India's Fantastic Four Stocks: Suzlon

Suzlon is the second of the 4 stocks in my series of India’s Fantastic Four Stocks

It is among the four stocks that are probably most widely held by retail/HNI investors from the days of previous Bull Run in anticipation that they will at least come back to the price at which they have invested in them.

However, I strongly believe that given its extremely weak business model the chances of Suzlon coming back to its 2007 high of around Rs. 470 and rising around 850% is quite remote.

It is perhaps one of the most talked about stocks across all the business news channels and there exists a support and resistance theory at every Rs 5-10 level just trapping investors at every fall and compelling them to average more and more. Moreover, a lot of institutions, fund managers and analysts rate the company as one of the Gen-X stocks in the sunshine sector and thus trapping the investors even further with the glittering story.

Why Suzlon is a Fantastic Stock?

• Despite being in the SUNSHINE wind energy segment its standalone net sales has fallen from something around Rs. 7000 crs in FY08 to Rs. 3500 crs in FY10
• PAT has fallen form a level of around Rs. 1200 crs to a LOSS of around Rs. 1400 crs
• The reason for this fall in sales coupled with even more fall in profits is the faulty blades which Suzlon produces and moreover spends huge sums to repair the same.

[A very interesting Google search with the key words “Suzlon, Blade and Problems” will highlight the core problem in Suzlon’s business and reason for its continuous stream of losses and poor performance]

• Total Debt has increased from around Rs. 9000 crs in to around Rs. 13,000 crs in order to execute expense acquisitions of international subsidiaries and paying hefty goodwill
• Total Goodwill in FY10 has increased to a level of around Rs. 6100 crs from the levels of Rs. 1400 crs in FY08, in fact there has being no addition in its gross block for plant and machinery, a capital intensive company is actually not adding real capital
• For FY10 for Suzlon around 100% of its Networth is Goodwill, so its tangible Networth is actually negative
• Current Higher interest rate scenario in India would hurt the margins further and added to already existing losses
• Its corporate governance policies given even more reason for an investor to disown this stock because in the past it has announced series of rights issues, QIPs, other equity raising instruments, precisely at the times its stock price had taken a major hit because of a bad market conditions
• A negative trailing 4Q EPS of Rs. (8.15) gives the stock a meaning less P/E and hence no compassion could be made for its valuations

To summarize I would say that Suzlon is like a fancy stock in a fancy industry which is just playing with the investors and continuously eroding their wealth. It’s better to avoid such a stock since market offers far better investment opportunities at the current levels rather than buying or even continuing to hold Suzlon.

In this Fantastic Four series you already know the first two i.e. DLF and Suzlon. The other 2 members of this team of Fantastic Four will follow soon…

Happy Investing…!!!