Just about 18 months ago, Suzlon, India’s largest maker of wind turbines and other related equipment, was remembered as a cautionary tale. Today, it commands an air of respectability synonymous with “industry movers and shakers”. About 18 months ago, Suzlon was trading at a market capitalisation of about ₹10,000 crore. Today it commands a market valuation of more than ₹1 trillion.
On Tuesday, Suzlon hit the 5% upper circuit limit, reaching ₹78.05 per share, after Morgan Stanley affirmed its ‘overweight’ rating on the stock a day after the company secured India’s largest wind energy order from NTPC Green Energy Ltd, a subsidiary of NTPC Ltd.
View Full Image
Howard Marks of Oaktree Capital explains in his memos that investor sentiment is like a pendulum. It swings from one extreme to another, spending very little time in the middle. We believe the same has happened with Suzlon – that the pendulum has swung to extreme optimism.
First, let’s get a sense of what drove the pendulum away from pessimism.
For more such in-depth analyses, read Profit Pulse.
Wind no longer a regulatory backbencher
India initially implemented the feed-in tariff mechanism through the National Tariff Act, 2006. The idea was to buy electricity at a slight premium to the development cost to support renewable energy developers till the industry matured.
In 2012, the tariff mechanism for solar was changed from feed-in to competitive bidding. Per-unit solar energy prices were declining across the world and competitive bidding was used to further reduce prices and benefit from this trend. The move to competitive bidding was so successful that by 2017 India had one of the lowest solar tariffs in the world.
Also read | These small cap green-energy stocks are near record highs. Will they pull back?
In 2017 the government introduced competitive bidding (reverse bidding mechanism) for wind energy as well, hoping to repeat the success it had with solar tariffs. Decisionmakers at the ministry of new and renewable energy also believed that wind energy was mature enough to withstand competition. But was it?
Reverse bidding allows bidders to continue bidding after the initial bid. This proved fatal. The per-unit tariff of wind energy dropped to unviable levels. Projects were awarded but never developed or commissioned because they were bid at such low rates that they became unviable. Capacity additions dropped from 5.5 gigawatts in 2016-17 to 1.7 GW in the following financial year and further down to 1.1 GW in 2021-22.
View Full Image
By 2018, the renewable energy ministry also realised that solar had a problem. Solar energy can be harnessed only during the day. Wind energy can be harnessed during the night as well as during monsoons, when solar energy is not reliable.
View Full Image
The ministry realised that it would be better to auction wind and solar projects bundled together, rather than separately. This would help achieve higher capacity utilisation and a more uniform supply of power to the grid as opposed to the intermittent supply each source provided in silos. This was introduced in 2018 through the national wind-solar hybrid policy.
The cherry on top was that the reverse bidding mechanism was done away with on plain vanilla wind auctions (as opposed hybrid wind and solar auctions) in January 2023, signalling a positive shift for the industry.
Wind in the order book
Though the hybrid policy was introduced in 2018, it wasn’t until January last year that the pace of wind auctions (hybrid solar and wind, plain vanilla wind, commercial and industrial) really began picking up. Over the past 18 months, Suzlon’s order book has jumped 8x, including the recent order of 1,166 MW from NTPC Green Energy.
View Full Image
The company raised money and paid off close to ₹1,500 crore debt in 2023-24, turning net worth positive after a decade. Marquee investors such as Blackrock (through funds) became shareholders. The number of public shareholders jumped from 2.4 million to about 4.2 million between the last quarter of 2022-23 (January-March 2023) and the first quarter of 2024-25 (April-June 2024). The stock went up nearly 10x.
Suzlon also recently acquired another company, sold its office space in Pune for ₹440 crore (and leased it back for five years). It’s also conducting road shows and investor meets.
Slight problem, though. Valuations!
Suzlon’s current price to earnings multiple is 109x (based on trailing earnings). Maybe an order book visibility of the next 2-3 years is better justified by a forward multiple. Accordingly, ICICI Securities, in a 4 September update on Suzlon, values the company at 50 times estimated FY26 earnings.
This means the market can see two years down the line with 20/20 vision. It means that a majority of the 5 GW orders will get executed, on time. There will be no delays in commissioning. Grid connectivity won’t be an issue. Land acquisition will be a cakewalk. There will be no shortage of cranes or skilled engineering, procurement and construction players to execute these projects.
A future I like to imagine but is hard to believe.
Also read | This seasonal trade could work wonders. All it needs is an X factor.
Underlying this optimism is also the firm belief that by 2030, the Indian government, through various entities, will auction an additional 50 GW of wind capacity. This equals around 8 GW of wind auctions per year for the next six years. The reasoning goes that since Suzlon is the market leader with a 25-30% market share, it will be a big beneficiary of this trend.
The reality on the ground is not as utopic, especially from an execution perspective.
First, availability of land and pathways. To get massive wind components to their respective site is a challenge.
View Full Image
Second, projects can get concentrated in certain states where land acquisition can be a problem. According to Suzlon’s first quarter call with analysts, Karnataka is one such state.
Third, grid connectivity can be a challenge. It can take up to 18 months to set up a wind site. It takes longer to set up transmission lines, the substations, etc., for evacuating the power generated. This difference can lead to delays in commissioning even though manufacturers of wind energy units such as Suzlon and Inox Wind Ltd have delivered the equipment and the site is ready.
In such instances, because the project is not commissioned, a percentage of revenue remains unpaid to the company. This can lead to higher receivables, higher working capital, and higher interest costs—i.e., a whole bunch of second order consequences not evident today.
We believe there are some challenges on the ground that are not being discounted in the stock price. We are onboard with the positive outlook. Suzlon’s order flow remains strong. It’s true that execution challenges are not alarming today. The fact remains that the stock may be priced to perfection, leaving little room for surprises.
Only time will tell how the Suzlon story plays out.
Note: 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.
Rahul Rao has been investing since 2014. He has helped conduct financial literacy programs for over 150,000 investors. He helped start a family office for a 50-year-old conglomerate and worked at an AIF, focusing on small and mid-cap opportunities. He evaluates stocks using an evidence-based, first-principles approach as opposed to comforting narratives.
Disclosure: The writer or his dependants may or may not hold the stocks/commodities/cryptos/any other asset discussed in this article.
