock of the company is highly liquid which is evident the high trading volumes. High demand for power generation is estimated in the future and suzlon will havc a strong role to play in meeting the demand. The future outlook of the company is looking strong and the prices of its stock are expected to rise which is evident from the technical analysis. The Fundamental Analysis revealed that the stock currently is under-priced. It is recommended to BUY and HOLD the stock.

Assumptions for the Analysis:

 The cost is considered to be a constant percentage of Total Operating income over the years.  Working capital will rise with increasing trading volumes, maintaining the same working capital turn-over ratio, or same Current ratio.  Current Assets will be required as per the operating income of the company.  Other Income is considered to be constant for further years as a proportion of total income.  Data on per unit sales was not available, Hence it was assumed to be per 100 units.  Sales Growth was expected to be constant at 10%, 5% more than the expected industry growth rate of 5%. This is due to the expectation of high demand for power generation in the future and the strong role of suzlon in meeting the power generation demand.  Expenses were expected to grow at 5% in line with the estimated industry growth rate of 5%