FINANCIAL ANALYSIS SUZLON ENERGY

December 03, 2010

Financial Analysis Suzlon Energy

Corporate Finance Project

SANDEEP SINGH (12/2010) HIMANSHU KAMAT (22/2010) PALLAVI SINGHAL (30/2010) SAHIL GUPTA (88/2010) AKANKSHA BHATNAGAR (102/2010) KUNTAL PANJA (106/2010)

Submitted to: Dr. Ashish Garg Lal Bahadur Shastri Institute of Management, Dwarka, New Delhi

Acknowledgements
In addition to our teams constant endeavor to delve deep into the project, we would like to thank people without whose assistance/ feedback the compilation would not have been possible. We would like to thank Dr. Ashish Garg, Faculty, L.B.S.I.M, for his guidance and supervision and constant knowledged opinions which guided us to successfully prepare this report.

Contents
Acknowledgement 1. The Company 2. Financials 2.1 Balance Sheet 2.2 Profit & Loss account 3. Analysis 3.1 Working Capital 3.2 Risk & Return 3.3 Cost of Capital 3.4 Leverage 3.5 Capital Structure 3.6 Ratio Analysis 4. Competitors Analysis 4.1 Risk & Return 4.2 Ratio Analysis 4.3 Stock Analysis List of References Bibliography

1.
THE COMPANY
Conceived in 1995 with just 20 people, Suzlon Energy is now a leading wind power company with: Over 16,000 people in 25 countries Operations across the Americas, Asia, Australia and Europe Fully integrated supply chain with manufacturing facilities in three continents Sophisticated R&D capabilities in Belgium, Denmark, Germany, India and The Netherlands Market leader in Asia, Suzlon Market Share (Combined with REpower) rose to 9.8% thereby making Suzlon 3rd * largest wind turbine manufacturing company in the world. The vision of company is: To be a technology leader in the wind industry To be among the top three wind energy companies in the world To be the most respected brand To be the best team and place to work at To be the fastest growing and most profitable business Suzlon as a group aims to provide a strong renewable energy platform thereby promising to power a greener tomorrow, today. Together with its subsidiary REpower, Suzlon has grown to be the 3rd largest wind turbine supplier in the world ensuring it builds a strong and futuristic path for the wind energy sector. From initiating a wind power project, till completion and even beyond, Suzlon ensures that nothing stands in the way of it serving its purpose. RECENT EVENTS The companys woes began when there were a few complaints from its American clients because Suzlons turbine blades started cracking while facing volatile winds. In fact, Suzlon was forced to retrofit 1,251 blades. Subsequently, a number of prospective wind turbine buyers cancelled their contracts with the energy major and a few orders that were in the pipeline were also cancelled. Moreover, the companys debt burden has been steadily rising. With an eye on global expansion, the company snapped up three large organisationsREpower, Hansen and SE Forge. With these acquisitions, Suzlons combined capacity increased to 5,450MW, which is one-sixth of the annual global installation of wind power projects. Low quality of blades in its turbinesleading to possible cracking in high-wind areas will force the company to develop high-performance carbon-composite blades and spares, which will lead to a further increase in costs.

Suzlon will have to overcome its technological and financial constraints to return to profitability. Suzlon is exposed to high debt, taken to fund its inorganic growth. With economic slowdown and credit squeeze across the globe funding of Wind Projects has become difficult, leading to slow order inflow from affected markets like Europe and the United States leading to further liquidity pressure. With demand from its key markets the US and Europe (which account for 32 per cent of revenue) expected to remain poor, the flow of new orders is unlikely to be strong. Other income decreased by Rs. 220 crore (48.9%), from Rs. 449 crore in FY 200809 to Rs.229 crore in FY 2009-10. This decrease was primarily because decrease in interest income received from banks due to reduced level of fixed deposits. Further in FY 2008-09, the other income included profit of Rs. 93 crore arising from sale of 10% stake in Hansen.

COMPANYS STOCK

2.
THE FINANCIALS
2.1 Balance Sheet

2.2

Profit & Loss Account

3.
ANALYSIS
3.1 Working Capital
Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. Working Capital = Current Assets Net Working Capital = Current Assets Current Liabilities A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.

CURRENT ASSETS Inventories Sundry Debtors Cash & Bank balances Loans & Advances Total Current Assets

2009-2010 797.8 2986.81 599.22 4054.4 8438.23

2008-2009 1383.62 4745.14 212.4 2698.75 9039.91

CURRENT LIABILITIES

2009-2010

2008-2009

Current Liabilities Provisions Total Current Liabilities Net Working Capital(CA-CL) Current Ratio (CA/CL)**

3641.87 244.36 3886.23 4552 1.853741213

3396.77 369.27 3766.04 5273.87 1.714094204

3.2

Risk & Return

The risk-return spectrum is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. The more return sought, the more risk that must be undertaken. There are various classes of possible investments, each with their own positions on the overall risk-return spectrum. The general progression is: short-term debt; long-term debt; property; high-yield debt; equity. There is considerable overlap of the ranges for each investment class. All this can be visualised by plotting expected return on the vertical axis against risk (represented by standard deviation upon that expected return) on the horizontal axis. This line starts at the risk-free rate and rises as risk rises. The line will tend to be straight, and will be straight at equilibrium. For any particular investment type, the line drawn from the risk-free rate on the vertical axis to the risk-return point for that investment has a slope called the Sharpe ratio. 2008-2010 Average Daily Return Average Annual Return RISK BETA (Cov(Ri,Rm)/2m) STOCK -0.2809 -67.9856 5.4709 = 0.14819576 MARKET 0.0504 12.1913 2.3898

3.3

Cost of Capital

The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds (both debt and equity), or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities". It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.

The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company can be modeled as the risk-free rate plus a risk component (risk premium), which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous (not linked to the company's activities). The cost of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the riskweighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments (comparable) with similar risk profiles to determine the "market" cost of equity. It is commonly equated using the CAPM formula (below), although articles such as Stulz 1995 question the validity of using a local CAPM versus an international CAPM- also considering whether markets are fully integrated or segmented (if fully integrated, there would be no need for a local CAPM). Once cost of debt and cost of equity have been determined, their blend, the weighted-average cost of capital (WACC), can be calculated. This WACC can then be used as a discount rate for a project's projected cash flows. Cost of Equity: Capital asset pricing model CAPM: Ke = Rf + * (Rm-Rf) Where, Ke = cost of equity Rf = Risk free return in market (government securities) = Levered beta Rm = Market Return Rm Rf = Risk premium of market assets over risk free assets PERIOD Annual Return on risk-free Treasury Bonds (Rf) Beta ( Cov(Ri,Rm)/2m ) Average Annual return of Market (Rm) COST OF EQUITY (Ke=Rf + (Rm- Rf) * ) Cost of debt: Ki= Interest Expense Total debt 2008 2010 6.85% 0.1481 12.191% 7.64%

Kd = Ki (1-t) Where, Ki = Cost of debt (before tax) t = Corporate tax rate Kd = Cost of debt (after tax) YEAR Debt Interest Average Debt Average Interest Cost of Debt (Before Tax) Tax Rate Cost of Debt (After Tax) 2009-2010 7601.22 380.12 7465.35 516.855 6.92% 33.99% 4.57% 2008-2009 7329.48 653.59

Cost of capital: Weighted Average Cost of Capital- WACC: It is weighted average of the cost of each specific type of fund. Ko = Ke*We +Kd*Wd Where, Ke is cost of equity. Kd is cost of debt. We is the proportion of equity in the capital structure. Wd is the proportion of debt in the capital structure. Cost of Equity (Ke) Cost of Debt (Before tax) Cost of Debt After tax (Kd) Equity (2008-2009) Equity (2009-2010) Average Equity Debt (2008-2009) Debt (2009-2010) 7.64% 6.92% 4.57% 6485.32 5604.31 6044.815 7465.35 7601.22

Average Debt Total Average Capital Cost of Capital (Ko)

7533.285 13578.1 5.9375%

3.4

Leverage

In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are: A public corporation may leverage its equity by borrowing money. The more it borrows, the less equity capital it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result. A business entity can leverage its revenue by buying fixed assets. This will increase the proportion of fixed, as opposed to variable costs, meaning that a change in revenue will result in a larger change in operating income.

Hedge funds often leverage their assets by using derivatives. A fund might get any gains or losses on $20 million worth of crude oil by posting $1 million of cash as margin.
Degree of operating leverage: DOL = Contribution margin Net operating income

PARTICULARS EBT INTEREST EBIT SALES DOL

Degree of financial leverage:

2010 -1238.69 653.59 -585.1 3488.68 -5.13771857

2009 -539.96 380.12 -159.84 7235.58

DFL = Operating income (operating income - interest - (preferred dividends (1 - tax rate)).

PARTICULARS EBT INTEREST EBIT

2010 -1238.69 653.59 -585.1

2009 -539.96 380.12 -159.84

EPS DFL Degree of Combined Leverage: DCL = DOL * DFL DCL= (5.138) * 0.6667 = (3.4255)

-9.19 0.666753326

-3.313

IMPACT OF FINANCIAL LEVERAGE

3.5

Capital Structure

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc. Debt vs Equity:

From 2009 2008 2007 2006 2005 2004 2003

To 2010 2009 2008 2007 2006 2005 2004

Class Of Authorized Share Capital Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share 445.00 445.00 445.00 430.00 330.00 101.00 30.00

Issued Capital 311.35 299.66 299.39 287.76 287.53 86.92 24.35

Paid Up Shares 1556731743 1498295400 1496934400 287764780 287531380 86922900 24347800

Face Value 2 2 2 10 10 10 10

Paid Up Capital 311.35 299.66 299.39 287.76 287.53 86.92 24.35

Net Income Approach: 2009-10 Total Equity (E) Cost of equity (Ke) Total debt (D) Cost of debt (Kd) We Wd Cost of Capital (Ko) 5604.31 7.64% 7601.22 4.57% 0.42 0.58 5.87% 2008-09 6485.32 7.64% 7329.48 4.57% 0.47 0.53 6.01% 2007-08 6947.66 7.64% 3084.74 4.57% 0.69 0.31 6.70% 2006-07 3713.31 7.64% 1136.64 4.57% 0.77 0.23 6.92% 2005-06 2822.25 7.64% 335.37 4.57% 0.89 0.11 7.32%

2009-10 Ke Kd Ko 7.64% 4.57% 5.87%

2008-09 7.64% 4.57% 6.01%

2007-08 7.64% 4.57% 6.70%

2006-07 7.64% 4.57% 6.92%

2005-06 7.64% 4.57% 7.32%

3.6

Ratio Analysis

4.
COMPETITORS STUDY
For comparison analysis we have chosen five competitors : 1. Siemens Ltd. 2. BGR Energy Systems 3. BHEL 4. Punj Lloyd 5. AIA Engineering

4.1

Risk & Return analysis

2008-2010 Average Return per day -0.281% 0.046% 0.089% 0.052% -0.116% 0.064% Average Return per annum -67.986% 11.029% 21.565% 12.533% -27.974% 15.430% RISK 5.47093 3.89259 4.14598 2.96299 4.41358 3.27162 BETA 0.1481 0.6233 0.6047 0.3682 0.6703 0.3367

Suzlon Energy Siemens Ltd BGR Energy BHEL Punj Lloyd AIA Engineering

4.2

Ratio analysis
Suzlon Energy 2.14 2 1.36 -0.14 -9.08 -37.89 BGR Energy 1.16 1.62 1.33 7.64 27.92 6.49 BHEL 1.37 1.04 0.01 198.19 88.06 12.55 Punj Lloyd 3.34 1.73 0.98 2.56 11.06 4.87 AIA Engineering 2.06 1.78 -305.1 12.99 14.74

Current ratio Quick ratio D/E ratio Interest coverage ratio EPS (Rs) Net profit margin (%)

Last dividend (%)

--

23.3

0.15

2.5

4.3

Stock analysis

SUZLON ENERGY vs SIEMENS LTD.

SUZLON ENERGY vs BGR ENERGY SYSTEMS

SUZLON ENERGY vs SIEMENS LTD.

SUZLON ENERGY vs PUNJ LLOYD

SUZLON ENERGY vs AIA ENGINEERING

References
http://www.suzlon.com/ http://in.finance.yahoo.com/ http://www.rbi.org.in/ http://www.moneycontrol.com/ http://money.rediff.com/ http://www.bseindia.com/

Bibliography
Chandra Prasanna, Financial Management - Theory & Practice. 2008, 4ed., Tata McGraw Hill. Damodaran Aswath, Corporate Finance - Theory & Practice. 2009, 2ed., John Wiley & Sons. Pandey I.M., Financial Management, 2006, 9ed., Vikas Publications, India.