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Winds of change
 

The Indian power grid needs more wind in its mix. The need to enhance wind capacity addition (post subdued activity in the recent past) has finally dawned upon the stakeholders. Grids are looking for a solution to meet demand effectively while containing carbon emissions. The supply of renewables can be increased by setting up a mix of wind, solar and battery storage capacities. Optimal solutions for the grid to meet demand by using renewables includes higher wind in the mix (of ~8GW per annum) led by the complementary nature of generation and cost curves of the wind. As a result, India has launched series of policy initiatives: 1) single-stage closed bidding (vs reverse e-auction), 2) 10GW of wind auction per annum, and 3) wind-specific RPOs etc. These policies are likely to generate tailwinds for the industry and, we believe, Suzlon Energy (Suzlon), the market leader, is best suited to reap the benefits of the same. Also, the ‘net debt / EBITDA’ ratio on Suzlon’s balance sheet has declined to ~1x (from ~10x in FY22). Initiate with BUY.

* A slew of policy actions: India has amended the wind energy policy, which adversely impacted capacity addition between FY17-FY23. It has discontinued with reverse e- auctions, introduced wind-specific RPOs, and its plans to auction 10GW per annum. Also, the repowering policy is under works.

* It’s not either wind or solar; wind has its place: The lowest-cost solution for an optimal decarbonised grid is a mix of wind, solar and battery storage capacities. Wind generates power in monsoon and nights when solar generation is low. Also, we believe higher wind will lead to lower battery storage requirement for a decarbonised grid.

* Sharp improvement in industry outlook; we estimate market growth at 35% CAGR: On the back of various policy actions, industrial demand and more round-the-clock contracts, we believe the wind industry is finally set to turn the corner. We are baking-in 3.5GW and 4.5GW for FY24E/FY25E (vs 2.2GW in FY23).

* Suzlon – market leader by wide margin: Suzlon has enjoyed a market share of 33% in India’s domestic market (based on total installations) (source: company). It has 20GW of operational wind power capacity globally and is well ahead of its competitors. Note that its existing orderbook at 1.5GW bodes well for execution through the next 2 years.

* A repaired balance sheet; leverage is relic of past: Suzlon has reduced leverage by restructuring its debt and by raising money through a rights issue. As a result, leverage is now merely 1x debt/EBITDA. Thus, the company has got all the right ingredients to benefit from industry tailwinds, in our view.

* Initiate with BUY: We believe Suzlon is best equipped to benefit from industry tailwinds. We expect a sharp uptick in earnings FY24E onwards. Initiate with BUY and a target price of Rs22 per share (assigning a multiple of 24x FY25E EPS).

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