Should you buy the dip in Suzlon Energy? Leading analysts agree to disagree.

Morgan Stanley, Anand Rathi and Geojit Financial Services, which suggested booking profits at ₹80 a share in September, now recommend buying at the dip at ₹60. Morgan Stanley’s ‘buy’ rating has caused Suzlon Energy stock to hit upper circuit for two trading sessions in a row.

However, Ventura Securities continues to maintain a ‘sell’ rating with a price target of ₹50, saying, “Suzlon Energy is a great business but not at a great price.”

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While all brokers agree that Suzlon Energy is in a sweet spot in India’s energy transition, they disagree on the right price for this turnaround stock.

The bullish JM Financial has a price target of ₹8, while Morgan Stanley has reduced its price target from ₹78 to ₹71 and Geojit Financial Services has a target of ₹68. The bearish Ventura Securities has a price target of ₹50. These targets were last updated on 19 November.

Why is there such a large gap between the price targets of the two analysts?

The bull case for Suzlon Energy

Analysts have set price targets for Suzlon Energy based on the next three years of earnings and revenue estimates (FY24-27). They are bullish on the stock for five reasons.

• Strong order book
• Lower competitive intensity
• Suzlon’s 32% market share in wind energy
• India’s wind addition to touch 500 GW by 2030
• Strong execution and favourable government policies

But these represent both an opportunity and a threat for Suzlon Energy. As a pure-play wind energy company, Suzlon is well-placed to tap the wind energy revolution. However, it is also equally affected by pauses in wind energy projects and subsidies.

Largest-ever order book

Suzlon currently has its largest order book since 2017 – 5.1 gigawatts. A strong order book brings visibility on revenue. Suzlon Group CFO Himanshu Mody, in an interview withCNBC-TV18in February, said the company realises an average of about ₹6 crore per megawatt. With this, you can draw a rough estimate around the revenue after adjusting for execution risk such as delays in acquiring land.

Suzlon’s past is filled with extreme volatility in orders and revenues. In FY17, Suzlon reported its best-ever financial performance after a significant restructuring: a ₹2,479 crore operating profit after a loss of ₹283 crore in FY16.

However, the government ended feed-in tariffs for wind energy projects and introduced competitive bidding in early 2017. Strong competition reduced power tariffs to a level that made wind energy projects unviable. This policy change had a ripple effect and Suzlon’s revenue fell from ₹12,714 crore in FY17 to ₹2,973 crore in FY20 as orders dried up. Its ₹852 crore net profit turned into a ₹2,692 crore net loss during this period. This is why the stock is sensitive to order volumes.

Coming back to FY24, the company has a strong order book that should keep it busy for the next two years. Over the past three years, revenue grew at a compound annual rate of 25% and analysts expect this to accelerate.Geojit Financial Services forecasts Wind Turbine Generator (WTG) deliveries will increase at a 67% CAGR between FY24 and FY27. Ventura expects revenue to grow at a 47.6% CAGR over the same period.

Wind in its sails

Such bullish revenue expectations come on the back of India’s transition to renewable energy. According to the Central Electricity Authority (CEA), India needs 100GW (from 42GW in FY23) of wind energy capacity to achieve the optimal renewable energy capacity mix by 2030.

As India’s leading wind turbine maker with a 32% market share, Suzlon is well-placed to benefit from this. However, achieving this ambitious target boils down to investments in wind energy, which are cyclical. So far, there is plenty of enthusiasm for renewable energy investments.

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Morgan Stanley expectsIndia’s wind addition to generate an order book of 32GW (worth $31 billion) from FY25-30 for original equipment manufacturers (OEMs). The brokerage expects Suzlon to generate a total sales volume of 7.15 GW between FY25 and 27, its market share to increase to 35-40% by FY27.

Little competition

Morgan Staley also sees little competition for Sulzon as there are not many pure-play wind turbine makers. One direct competitor is Inox Wind, a smaller company that is expected to report its first full-year net profit in FY25. The company also has a strong order volume of 2.9 GW and is improving its execution from 376 MW in FY24 to an expected 800 MW in FY25 and 1.2 GW in FY26. Better execution will drive its revenue growth. 

While Suzlon leads in wind, Inox Wind is growing quickly and could pose still competition for Suzlon if the going gets tough. for now, though, competition from Inox Wind is not a concern.

Government’s wind energy policy

Apart from new wind additions by the government, C&I companies are also adding wind capacity to meet the wind renewable purchase obligation (wind RPO) up to 2030. Moreover, the accelerated depreciation benefit, concessional customs-duty exemption on certain components of wind electric generators, and a generation-based incentive scheme on wind projects commissioned before 31 March 2017 are driving wind energy adoption.

However, the company is exposed to changes in government policies. The 2017 policy change pushed Suzlon into three years of losses (FY18-FY20). Such vulnerability has kept investors cautious and analysts puzzled about the valuation.

Cautiously optimistic valuation

Circling back to the right price for Suzlon Energy stock, the key lies in the price-to-earnings (PE) ratio. A look at the historical data reveals huge gaps in PE ratios. There are periods when there is no PE ratio because the company has been making losses. In seven of the last 12 years, Suzlon reported a net loss.

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High debt and volatility in orders have strained Suzlon’s profits for several years. The company sold some businesses and raised equity capital to repay debt. In August 2023 the company became debt free.

With debt woes out of the picture, supportive government policies will drive earnings and re-ratings, according to Anand Rathi.

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Considering its volatile past, stable present and promising future with exposure to external factors, is Suzlon a buy at 89.2 PE ratio? There is no point in looking at its median PE because of years of losses. Can the stock go back to its January 2024 PE ratio of 155x and sustain it? Inox Wind is trading at a PE ratio of 130, which shows there is bullishness around renewable energy stocks.

The bottom line

Analysts expect Suzlon’s earnings to grow: Geojit expects earnings per share to increase at a 61% CAGR and Ventura expects net earnings to grow at a 66.2% CAGR from FY24-27. If these fundamentals are sustained, Suzlon’s stock could grow.

It remains to be seen if Suzlon can keep optimism and investor interest high over the long term. For now, even analysts are divided on the stock.

For more such analysis, read Profit Pulse.

Note: We have relied on data from Screener.in throughout this article. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.

Puja Tayal is a seasoned financial writer with more than 17 years of experience in fundamental research. She brings a good blend of comprehensive, well-researched insights into a company’s work in her articles.

Disclosure: The writer and her dependants hold the stock discussed in this article.