Rally 9x Suzlona: Does the company have enough wind in its turbines to maintain this momentum?

About 18 months ago, Suzlon, India’s largest manufacturer of wind turbines and other related equipment, was remembered as a cautionary tale. Today, it enjoys a reverence that is synonymous with “industry movers and shakers”. About 18 months ago, Suzlon traded at a market capitalization of around ₹10,000 crore. Its current market valuation is over ₹1 trillion.

On Tuesday, Suzlon hit the upper limit of the circuit of 5%, reaching ₹$78.05 per share after Morgan Stanley affirmed an “overweight” rating on the company’s stock, a day after the company bagged India’s largest wind power order from NTPC Green Energy Ltd, a subsidiary of NTPC Ltd.

Oaktree Capital’s Howard Marks explains in his notes that investor sentiment is like a pendulum. It swings from one extreme to the other, spending very little time in the middle. We believe the same thing happened with Suzlon – that the pendulum swung to extreme optimism.

First, let’s try to understand what caused the pendulum to swing away from pessimism.

For more detailed analysis, read on Profit Pulse.

The wind is no longer a regulator

India initially introduced a feed-in tariff mechanism through the National Tariff Act, 2006. The idea was to purchase electricity at a small premium over development costs to support renewable energy developers until the industry matured.

In 2012, the solar tariff mechanism was changed from feed-in to competitive bidding. Solar prices per unit were falling globally, and competitive bidding was used to further reduce prices and capitalize on this trend. The move to competitive bidding proved so successful that in 2017, India had one of the lowest solar tariffs in the world.

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In 2017, the government also introduced competitive bidding (reverse tendering) for wind power, hoping to replicate the success it had with solar tariffs. Policymakers at the Ministry of New and Renewable Energy also believed that wind power was mature enough to withstand competition. But was it?

Reverse bidding allows bidders to continue bidding after the initial bid has been submitted. This has proven disastrous. The price per unit of wind power has fallen to uneconomic levels. Projects have been awarded but never developed or launched because they were offered at rates so low that they became uneconomic. Capacity additions have fallen from 5.5 gigawatts in 2016-17 to 1.7 GW in the following fiscal year and further to 1.1 GW in 2021-22.

By 2018, the Ministry of Renewable Energy also realized that solar energy had a problem. Solar energy can only be used during the day. Wind energy can be used at night and also during the monsoon season when solar energy is not reliable.

The ministry realised that it would be better to bid for wind and solar projects as a bundle rather than separately. This would help achieve higher capacity utilisation and more even supply of energy to the grid as opposed to intermittent supply of energy from each source in silos. This was introduced in 2018 as part of the national wind-solar hybrid policy.

The icing on the cake was the abolition of the reverse bidding mechanism for regular wind auctions (as opposed to wind-solar hybrid auctions) in January 2023, signaling a positive change for the industry.

Wind in the order book

While the hybrid policy was introduced in 2018, it was only in January last year that the pace of wind auctions (solar-wind hybrid, conventional wind, commercial and industrial) really started to pick up. In the last 18 months, Suzlon’s order book has grown 8-fold, including the recent order for 1,166 MW from NTPC Green Energy.

The company raised money and paid off almost ₹1,500 crore of debt in 2023-24, becoming net worth positive after a decade. Prominent investors like Blackrock (through funds) became shareholders. The number of public shareholders increased from 2.4 million to around 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 rose almost 10 times.

Suzlon also recently acquired another company by selling its office space in Pune for ₹440 crore (and leased it back for five years). He also conducts roadshows and investor meets.

There is a small problem though. Pricing!

Suzlon’s current price to earnings ratio is 109x (based on last 2 years of earnings). Perhaps the order book visibility for the next 2-3 years is better justified by the forward multiple. Accordingly, ICICI Securities in its September 4 update on Suzlon values ​​the company at 50x estimated FY26 earnings.

This means that the market can see two years in the 20/20 perspective. This means that most of the orders for 5 GW will be fulfilled on time. There will be no delays in commissioning. Network connectivity will not be an issue. Land acquisition will be a piece of cake. There will be no shortage of cranes and skilled engineers, suppliers and construction contractors to implement these projects.

A future I like to imagine, but find hard to believe.

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Underpinning this optimism is also the strong belief that the Indian government, through various entities, will auction an additional 50 GW of wind capacity by 2030. This equates to about 8 GW of wind auctions per year for the next six years. The rationale is that since Suzlon is the market leader with 25-30% market share, it will be a big beneficiary of this trend.

The reality on the ground is not so utopian, especially when it comes to execution.

First, the availability of land and paths. Getting massive wind elements to their proper locations is a challenge.

Second, projects may be concentrated in certain states where land acquisition may be a problem. According to Suzlon’s Q1 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, substations, etc. to evacuate the generated power. This difference can lead to delays in commissioning, even when wind power unit manufacturers such as Suzlon and Inox Wind Ltd have supplied the equipment and the site is ready.

In such cases, because the project is not commissioned, a percentage of revenues remains unpaid to the company. This can lead to higher accounts receivable, higher working capital, and higher interest costs—a whole host of second-order consequences that are not visible today.

We believe there are some challenges on the ground that are not factored into the stock price. We are on board with the positive outlook. Suzlon’s order flow remains strong. It is true that execution challenges are not alarming today. The fact remains that the stock may be priced perfectly, leaving little room for surprises.

Only time will tell how Suzlon’s history will unfold.

Note: The purpose of this article is to provide interesting charts, data points, and thought-provoking opinions only. This is NOT a recommendation. If you wish to consider investing, we strongly recommend that you consult with an advisor. This article is for educational purposes only.

Rahul Rao has been investing since 2014. He has helped lead financial education programs for over 150,000 investors. He helped set up a family office for a 50-year-old conglomerate and worked at AIF, focusing on small and mid-cap opportunities. He evaluates stocks using an evidence-based approach and first principles rather than comforting narratives.

Disclosure: The author or his dependents may or may not own the stocks/commodities/cryptocurrencies and other assets discussed in this article.