Suzlon Energy Limited (SUZLON) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '24 Earnings Conference Call of Suzlon Energy Limited, hosted by ICICI Securities. During this call, the company management may make certain statements which reflect their outlook for the future or which could be constituted as forward-looking statements. These statements are based on management's current expectations and are associated with uncertainties and risks as fully detailed in the company's annual report, which may cause the actual results to differ. Hence, these statements must be reviewed in conjunction with the risks that the company faces. Thank you. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashwani Sharma from ICICI Securities. Thank you, and over to you, sir.

Yes. Thank you, Michel. Good afternoon, everyone. On behalf of ICICI Securities, we welcome you to the Q1 FY'24 earnings call of Suzlon Energy Limited. We have with us, the top management of the company, being represented by Mr.JP Chalasani, Group CEO; and Mr. Himanshu Mody, Group CFO. I hand over the call now to the management for the opening remarks, post which we'll open the floor for Q&A. Thank you, and over to you, sir.

Thank you, Ashwani. Good afternoon to each one of you for joining our FY'24, Quarter 1 earning call. I hope you had an opportunity to review our results and the investor presentation released prior to that. We will now share with you an overview of the industry, and we will walk you through Q1 performance. We will then take your questions. With good policy initiatives from the government, [indiscernible] -- the 2030 target of 50 gigawatt of [indiscernible] capacity includes a healthy mix of wind and solar capacities into exchange of 100 gigawatts in solar 30 gigawatts was to have both solar and wind to coexist and not compete with each other. And this combination gives us the lowest cost of generation to meet the demand. This helps in the diversity of the edition purses and also the healthy form the perspective of great health. The fact that wind is also available during the late evening and night when the power demand in India takes such balance the power generation profile and also support the grid. Initiatives like discontinuation of TV was auction for wind, new resin being on single state and all up close bit cases is expected to lead to better tariff discovery. There will also be a pulling of tariff for different spaces, which will reduce the average cost of [indiscernible] Of power. The good part is that with new bidding wind capacity will come up in all 8 wind states, significantly opening up the availability of land and evacuation infrastructure.[indiscernible] Has also announced event projects bidding for of 50 gigawatt per annum, which includes 10 gigawatts of wind from FY '24 to FY '28. There is also a monthly RE bidding plan in place for FY '24, which will be conducted through renewable energy implementing is in phase, [indiscernible]. That's totaling 10 gigawatts. [indiscernible] project in the market shall further reduce the demand for wind, which will be lower than the whole 10 gigawatt per annum plan. Initiatives like ISTS waiver extension for COD projects till June 2025 and gradual phasing thereafter, will boost COD segment and led to huge demand for RE projects. Wind repowering potential of 25 gigawatts and green hydrogen mission targets, RPO, RGO obligations, green open access regulations, et cetera, will further boost this sector. Our cumulative orders of 1,582 megawatt include order book as on June 30, 2023 of 14 agreement was orders announced subsequently and subsequently 140 megawatts in 30 June 30 and 114-megawatt year after. This is also well diversified and healthy order book. Our priority going forward is to pursue quality orders with higher value and better margins. Our focused remains on executing and building our order book. Our service business continues to do well with 14.2 gigawatt capacity under our service. I would also want you to know about the business impact of cyclone of which hit us at Biparjoy in Gujrat during June 2023. It also affected our OMS operations in a limited manner and some of the customers ability along the transmission lines and other extreme network of [ Hermes. ] Escalation works are ongoing at the said wind farms, and these are expected to be completed soon. Net of expected insurance plans on a conservative basis, the company has provided an expenditure of INR 20 crores during quarter 1 towards the escalation expenditure with strong fundamentals and strong sectoral tailwinds. Suzlon is now well equipped to leverage the market opportunity arising from energy transition. I would now like to invite Himanshu to take you through our financial performance.

Thank you, JP sir, and good evening, ladies and gentlemen. I would be using Slide #17 to 23 of our investor presentation, which has been uploaded on our website as the reference point for my discussion during this presentation. Q1 FY '24 has seen us register consistent improvement in all our key parameters. Our balance sheet gets even more stronger. And the fundamentals have stranded with a focus on bottom line based on performance. We are pleased to report that we are ending the quarter with a strong consolidated net worth of INR 1,297 crores. Our gross debt for the quarter stands at INR 1,806 crores, which is a substantial reduction from little over INR 13,000 crores in March 2020. Our net debt as of 30 June 2023 is INR 1,223 crores resulting in a net debt to net worth ratio of 0.9, which is less than 1, which is quite healthy. Our consolidated PAT for Q1 FY '24 before exceptional item, stands at INR 93 crores. This is against Q1 PAT of the previous financial year FY '23 before exceptional items was negative INR 37 crores -- and our Q4 PAT of FY '23 was positive INR 68 crores. This is all before exceptional items. With continuous focus on deleveraging of the balance sheet in the last financial year, we have achieved a substantial reduction in debt finance costs, which for Q1 of FY '24 stands at INR 51 crores versus INR 148 crores in Q1 of the previous financial year, resulting in a substantial reduction of 66%. Being in the capital goods segment, it is important to look at the annual performance of the company rather than quarterly because in our case, quarterly performance is very cyclically due to mix of orders that we are able to deliver, climatic conditions allowing us write-off way for implementation of projects, installation and balance of plant activity. As a result of which, typically, in the first half of any financial year, we're able to deliver about 30% to 35%, whereas S2 is debalance. The economy being on the strong footing and as the FCs are said, sectoral tailwinds being even more stronger for a renewed focus on renewable energy, it all augurs well for Suzlon at this time. With that, I'd like to conclude my presentation, and we can now open the floor for any Q&A that the callers may have. Thank you.

Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of Abhineet Anand from Emkay Global Financial Services.

Thanks for the opportunity. So first is on the stand-alone margin there has been strong uptick on the gross margin side, whether we see Q-o-Q or Y-o-Y. If you can just explain whether it is because of some good order product mix or how is it?

Hi, Himanshu here. So as I said in my opening remarks, I urge everyone to look at our overall annual performance rather than quarterly performance. Yes, you are right, there is an uptick in the Q1 margins at the contribution level. That is not necessarily representative of the margins that we may see for the next few quarters. So I would say that the margins that we saw in FY '23 for the full year should be the benchmark or basis of what you assume for FY '24. Of course, the endeavor at the management is to keep improving on those margins. And with improved supply chain, inventory levels and increased focus on working capital. We are confident that we'll be able to improve our margins from FY '23 onwards. But having said that, you should not assume the Q1 FY '24 as the benchmark.

Secondly, sir, this INR 20 crore impact because of the cycle largely factor the OMS margin, I'm assuming, right?

That's correct. Yes.

Okay. So of -- so I think earlier you guys is to give a guidance of around 40% on the margin for OMS, that could be a fair assumption.

Yes. I think if you add back the INR 20 crores that we should -- for this exceptional, then we would be at about a bit over 40% in operating margins.

And in terms of order pipeline, if you can see if you can throw some light in terms of that 20 crores, obviously, ordering costs at Suzlon has been good and some of the other players -- so for the rest of the year, how is the pipeline looking? I understand there is a large industry, but from a pipeline particular like 3 to 6 months. How are the inquiries and all?

We are continue to see the traction in part of our lines both from the bidding side, which is like utility PP business and also we are looking at a large interest in terms of the CNS segment, including the retail segment. Obviously, there's a lot of interest, and the interest also is more on -- the interest is also significant because of 3 megawatts having come out. So the momentum continues. So I would say that much. And look at FY '25 as well as atypically moving some orders, which will be locked in even in us now the projects are like 24 to 30 months or between like later be is not the order some of the players. These things will now even some part of becoming an FY '26 as we even those disputes are happening. So we are quite optimistic about the out of that name and the interest being shown from all sectors.

The next question is from the line of Amish Kanani from JM Financial Services PMS.

One, if you see the cost execution looks relatively low vis-a-vis book. So you can explain what are the challenges on the ground for execution? And/or I understand you said it first will be 30%, 35% of the overall. But the situation the way it is, why should we execute so low when not out will be so high. So if we can give us some sense on the execution side. And second question, sir, is with the 3-megawatt order and also our orders being a mix of EPC versus non-EPC. If you could give us some sense of whether our execution can be much faster in the second half of this year. And what are the kind of maybe directionally, if not exact numbers, what are the margin differences at the gross margin on the WPG side for the 3-megawatt versus non-3 megawatt and the EPC versus non-EPC ones. If you can give us some color that will be really helpful, thanks.

On the execution side, I'm assuming when you call about execution, you're talking about supply, you're not talking about the commissioning inward, which is significant it's 25% of the market and David, I'm assuming you're talking about supply, not about the commissioning, right?

Yes, sir. 185 megawatts I think is what we are seeing is our outstanding order got...

Yes, 2 factors. The order book looks quite healthy. But if you see the presentation as well, besides 50% of it is for 3-megawatt orders, okay. The supply of which will start in quarter 4 of this year. And as far as the 2.1 megawatts are concerned, the supplies will depend upon when we do get orders. So the orders would have been issued, and there the dispatch [indiscernible] from quarter 2 and quarter 3 and quarter 4. So the -- normally, the -- when you have an order the site has stability and they should be ready to access the turbines and ready to defuse the order, from the time is what the schedule happens. So most of this will come in Q3 and Q4. And Q4 gets added up because of 3 megawatts also stuck at [indiscernible]. Also, you must keep in mind, as I said, the climatic conditions, especially during back end of Q1 and early Q2 create implementation hurdles right-of-way as a result of which H1 is the sort of sales is more skewed towards -- To your point on margins, as I mentioned earlier, you should assume FY '23 margin, the gross margin is something that we can definitely continue with whether we'd be able to better that or not, would be the only time will tell with more sort of inventory and working capital and supply chain getting streamlined. But that is the base case that you should have.

And your comparison of 3 megawatts and 2.1 megawatts from the margins perspective. Obviously, 2.1 megawatt is an established product, where you post or in everything, 3-megawatt is coming now. The 3 megawatt, the Note brand mainly the [indiscernible] Before you take advantage of maybe you can keep your pricing. So therefore, just wait and see how the marketplace and it depends upon both internal factors of cost-out, the initial rollout versus as we keep increasing the volumes and the BOP cost reduction for the Ipps. About EPC versus non-EPC. Yes, right today is like 2/3 EPC and 1/3 of non-EPC type of thing, but it's changing with some few new orders coming. I expect that it would remain as a 50-50 or 60-40 in terms of EPS and not just the EPC and non-EPC and we have categories like [indiscernible] Supervision alone, and there is nothing on distinct bases we are supply and installation. In some places, we also play this foundation sensation in there are different types of contracts coming in now. And then EPC, the fewer EPC where we take the total, but not the currency. We have a different contract for supply, POP, land, et cetera. And each compact doesn't talk to other one. So we get that -- we don't have the contract and is coming on us.

The next question is from the line of Dhawan from Beriate Capital.

My question is how much -- what execution are we targeting for FY '24?

Our guidance, it depends upon what is your estimate for the country. So our guidance will always been reaching around 30%, 25% to 30% of the head-count capacity edition. That's what we did in quarter 1, if you see our numbers, but we are about 25% of the total [indiscernible] happened in the Q1. And we expect to maintain that 25% to 30% market share in terms of commissioning.

And given this current excessive range and this flooding situation a couple of places. Is it causing any capital hindrance in our execution? And I mean, in just our overall operations of the company?

It is in terms of like there are our clients in that area who are, where we are supposed to do the talent supply and all the work and we just do the supply in direction. We are done direction, but we're unable to commission because then demand plants are not ready and other things are not ready. In some places where they're actually still balance the rate movement is getting impacted. There is some impact definitely is. But most of those projects are not most, the one of the projects are actually [indiscernible]. We have more of a seat on direction of solution. Commissioning is impacted definitely. Otherwise, we could have done more than what we did.

Because in FY '23, we executed 664 megawatts -- and now versus that we have a very healthy order book still. Our Q1 numbers are not very exciting compared to the last year. So that -- I just wanted to understand in terms of the profitability, what is it? Where are we -- I mean, why is it why are we lower than the last year in the top line and also the margins?

Yes. I answered the previous question. The overall order book is definitely one difference point. And if you look at more on order book, 50% of that is 3-megawatt orders, which the way would start from -- so suddenly, you will see the more quality coming in because that's a 3-megawatt versus 2 megawatts before say the supply of 20 megawatts versus 30 megawatts. Those orders are there, 50% of our order book is spoke by capacity, but the supply of that would come in at -- so the 1 will see the such coming there. And second, as for the 2-megawatt is concerned, while orders are there, I just said some time back, it also depends upon when we receive the order and what is the dispatched here since we get some of the clients because many of these things are in their scope and some places, the direct substation of how we taking delays, so they want to readjust the time line. So before a month of that, not just the numbers, the capacity also -- you'll see it delay as well. You can't really look at the quarter and then say that this is what is going to effect the performance. There are a number of factors.

Okay. So if I were to understand this 3-megawatt more clearly, so 50% of order book is 3-megawatt and assume we do say maybe 800-megawatt of execution for the current year, for example, -- so 50% of that will happen in fourth quarter. That didn't mean that?

No, no, no. Out of the existing order book, 50% is for 3 megawatts. Correct Okay. So we are not saying before 800 assumption. So I'm just quoting you a number, 800, if we take it 50% of that megawatt, No, we're not saying that. So these 2 are 2 different things. The 3-megawatt supply will commence in quarter 4. So therefore, the volumes will significantly increase in quarter 4 because that's where it's coming in. Till then we keep supplying 2 megawatts, but the ratio will not be 50-50 for this year. Order book is 50-50, but the ratio of 2-megawatt and 3-megawatt won't 50, 50 this year. 2 megawatt will be more and 3 mega will be less. Correct.

So a lot of it 3-megawatt will be executed in Q4 this year than Q1, Q2 of next year.

Yes.

And then FY '25 have...

So just to add also to give you another factor it. So if you see FY '22, the total deliveries in FY '22 was 808 megawatts. And those were all 2-megawatt turbines. Now in Q1 of FY '22, we did 116 megawatts of deliveries. I just leave those 2 data points to address your concerns.

And so technically, the yield for the customer is higher and also for us, the profitability should be a little higher in 3-megawatt turbine. So then your profitability also should be much better in '25 compared to '24?

Let's see when we come '25, obviously, we will have these earning calls with results. We'll keep discussing.

Ladies and gentlemen, to ensure that the management is able to address questions from all participants in the conference. Please limit your questions to two per participant. The next question is from the line of Deepak Poddar from Sapphire Capital.

First, I wanted to understand the first up, so what is the capacity addition at the industry level we are looking at maybe this year, any sort of benchmark we have?

This is anybody's test so anything towards the north of 4 gigawatts the company of 4 gigawatts and then up to 5 gigawatts is what is the estimate -- and let's say, in the quarter 1, if you look at it, quarter 1, 140 was the addition in the first quarter, right?

And for the entire year, I could not make a number, sir. It is between anywhere between 4 to 5 gigawatts, like 1,000 to 5,000 megawatts around about that and mega.

Yes.

On 25% to 30% is the market share that we are looking at. So ideally, from INR 1,000 to INR 1,200 is the range that we might at -- any kind sample calculations for your result, we gave you both Undertone. And sir, do we see any risk that the 3 megawatts, which is expected to start from fourth quarter, if nothing comes in FY'24.

No, we don't see anything because the -- this is already [ 5 ] test certificate has come from the third party and it's already launched our [ LMM ] listing. Listing is also expected to come in this quarter. So then we have [indiscernible] from the manufacturing point of it. I don't think we see any problems in terms of...

Understood. And the clarification, you mentioned that FY '23 should be the benchmark margin from FY '24 -- so you're talking about the gross margins here or the EBITDA margins?

No, no. We're talking about the gross margins.

And sir, my final question is on your threshold margin. I mean, whenever we take any kind of orders, so what is the minimum threshold margins at the EBITDA level that we look at...

No, no, no. I don't think -- it varies. You can't really answer simply by saying being that other thought -- it depends upon a number of things, [indiscernible] whatever the risk we're taking it, at which stage. There are a number of other factors and which time of our production cycle comes. So it's not possible to say that you thought of what margin, if there are number of variables coming in to...

Let me just clarify because we've said this on a few occasions in this call. So when I say FY '23 as a benchmark, that is for stand-alone contribution margins, not for the consolidated.

Standalone, right?

Yes, yes.

The next question is from the line of Nikhil Abhyankar from ICICI Securities.

Sir, my first question is regarding can you brief us about the idea behind the fundraise that you have just announced because we have significantly reduced our debt in the last 3 years. So what is the rationale behind this fundraising now?

So the thought process essentially is, of course, as you know, there's gross debt of about INR 1,800 crores, and there are certain CapEx requirements plus to ease out the working capital. Of course, there are certain covenants that they are there from a lender's perspective. So when a lender looks at growth of a company that will be very different from how an equity investor looks at. So long as the debt continues in the company at these levels, we would be tied to those covenants. Now the optionality between before the company management is very simple that we continue on a status quo basis, which is no need to do any fundraise, keep performing whatever working capital we are able to generate, keep delivering bases that we will still have a decent market share. But if we need to sort of have a good chance in getting market share, which is in excess of 30% as we go forward. I mean, not so much for FY '24, but FY '25, FY '26 onwards, then it probably makes sense for us to look at some kind of an issuance that we are thinking of which enables us to make the balance sheet that light or near debt-free. And also releases some cash for working capital and CapEx needs of the company over the next few quarters. So that is the intention of the management. Of course, the size and type of issuance, we will decide in the next few weeks and based on that as and when we make any progress or development, we will come back to you.

Understood. So the entire fundraising will be used for debt reduction for current...

Well, it depends on the size of the issue. As you know, we've taken enabling approval from the Board of fundraise of up to INR 2,000 crores, and that is currently impending shareholder approval. So whether we do up to INR 2,000 crores means we could theoretically do full INR 2,000 crores or we could do less. That is something we will be deciding as I said, over the next few weeks and we'll come back to the markets, accordingly.

Sure, sure. And the final question regarding the C&I segment. So what is the kind of response you're getting from the industry and which segments of the industry are really interested in this segment?

Right now, the between C&I and retail, particularly what do you call it, what the C&I is or order book is more than 50, I think 50, 50-plus percent is coming from that segment. The C&I segment is predominantly like one is smaller segment where 35, 30, 50 megawatts. But there's a bigger segment of large industries where they have a capital requirement, which today is happening on fossil fuel. They want to replace that with renewables. Just an example, giving 2 names like [indiscernible] or the [indiscernible], there are various big companies who are trying to do this. And my assumption is that this would further in the next few years, start immediately, further go up because once the hydrogen picks up but that's few years away anyway, we all know. But on this initial C&I segment of replacing the existing capital capacity with renewable of -- gas fossil fuel, let's say, next couple of years, where you will see significant uptick in terms of demand. I think the hydrogen would tick up by then. Renewable energy for hydrogen, that again would be more of a C&I segment.

The next question is from the line of Vikram Sharma from Niveshaay Investment Advisory.

So first question, we think we can 90 lakh per megawatt around...

Mr. Sharma, your audio is not clear. May we request you to use your handset to ask a question please.

So I was asking 90 lakh per megawatt around contribution, and we have the expenses around 560 per megawatt. So I wanted to now break up of INR 500 crore fixed cost. And I also want to ask if it will be maintained if we do like 3 gigawatts if we -- once we add our 3-megawatt capabilities, so what will be the [indiscernible] expenses for company [indiscernible].

So let me just try and understand the question because audio was a little faint. So in terms of contribution margin, as I've said, I'm not commenting on rupees, lakhs, but one should assume mid-teens as a contribution margin, which is what we did in FY '23. And as I said, we'll endeavor to improve on that, but you should not take that as an assumption. So far as fixed costs are concerned, yes, our fixed costs are approximately INR 500 crores on the manufacturing side. We won't be able to give a split of that, but that is various corporate functions, our technology group, R&D team, manufacturing facilities all put together. So we won't be able to provide a split on that. And for -- if we -- even once we get 3-megawatt turbine into serial production. We don't see a significant increase in the fixed costs other than what inflationary increases would normally be there.

And sir, second question, what will be our 3-megawatt-plus capacity in FY '25?

Let's say, it's a [ case base ]. Right now, let's not go into that because the cost requirement is the quarter 4 stabilizes and then look at the FY '25, what would come. So the -- right now, we are getting in different modes. It all depends upon what is the grid capacity. So that's why that's where I want to do it.

And so last question on O&M portfolio side like what...

Sir, you voice is not clear. We are not able to understand what you're speaking.

So I was asking what is our revenue per megawatt on O&M portfolio side? And what is the expenses on that side?

So again, if you see the investor presentation, we have given details of the -- each business and certain broad KPIs, so Slide #20 on the investor presentation, you will get the detailed answers to your question.

We have the next question from the line of [ Prayesh Babaria ] from Max Life Insurance.

Congratulations for the good set of numbers. Sir, you just rightly mentioned that our fixed cost is around INR 500 crores or so, and it is expected to increase when we [ executed without ] portfolio. So can you please elaborate on the [ same ]?

No, no, no. That's not what we said. We didn't say the fixed cost will increase. We said, in fact, the fixed cost will not increase if we add the 3-megawatt portfolio from Q4. The only increase will be on account of normal inflationary cost increases. That's it. So INR 500 crores would not see an increase.

The next question is from the line of Vineet Gala from Xylem Investments.

Sir, you have mentioned about the government orders of 2.5 gigawatts being floated by these 4 entities. Sir, recently, [ NSCC ] mentioned that they would want to focus only on solar. So how do we see this? And what is the level of commitment have these 4 entities already given on these orders to be floated?

See, directionally, the government said that we will lose 50 gigawatts per year bidding and another 10 gigawatt is for bid. That's one direction. Second thing is the pure solar is not the recommended route today because solar is already touched. As I said that the last time, also we discussed, when you go to 2030, after the 3-year detailed study, if you want to meet the trade demand, not talking about the capital demand, trade demand in 2030, least cost option, they said is 300 gigawatts of solar and 100 gigawatts of wind. Okay. Obviously, we all know that in India, we are extremely sensitive to the tariff. And that is a least cost option, whether you do it pure solar, pure wind [indiscernible]. Therefore, the wind, especially now if we see the last few months, there's an uptick on the wind because the wind has to catch up. There is 2 types of hybridization. One happens at the project level. Second happens at the grid level. There is more question to do it. In fact, if you see that 50 had issued the RFS for 2.5 gigawatts of wind and [indiscernible] that we showed are supposed to come back [indiscernible]. So I think the -- it is not -- we always said it is not solar versus wind. It's just solar and wind and what the required for grid stability plus which is the least cost condition. Therefore, directionally, the government is also saying if at 43 gigawatts today, we need to go to 100 gigawatts of wind by 2030. So therefore, we will first focus on that part of it. If somebody is coming up with [ good solar ], so be it. But ultimately at the end of the day, this will meet the global study of 300 gigawatts of solar and 100 gigawatts of wind. [ Who does do ] solar, wind is not an issue, but I think directionally, this is where we're going to go. And obviously, when it comes to the C&I segment, we -- it is like -- again, they will do a hybrid, depending upon the load profile of the capital load, and they will do the other calculations. And also, if you see the profile of wind in terms of the demand versus the profile of solar is different. Together is good. And if you look at more pure wind, right, wind has a better profile at the time of great demand.

So like all of this put together given our conversations with the OEMs from 4 gigawatts of installations built there, how do we see next couple of years timing now given that these 10 gigawatts worth of orders only from government and then you have C&I segment. So how do we see basically the installation doing from the current levels?