Kotak 2006

Suzlon Energy (SUZL.
BO)
Industrials / Electrical equipment
Initiating coverage
Riding a tailwind . We expect rising global investment in wind
"
January 18, 2006
Stock rating: Outperform
Coverage view: Attractive
Price: Rs877
energy to drive strong growth for Suzlon, Indias largest wind

equipment manufacturer. Likely positive news flow catalysts over
the next year support our OP rating. Our price target of
Rs1,040/share implies 19% potential upside.
Target price: Rs1,040

BSE-30: 9,238
India
Why read this report?
Initiating with OP
News flow catalysts

identified
Suzlon Indias largest wind energy equipment manufacturer

Suzlon is Indias biggest wind equipment maker with over 50% market share (1HFY06).
Its key strengths include its established domestic manufacturing base and ability to provide
total solutions. We like the managements strategies for growth and risk mitigation, viz.
geographical diversification into other growing countries, providing maintenance services and
greater vertical integration into components.
Likely strong growth in global wind energy investments to benefit Suzlon

Our strong earnings growth forecast for Suzlon is predicated on rising global wind energy
investments. Several factorshigh fossil fuel prices, rising environmental concerns and the
need for energy securityare making regulatory policies more conducive to renewables.
We see India as a key growth market, with a more conducive regulatory and fiscal regime,
sustained industrial growth in a power deficit scenario and near-term shortage of fossil fuels.
We rate Suzlon an Outperformer with a price target of Rs1,040/share
Shilpa Krishnan
shilpa.krishnan@kotak.com
Mumbai: +91-22-5634-1239
Lokesh Garg
lokesh.garg@kotak.com
Mumbai: +91-22-5634-1496
Aman Batra
aman.batra@kotak.com
Mumbai: +91-22-5634-1231
Our price target is based on P/E of 22.7X FY2007E EPS, a 5% discount to the Kotak
electrical equipment coverage universe. High crude prices, domestic coal shortages,
continued positive regulatory news flow and concrete moves to trade in carbon credits are
positive catalysts that support our OP rating.
Key risks: increasing multinational competition, regulatory changes

Key risks include (a) intensifying competitive pressures impacting domestic market share and
margins, (b) inability to scale up international presence and (c) restrictive regulatory policies.
Suzlon would become a full tax paying company post 2008, resulting in likely earnings decline.
Company data and valuation summary
Company data
Rating: Outperform
Current price (Rs)
877
Kotak Institutional Equities

Research
Important disclosures
appear at the back of
this report.
Stock data
52-week range (Rs)
Yield (%)
Priced at close of:
High
949.8
Low
580.2
Price performance
Absolute (%)
1M
(5.0)
3M
72.0
12M
N.A.
63.7
Jan 18, 2006
Rel. to BSE-30 (%)
(4.5)
51.3
N.A.
Capitalization
Market cap (Rs bn)
Net debt/(cash) (Rs bn)
252.3
2.4
Forecasts/valuation
EPS (Rs)
P/E (X)
2005
44.2
19.9
2006E
27.8
31.5
2007E
45.7
19.2
Free float (%)

Shares outstanding (mn)
30.2
287.5
ROE (%)
EV/EBITDA (X)
66.1
52.0
42.6
25.7
37.3
15.9
Source: Company data, Kotak Institutional Equities estimates.
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Suzlon Energy
Table of contents
1 Overview: Riding a tailwind
3 Valuation and timing
10 Strong growth in investment for global wind energy
14 India likely to remain a key growth market for wind energy
22 Suzlons key initiatives: Integration, diversification
27 Key risks: Competitive pressures, regulatory changes
30 Financials: Strong earnings growth likely
35 Appendix 1: Wind energy market basics
42 Appendix 2: Suzloncompany profile
45 Disclosures
Expected news flow/events

Date
January 2006
2QFY07
2QFY07
Indefinite
Event
Introduction of fixed price feed-in system and
guaranteed grid access in China
Concrete announcements by Indian private/state
utilities to add wind power capacities in compliance of
SERC norms
Enforcement of EUs country specific targets
Concrete moves to trade in carbon entitlements as

envisaged under Kyoto protocol
Comment
Could increase wind energy installations in China and
potential orders for Suzlon
Order catalysts for Suzlon
Could lead to increase in wind energy installations in

Europe positive for the industry although Suzlon
currently does not have presence in Europe
Positive for wind energy installations (barring in USA,
which has not agreed to the Kyoto Protocol)
Source: Kotak Institutional Equities estimates.
The prices in this report are based on the market close of January 18, 2006.
Kotak Institutional Equities Research
Suzlon Energy
Overview: Riding a tailwind

Exhibit 1: Forecasts and valuation
Year to
March
2004
2005
2006E
2007E
2008E
Revenues
(Rs mn)
8,575
19,425
37,191
62,965
74,414
EBIDTA
(Rs mn)
1,239
4,895
9,755
16,099
18,798
PAT
(Rs mn)
979
3,839
7,998
13,153
15,447
EPS
(Rs)
40.2
44.2
27.8
45.7
53.7
Mcap/Sales
(x)
29.4
13.0
6.8
4.0
3.4
EV / EBIDTA
(x)
205.0
52.0
25.7
15.9
13.3
P/E
(x)
21.8
19.9
31.5
19.2
16.3
We expect rising global investment in wind energy to drive strong growth for
Suzlon, Indias largest wind equipment manufacturer. Likely positive news flow
catalysts over the next year support our OP rating. Our price target of
Rs1,040/share implies 19% potential upside.
Suzlon: Indias largest wind energy equipment manufacturer

Suzlon commands a 50% market share (1HFY06) amongst wind power equipment
manufacturers in India. Along with unlisted associate companies, Suzlon provides
holistic wind energy solutions ranging from site location, project development,
infrastructure creation (including associated transmission facilities) to equipment supply
and O&M.
Investments to grow in wind energy across the world: India a key growth market
High fossil fuel prices, environmental concerns and growing anxieties regarding
energy security are making regulatory policies more conducive to renewable sources
of energy. USA, India, China and Australia will likely lead growth.
In India, captive power producers comprise the primary customer segment for wind
power with cost savings and reliability being the key market drivers. We expect
favorable regulatory policies, sustained industrial growth in a power-deficit scenario,
growing scarcity of coal (a competing fuel for captive use) and delays in gas
distribution infrastructure to drive strong growth in wind energy.
Additionally, we forecast 600 MW of capacity addition by Indian private/state utilities

through FY2008 based on state regulatory commissions mandating distcoms (distribution
utilities) to procure a minimum percentage of their consumption from renewable sources
of energy.
Suzlons key initiatives: vertical integration, geographical diversification, O&M

We like Suzlons strategies for growth and for risk mitigation: (a) geographical
diversification into other growing countries, (b) providing O&M (operations and
maintenance) of wind equipment and (c) greater vertical integration into components.
Suzlon Energy
We believe overseas revenues could constitute 41% of revenues by FY2008, though

insignificant at present. Suzlon has already reported early successes in USA and
China and plans to include Australia in its geographical diversification. The company
is setting up supporting manufacturing facilities wherever required.
O&M services for the installed base of wind energy equipment provides multiple
benefits of stability, growth, high margins and control on assets.
Key risks: competitive pressures, regulatory changes

Key risks include (a) intensifying competitive pressures impacting domestic market share
and/or margins, (b) inability to successfully establish presence in international markets
and (c) less friendly regulatory policiestough taxation policies could lower IRR for
wind power generators, in turn impacting capacity additions and Suzlons EPS.
Suzlons earnings are very sensitive to our assumptions for domestic market share: a 5%
lower-than-expected domestic market share could lower our EPS estimate by 7.1% while
a 5% lower price realization (per MW installed) could depress our EPS number by 6.4%.
We estimate 56% and 59% CAGR in Suzlons revenues and earnings

We forecast 59% PAT CAGR between FY2006-08 led by 56% revenue CAGR. A large
part of the growth comes from exports, which, we believe, would constitute 41% of
revenues by FY2008. We see RoE declining from current level of 66% to 32% by
FY2008the decline is mainly due to Suzlons equity expansion in early FY2006.
As tax benefits available to Suzlon taper off, post FY2008 we see RoE dip to a
sustainable (and healthy) level of around 20%.
Valuation: Relative valuation based on near-term earnings growth, news flow

We rate Suzlon an Outperformer with a target price of Rs1,040, based on P/E of 22.7X
FY2007E EPS. We believe news flow over the next one-year is likely to be favorable,
supporting our OP rating. In particular, we expect an impetus led by high crude prices,
severe coal shortages and positive regulatory measures.
Given the limitations of a DCF analysis (nascent sector, Suzlons limited history as a
publicly known listed company, no proven track record in overseas markets), we view
relative valuation as more appropriate for the next one year. We believe investors would
mainly focus on near-term earnings growth and news flow momentum to time their entry
into (or exit from) the stock. The stock is liquid and has no FII restrictions, which also
supports an active trading strategy.
Rising prices of conventional fuels (oil and coal) are possibly the most compelling driver
for governments and private industries to adopt a favorable outlook towards nonconventional energy sources. Therefore, wind equipment stocks tend to perform well in
times of rising crude prices.
Suzlon Energy
Valuation and timing

We rate Suzlon an Outperformer with a target price of Rs1,040, based on a P/E of
22.7X FY2007E EPS. Wind equipment stocks tend to perform well in times of rising
crude prices. High crude prices, domestic coal shortages, positive regulatory
tidings and momentum in carbon credit trading are potential catalysts supporting
our OP rating.
Relative valuation based on near-term earnings growth, news flow

Suzlons short trading history and lack of accurate comparables constrain a precise view
on which valuation methodology and benchmarks have worked best in the past.
Investors have tended to view Suzlons peers in the capital goods / engineering space
(BHEL, L&T and ABB) as long term plays on Indias compelling capex and
infrastructure themes. A DCF-based valuation methodology is the best metric to capture
this potential.
Wind energy is also a compelling long-term theme. Key events shaping Suzlons DCF
model would be (a) determining linearity and a likely inflexion point in the domestic
growth trajectory, (b) emerging competitive scenario in the domestic space and (c)
Suzlons success in uncharted overseas territories. However, limited history as a listed
(and therefore known) company, relatively unproven track record in overseas markets
and nascent characteristics of the domestic industry place severe limitations on an
effective DCF analysis.
We therefore believe relative valuation based on closest available peers would
work best over the next year. We see investors focusing on near-term earnings
growth and news flow momentum to time their entry into (or exit from) the stock.
The stock is liquid and has no FII restrictions, which also lends itself to an active
trading strategy.
Selecting peers: BHEL, Vestas the best comparables

We believe BHEL (Indian power plant equipment major) and Vestas (global wind energy
equipment major) are the two best comparables for Suzlon.
Suzlon is currently trading 5% discount to the Kotak electrical equipment universe and
2.4% discount to BHEL (Exhibit 2). We have set our target price for Suzlon at 22.7X
FY2007 EPS (based on 5% discount to the Kotak electrical equipment universe) which
implies 3.1% discount to our target multiple for BHEL. A key factor driving the
discount to the sector is the imminent increase in Suzlons effective tax rates (as
opposed to other companies that are already paying tax at peak rates), which we
believe should be factored into the market multiples. We have a detailed analysis of
qualitative factors comparing BHEL with Suzlon in Exhibit 3.

Our valuation implies a 13% discount to the world leader Vestas (Exhibit 4). Vestas
premium stems from its long-established presence in the segment, significantly larger
size and market share. Note that Gamesa, second-largest in the world, gets significantly
lower P/E multiples.
Suzlon Energy
Exhibit 2: Kotak Institutional Equities industrials sector coverage universe

Implied 07 val at tgt price
Electrical equipment
BHEL
ABB
Suzlon
Electrical equipment aggregate
Engineering & construction
L&T
Dredging Corp
Engineering & construction aggregate
Defense
Bharat Electronics
Rating
CMP
OP
IL
OP
1,466
2,059
877
Shares o/s
(mn)
Mkt cap
(Rs bn)
245
42
288
359
87
252
Target price
(Rs)
P/E
(x)
EV/EBIDTA
(x)
P/B
(x)
1,750
2,300
1,040
23.5
31.5
22.7
14.7
19.4
18.8
5.0
8.6
7.4
23.9
16.5
6.0
21.4
10.2
14.9
7.4
5.3
1.6
19.6
14.1
4.5
698
IL
OP
1,843
678
133
28
244
19
2,000
660
332
IL
1,000.0
80
KIE sector aggregate
80
1,075
14.6
1,042
EPS (Rs)
2005
2006E
8.4
21.8
3.6
15.0
5.3
2008E
EPS CAGR
(%)
EPS growth (%)

2007E
2008E
2006E
2007E
BHEL
39.0
60.4
74.6
72.1
54.8
23.5
(3.3)
22.7
ABB
Suzlon
35.5
44.2
52.5
27.8
73.0
45.7
90.5
53.7
48.0
(37.0)
38.8
64.5
24.0
17.4
36.6
6.7

L&T
Dredging Corp
59.5
44.9
73.9
61.5
93.4
64.9
113.3
65.0
24.2
37.2
26.4
5.4
21.3
0.2
24.0
13.2

Defense
Bharat Electronics
60.7
67.1
73.5
79.4
10.6
9.4
8.1
9.4
2005
2006E
2007E
2008E
2005
2006E
2007E
2008E
BHEL
16.9
22.5
23.3
19.3
16.7
21.4
22.4
19.0
ABB
Suzlon
23.2
66.7
27.9
42.7
30.5
37.6
29.5
32.9
22.7
44.8
27.3
36.5
29.9
35.2
29.0
31.6

L&T
Dredging Corp
21.6
27.0
28.0
24.4
20.7
25.3
26.8
23.9
25.2
14.7
26.2
18.1
27.5
16.7
27.5
14.7
17.9
14.0
18.4
17.4
20.1
16.3
20.9
14.6

Defense
Bharat Electronics
22.9
24.6
25.4
25.2
17.3
18.2
19.6
20.1
34.2
30.4
27.5
25.1
32.5
29.1
26.6
24.4
23.5
26.7
27.2
24.7
20.6
23.1
24.3
22.7
RoE (%)
RoCE (%)
P/E (x)
EV/EBIDTA (x)
2006E
2007E
2005
2006E
2007E
2008E
2005
BHEL
ABB
37.5
58.0
24.3
39.2
19.7
28.2
20.3
22.7
21.9
38.5
14.8
24.8
12.1
17.2
12.2
13.2
Suzlon
19.9
31.5
19.2
16.3
52.0
25.7
15.9
13.3

L&T
46.9
27.9
20.2
18.9
30.1
18.8
13.9
12.7
31.0
24.9
19.7
16.3
21.8
17.5
13.8
11.0
Dredging Corp
15.1
11.0
10.4
10.4
8.0
7.0
7.6
7.9

Defense
Bharat Electronics
37.0
28.8
23.0
19.1
24.9
20.4
16.5
13.6
16.5
14.9
13.6
12.6
9.6
8.8
7.7
7.0
36.2
24.9
19.0
17.2
23.5
16.8
13.0
11.6
2005
2006E
2007E
2008E
2005
2006E
2007E
2008E
6.0
12.3
31.7
5.0
9.8
8.5
4.2
7.7
6.2
3.6
6.0
4.7
3.5
3.6
13.1
2.8
2.7
6.7
2.4
2.1
4.1
2.1
1.7
3.4
9.3
6.4
5.1
4.2
4.9
3.6
2.8
2.4
7.3
2.1
5.9
1.9
4.8
1.6
3.9
1.4
1.8
3.0
1.5
2.8
1.2
3.0
1.0
2.9
7.8
6.5
5.3
4.4
2.2
1.9
1.6
1.3
P/B (x)
BHEL
ABB
Suzlon
L&T
Dredging Corp
2008E
EV/sales (x)

Defense
Bharat Electronics
4.8
4.0
3.3
2.8
2.0
1.8
1.5
1.3
7.7
5.7
4.7
3.9
3.1
2.5
2.0
1.7
Suzlon Energy
Exhibit 3: A qualitative assessment of BHEL v/s Suzlon

BHEL
Suzlon
Management
Ownership
Navratna PSU under the Ministry of Heavy Industries
Private corporate majority owned by Tanti family
Management bandwidth
Has some degree of autonomy in capex and M&A. Has been

proactive in accessing new technologies and overseas forays.
PSU limitations: HR policies
Proactive management - established Indian presence, now

making overseas forays in marketing and manufacturing
History and track record
40-year old company, very well established in domestic steambased power generating equipment
10-year young company, well-established in India and has

recently catapulted in global wind equipment league tables
Fuel mix
Diversified - capable of producing equipment for coal, gas and

hydro power plants
Equipment for wind-based power plants
Customer mix
80% - government controlled utilities
60% - private industries for captive power; 40% - investors
Market share
90% market share in steam-based PPE, 60% market share

amongst central and state government owned utilities
50% domestic market share, 4% global market share
Current stature
Nature of business / long term opportunities and threats

Business model
predictability
Domestic power capacity addition plans well-laid out 5-10 years

in advance. Assured revenue visibility for 2-3 years due to long
gestation nature of orders
Order gestation period is just 3 months hence no long term

visibility. However, ministry of non-conventional energy sources
spells out its long term forecasts
Long term robustness of

model
India has 300 years of coal reserves, but attempting to reduce

dependence on non-renewable energy sources
Gainer from growing thrust on renewable energy sources but

assessed domestic potential is finite
Competitive strengths
and concerns
Will likely continue to have dominant market share in India as

global top 3 (GE, Siemens, Alstom) are collaborators in one
segment or another. However, Chinese and Korean PPE
manufacturers pose threats
Dominant market share threatened from global majors that are

eyeing India's immense potential
Overseas capabilities
Established credentials in Middle-east and Asia. However access

to US and European markets limited due to nature of agreement
with domestic collaborators
Recently made forays into USA and China. Aspires to establish

stronger presence in overseas markets
Bargaining power of
suppliers
Established global component vendors
Needs to manufacture key components in-house due to erratic

component supplies
Vulnerability to input
costs
Has price escalation clause in some contracts
Short gestation period obviates need for price escalation clauses
Regulatory / political
risks
Purchase price preference not applicable any more; revenues

are however dependent on government spending and subject to
political risks
Competes in free markets, revenues prone to fiscal and

regulatory policies favouring (or limiting) wind power
Tax break vulnerability
Pays tax at peak rates
Saves tax due to investments in backward areas, exposed to

changes in tax regime
Investors
Investor friendliness
Company meets investors but does not hold analyst meets
Company meets investors and holds analyst meets
Quality of disclosures
Fairly good
Fairly good
Ability to invest
FIIs cannot invest as FII holding has touched the 24% limit, no
visibility on enhancement of this limit
FIIs can invest
Exhibit 4: Comparison of wind power companies ( C )

Price
Vestas
17-Jan-06
13.20
Mcap
(mn C)
Sales
(mn C )
2005E
2005E
EPS ( C)
2006E
2007E
2005E
PER (x)
2006E
2007E
EV/EBIDTA (x)
2005E
2006E
2007E
2,309
3,367
(0.6)
0.5
0.8
(20.7)
26.1
15.6
44.7
8.2
Gamesa
Nordex
12.30
5.53
2,961
219
2,243
237
0.8
(0.1)
1.0
(0.0)
1.1
(24.1)
14.7
(39.5)
12.9
(553.0)
11.3
(0.2)
10.2
70.7
9.1
22.4
RePower
37.02
171
349
(1.0)
1.0
1.8
(36.8)
38.2
20.9
77.7
9.9
6.3
8.1
(32.2)
7.6
Source: Bloomberg.
Suzlon Energy
Momentum indicators: crude prices, regulatory news, order flows

Rising prices of conventional fuels (oil and coal) are the most compelling reason for
governments and private industries to look favorably at non-conventional energy sources.
While wind is unsuitable for baseload applications, it scores over conventional energy
sources due to (a) reliability of cost of power and (b) short gestation period, both of
which are critical in times of rising fuel prices.
The following points suggest that wind energy equipment stocks respond positively to
news flow momentum:
Crude prices explain a significant percentage of the stock price movement of Gamesa
over the past five years and that of Vestas over the past year (Exhibits 5 and 6).
Stocks have turned in reasonable outperformance vis--vis their benchmarks during

rising crude prices (Exhibit 7).
Exhibit 5: Gamesas stock price has shown strong

correlation (corr = 0.80) with spot crude prices over the
past five years
Gamesa stock price v/s spot crude price
16
Gamesa ( C), LHS
14
Crude (US$), RHS
12
Exhibit 6: Vestas has shown a strong correlation to

spot crude prices over the past year (Corr = 0.78)
Vestas stock price v/s spot crude price
70
26
Vestas (US$), LHS
60
24
Crude (US$), RHS
60
22
50
10
70
50
20
40
18
8
30
16
20
20
Source: Bloomberg.
Dec-05
Nov-05
Oct-05
Sep-05
Aug-05
Jul-05
Jun-05
May-05
Apr-05
Apr-05
10
Jan-05
Oct-05
May-05
Dec-04
Aug-04
Mar-04
Nov-03
Jun-03
10
Jan-03
0
Sep-02
0
Apr-02
12
Dec-01
10
Jul-01
2
Mar-01
30
14
Mar-05
Feb-05
40
Source: Bloomberg.
Exhibit 7: Gamesa cumulative outperformance v/s IBEX 35 has > 50% correlation
(Corr = 0.52) with prevailing crude price level
Gamesa's cumulative outperformance v/s Spanish market index IBEX 35
Gamesa cumulative outperformance v/s IBEX 35, LHS
80.0
70
Crude (US$), RHS

60
60.0
50
40.0
40
20.0
30
0.0
20
Dec-05
Sep-05
Jun-05
Mar-05
Dec-04
Sep-04
Jun-04
Mar-04
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
0
Sep-01
(40.0)
Jun-01
10
Mar-01
(20.0)
Source: Bloomberg.
Suzlon Energy
News flow over the next year likely to be favorable
Crude prices expected to remain high. Goldman Sachs, in its report titled
Americas Energy: Oil dated December 12, 2005, has reiterated its view that we are
in the early stages of a multi-year super-spike phase in crude oil prices,
underpinned by resilient energy demand, lackluster supply growth, and non-existent
spare capacity. With WTI oil prices on-track to average about US$57/bbl in 2005,
GS believes 2005 will be remembered as the first of what could be a four- to fiveyear super-spike phase. The base-case view for energy commodities in 2006
remains US$68/bbl for West Texas Intermediate (WTI) spot oil and US$10/bbl for
Gulf Coast refining margins. The super-spike range is US$50-US$105/bbl.
Coal supply in India likely to remain stretched in the foreseeable future, which
could possibly result in a continued rush to add captive power capacities based on
non-conventional sources. India has coal reserves of 248 bn tones, 550X the
estimated demand of 446 mn tonnes in FY2006. Despite this, India is facing coal
shortages because of chronic under investment in coal mining. Until a few months
ago, nearly a third of 75 coal-based power plants in India were facing critical coal
shortages. According to Planning Commission estimates, the amount of coal likely to
be imported during the year 2006-07 is 46.6 mn tonnes. With a target of 35 GW of
coal-based thermal power capacity for the 11th plan, coal supplies are likely to be
stretched. The industry is still awaiting clarity on the policy for captive coal mining.
Regulatory news flow will likely remain favorable in view of the above factors.
The US government has recently extended production tax related fiscal incentives
available for wind-based power generation through 2008, in addition to the
continuing Renewable Portfolio Standards for wind power. We believe Indias
existing fiscal and regulatory incentives for wind power (such as accelerated
depreciation and a minimum procurement policy) are likely to continue and
strengthened over the next few years. Key news flow catalysts include: (a)
concrete announcements by Indian state utilities to add wind power capacities
in compliance with SERC guidelines, (b) move to enforce carbon trading
mechanism as envisaged under the Kyoto protocol, (c) introduction of fixedprice feed-in system and guaranteed grid access in China and (d) individual
country renewable targets by EU in Europe.
Company and industry-specific factors influence our DCF valuation

We prefer using DCF to value stocks in the industrials sector, as it remains, in our view,
the best metric to capture sustainable free cash generation and long-term growth
possibilities. While wind energy is a compelling long-term theme, a long-term model for
Suzlon involves a view on a likely inflexion point in Suzlons domestic growth trajectory,
regulatory policies of various governments (that have, in the past, been erratic),
competitive scenario in India (which may change) and Suzlons capabilities to succeed in
overseas territories (not tested in the past).
Suzlon Energy
Wind equipment companies do not follow a typical linear growth model

We believe wind energy equipment companies do not show characteristics of classic
cyclical growth. However, withdrawals and re-introductions of regulations have made it a
volatile model in the past. Additionally, we see the likely attainment of Indias 45 GW of
proven finite wind energy potential as an inflexion point in the growth trajectory.
Although this appears far-fetched at the moment given Indias installed capacity is only
3.5GW, the likely continuation of current capacity addition run-rate brings in this
scenario at 2017 (Exhibit 8).
If this scenario does pan out, domestic original equipment demand (constituting 59% of
Suzlons estimated revenues in FY2008) is likely to taper off in 2017. Thereafter,
replacement demand would start kicking in. Wind equipment has a 20-year replacement
cycle, which implies that equipment installed in 1998 would be replaced in 2018 and so
on. Based on these assumptions, we see an intermediate lull-phase before domestic
equipment growth kicks in once again (Exhibit 9). It is difficult to take a view on the
precise growth trajectory at this time due to other possibilities such as (a) discovery of
offshore wind energy potential, (b) further enhancement of proven onshore potential
(note that currently assessed capacity is at low hub heights of 30m and with lower
capacity machines) or (c) shorter-than-expected hyper growth phase followed by a
prolonged lull.
Exhibit 8: At current growth rates, India would achieve
its identified wind potential of 45,000 MW by 2017
Incremental capacity addition and cumulative wind based
power generation capacity
5,000
Cumulative capacity (MW), RHS
4,500
Capacity addition (MW), LHS
50,000
Exhibit 9: Having achieved the full potential for

incremental capacity addition, replacement demand
picks up after 2017
Demand from new capacity installation and replacement
market
5,000
Domestic product MW
Replacement demand MW
4,500
4,000
40,000
4,000
3,500
3,500
3,000
30,000
3,000
2,500
2,500
2,000
20,000
2,000
1,500
1,500
1,000
10,000
1,000
500
2037
2035
2033
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
0
2005
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
2003
500
Suzlon is making the right global moves but its capabilities are untested
We believe Suzlon is following the right strategy of geographical diversification as a
growth and risk mitigation tool. The company would have to set up an aggressive
overseas footprint over the next decade. China, endowed with massive wind energy
potential, is a key target for Suzlon. However, we believe the imminent emergence of
strong Chinese local companies may threaten Suzlons ambitions.
Suzlon Energy
Suzlons tax rates may increase going forward

Suzlons manufacturing locations are situated in areas that enjoy backward state-related
tax benefits. We believe the benefits are likely to expire over the next five years, as
shown in Exhibit 10, leading to higher tax rates. Note that the rest of the Kotak
Industrials sector coverage universe already pays tax at near-peak rates.
Exhibit 10: Suzlon enjoys low tax rates due to location of plants in backward areas likely to dissipate by 2009
Suzlon - tax exemptions
Wind Turbine Generator manufacturing units

Diu
Daman I
Pondicherry
Daman II
% of profits exempted from tax

2007
2008
2009
2010
2005
2006
2011
2012
30
30
100
100
30
30
100
100
30
100
30
30
100
30
30
30
30
30
30
30
30
30
100
100
100
100
100
100
100
100
30
30
30
30
30
30
30
30
11.2
26.6
27.7
Rotor blade manufacturing units

Daman III
Pondicherry
Effective tax rate (%)
9.2
10.5
11.2
27.6
27.8
We believe compelling near-term news flow could trigger a premium to

DCF-based valuation
We believe likely investor focus on positive news flows over the next year could result in
the stock trading above its DCF-based fair value. As investor comfort levels with the
industry, company and management builds up over a period of time, a clearer consensus
is likely to emerge on long-term issues, which in turn would lead to more accurate DCFbased value realization, in our view.
Suzlon Energy
Strong growth in investment for global wind energy

We expect global wind energy investments to exhibit strong growth, led by USA,
China, India and Australia. High fossil fuel prices, rising environmental concerns
and the need for energy security are making regulatory policies more conducive to
renewable sources of energy. Concurrently, improving inherent competitiveness of
wind power is likely to protect the sector from regulatory policy-related volatility in
the long term.
We forecast global wind energy investments to show strong growth

BTM-Aps, an authoritative publication on wind energy, expects 22% CAGR in windbased power capacity installation through 2009. China, Australia, USA and India are
expected to dominate this growth (Exhibit 11). The action seems to be shifting away from
Europe, the traditional stronghold of wind power generation.
Exhibit 11: Europe likely to decelerate; China and USA the likely growth drivers
Past and expected growth in installed capacity (MW)
2001
2004
2009E
% CAGR
8,674
3,329
2,328
16,649
8,263
3,083
24.3
35.4
9.8
430
682
386
1,081
1,261
889
36.0
22.7
32.1
Others
Total Europe
USA
4,245
3,499
34,725
6,750
16.7
74,600
18,850
16.5
22.8
India
Japan
China
1,482
357
406
3,000
991
769
26.5
40.5
23.7
8,300
NA
3,119
22.6
NA
32.3
NA
421
45,665
NA
2,121
106,990
38.2
18.6
Germany
Spain
Denmark
Netherlands
Italy
UK
Australia
Total
% CAGR
Note: Our growth estimates for India and USA are more optimistic than BTM forecasts.
Source: BTM Consult Aps, Kotak Institutional Equities estimates.
Imperatives for renewable energy

1. High fossil fuel prices
We estimate fossil fuels to account for 67% of global power capacities. Crude oil prices
have spiked by more that 100% over the past two years, increasing the cost of power
generation immensely. Expectations of continued volatility in fossil fuel prices is urging
governments to emphasize renewable resources such as wind through favorable
legislations.
10
Suzlon Energy
2. Rising environmental concerns

The recent UN climate change conference at Montreal reiterated the commitment of
nations under the Kyoto Protocol to control temperature rises and cut greenhouse gas
emissions. The likely doubling of installed wind capacity in Europe by 2010 would
deliver a third of the EU commitment to the Kyoto Protocol. Additionally, the awareness
of the social and environmental cost of fossil fuels is increasing. It is estimated that the
cost of producing electricity from coal or oil would double and that of electricity
production from gas would rise by 30% if environmental and health costs are taken into
account, rendering wind energy relatively inexpensive.
3. Need for energy security

About 60% of the worlds oil imports are from the politically volatile zones of the
Middle-East and Africa. Socio-political instability and wars in these regions have
periodically led to oil price spikes. Secondly, amidst static oil reserves, countries are
making a rush to secure oil supplies and prices for the long term. Wind is touted as one of
the best ways to secure future energy needs, as it is abundantly available and free of cost.
The action is likely to shift towards USA and China

USA: PTC and RPS to drive growth
The Production Tax Credit and Renewable Portfolio Standard adopted by many states are
two key drivers of demand for wind power equipment in the US. When PTC expires (as it
has three times over the past six years), contracts are typically put on hold and
investments in wind power capacity trickle to almost a complete halt. PTC expired in
December 2003 and thus only about 389 MW of new wind power capacity was installed
in 2004.
However, PTC was reintroduced in October 2004 and has been subsequently extended
through 2007 in August 2005. Consequently, upto 2,200 MW wind power-based capacity
may be installed in the US in 2005 and we believe that this strong momentum will
continue in 2006 and 2007. We believe that cumulative installed wind power capacity in
the US would grow at a CAGR of 29% CAGR through FY2009. With PTC once again
slated to expire on December 31, 2007, we believe it could either be renewed once again,
or states could continue to add renewable-based power capacities (in pursuit of RPS
goals) even without PTC.
China: Big potential and ambitions

Installed capacity of wind-based power in China is expected to grow at a CAGR of
32.3% through 2009 (BTM Consult Aps)the second-highest growth rate after
Australia. However, this growth is coming off a very small capacity base of 850 MW at
the end of 2004.
China is rich in wind energy potentialthe Chinese Metrological Research Institute
suggests that land-based potential for wind power generation is 235 GW, while oceanbased wind resource is capable of supporting a further 750 GW of capacity.
11
Suzlon Energy
In March 2005, the Chinese government passed the Renewable Energy Promotional Act,
which mandates that by 2020, 10% of electricity production (amounting to a capacity of
about 121 GW) must come from renewable energy sources.
Meanwhile, China is promoting wind power concession projects for which local
authorities invite investors to set up 100 MW size wind farms at potential sites through a
lowest tariff-based bidding procedure. China wants to bring down the cost of power and
also increase the proportion of locally made components to 70%. The provincial grid
company is responsible for evacuating the power. After 30,000 hrs of operations, the
tariff reduces to the average tariff for electricity across sources at the time.
In its long-term planning, the Chinese government has proposed that wind power
capacity should reach a figure of 20 GW by 2020. In order to spur further development of
wind-based power, a new Chinese Renewable Energy Promotion law is likely to come
into force in January 2006, which would introduce a fixed-price feed-in system similar to
other countries and many Indian states while guaranteeing grid access.
Australia: Fastest growing market from a small base

The Australian market is driven by the availability of Mandatory Renewable Energy
Target (MRET). MRET places a legal liability on wholesale purchasers of electricity to
proportionately contribute towards the generation of an additional 9,500 GWh of
renewable energy per year by 2010, along with enforceable interim targets for each
specific year (to ensure consistent growth across years). The Australian Government
initiative has also developed a legislated national renewable energy market based on an
innovative system of tradable certificates for utilities to meet their assigned renewable
energy targets.
Australia added about 100 MW wind power capacity in 2004, reaching a cumulative
installed capacity base of 380 MW as at December 2004. It is likely to add almost twice
the capacity added in 2004, reaching a cumulative installed capacity of about 580 MW by
December 2005. BTM Consult ApS have projected that cumulative installed capacity in
Australia would grow by a CAGR of about 38%, making it the fastest-growing wind
power equipment market.
Europe: Mature and waiting for the next trigger

In Europe, Denmark and Germany, have been key hotbeds of activity in wind energy,
including the area of technological developments. However, the big markets in Europe
Germany, Spain and Denmarkappear to be maturing.
The next big investment wave in Europe wind energy sector could be driven by the
targets set in the European Unions renewables directive (2001/77/EC) for individual
countries, which deals with the percentage of electrical power to be produced from
renewable energy sources in each country. For example, France is committed to sourcing
21% of its electricity from renewable sources by 2010, while Italy is targeting to have
renewables accounting for 5% by 2012.
Wind energy may also take off in Europe with increased acceptance of the idea of
tapping offshore wind energy. UK is currently implementing two large 90 MW wind
power projects at Barrow and Kentish Flats.
12
Suzlon Energy
The European Commission has ratified the Kyoto protocol and has also established
formal carbon trading systems and procedures along with penalties for non-compliance.
Under the regulations, non-compliance incurs a penalty of C 40/tonne CO2 during the
first phase of 2005-07, increasing to C100/tonne CO2 in the second phase of 2008-12.
We believe carbon emissions are going to get increasingly contentious, giving wind
energy investments the benefit of carbon trading revenues.
Wind-based power becoming more competitive

Through technological advancements, we believe the inherent competitiveness of wind
power is improving. This is necessary to build wind energy as a sustainable resource for
power generation in the long term, irrespective of regulatory policies.
Falling capital costs

Technological advancements are continually improving the economic viability of wind
energy generators. While large WTGs (international norm is 1.5 3 MW WTGs) lower
capital costs, more efficient designs of the new WTGs are leading to higher electricity
generation at even low wind speeds. A higher unit rating causes lower per MW cost
(including land, installation and freight costs)
Falling variable costs

Variable costs may decline due to falling O&M costs per unit of electricity produced by
larger plants. Variable costs could also decline if netted off against possible revenues
from carbon credits.
Low interest rate regime

With declining interest rates (and therefore return expectations), investors are
comfortable with low IRRs on their wind energy investments.
Bank funding is more readily available

In India, banks are now more willing to fund up to 70% of the cost of wind energy
installations.
13
Suzlon Energy
India likely to remain a key growth market for wind energy

We forecast 42% CAGR in cumulative wind energy installations in India through
FY2008. Continued friendly regulatory and fiscal regime, sustained industrial
growth in a power deficit scenario and near-term shortage of competing fuels
would be the key growth drivers in India.
Captive power producers most keen buyers

The Indian market for wind power is different from its global counterparts, as captive
power producers represent the key customer segment. There are three types of customers
for wind energy equipment:
a) Captive power producers: Private industries that install power plants for their own
or third party consumption. In India, these comprise around 65% of demand.

b) Investors: Corporates who install wind-based capacities for the purpose of sale to
the state grid account for 35% of demand.

c) State and private utilities: These currently comprise a negligible portion of demand.
Buying WTG for different reasons

1.
For a captive power plant producer, the basic buying motives are cost savings
and reliability. The considerations for choice of fuel would be costs, fuel
availability, gestation period and economical unit sizes (Exhibit 12).

Exhibit 12: Advantages of wind v/s competing fuels for captive use: cost stability, quick set-up, suited for small
requirements, available in most industrial states of India
Comparisons and contrasts between alternative sources of captive power
Coal
Diesel
Basic considerations for setting up a captive power plant
5.0
Life-cycle cost of power 2.5
(Rs/KWH)
Reliability, with respect
to
a) power availability
High
High
b) prices
Standby purposes
Gas
Hydro
Wind
3.0
3.0
3.2
High
High
Low, as consumer continues to

be fed by grid
Low - subject to coal

prices
Low - subject to
international crude prices
Low - subject to gas

prices
High - no fuel cost
High - no fuel cost
Unsuitable
Highly suited
Unsuitable
Unsuitable
Unsuitable
Can be as low as 50KW
Ideal for >10MW scale economies with

increasing size
Ideal for >10MW - scale

economies with
increasing size
Can be as low as 300 KW
Other considerations
Size
Ideal for >25MW - scale
economies with
increasing size
Regulatory friendliness States continue to have policies favoring SEBs and the cross-subsidy burden they have to bear. Electricity Act
allows group captives and third party sales subject to state regulatory bodies
States have a more friendly

attitude due to environmental
reasons and perception of
limited damage potential
Set-up time
Fuel availability
3 months
Only in 9 'windy' states - but
these are India's most
economically developed states
Minimum 2 years
Dependent on imported
coal / Coal India Ltd (a
monopoly); captive coal
mining policy still not
clear
3 months
Easily available
12 months
Lots of gas
discoveries in India
but still not available,
regas. terminals not
adequate
Minimum 2 years
Potential mainly in far
north and north-eastern
states which are not
economically developed
14
Suzlon Energy
2.
An investor would base his decision on the IRR of the project. For example, an
investor in Maharashtra setting up a 1.25 MW unit could earn a base-case IRR of

10.1% (Exhibit 14) with our base case assumptions given in Exhibit 13. Our IRR
calculations are extremely sensitive to assumptions of PLF and continued fiscal
incentives (Exhibit 15). For example, if PLF was 25% instead of 21%, the IRR could
shoot up to 13%. Wind energy has, in the past, exhibited low and volatile PLFs due
to varying wind availability year on year (Exhibits 16 and 17). However,
technological advancements can bring about higher PLFs, in our view.
Exhibit 13: Key assumptions for calculating IRR: PLF of 21%, continued tax incentives
Key assumptions for calculating IRR for a wind-based captive power producer
Key assumptions
Installed cap (MW)
State
Equipment cost (Rs mn)
Land / other cost (Rs mn)
Total installation cost (Rs mn)
Assumed PLF (%)
% sold to grid
Unit sale price (Rs/KWH)
Carbon credit
O&M cost
Interest
Depreciation
Tax rate (MAT, %)
Scrap value of windmill
Land value
1.25
Maharashtra
54.8
7.7
62.5
21.0
100
MERC specified buyback rate, 15p escalation p.a for 13 years
Not assumed in our working
2% of initial capital cost with 4% cost escalation
Assuming 70:30 DER and 9% interest rate
5% SLM, assuming useful life of 20 years
8.5
120 tons per 1MW WEG @ US$250/ton
Assuming land appreciates at WACC
Exhibit 14: An investor could easily earn an IRR of 10.1% on a WTG installation
Calculation of the economics of setting up a wind energy generator for an investor
Year #
Generation (mn KWH)
a) Captive consumption
b) Sold to grid
Carbon Credits sold (Rs mn)
Sales (Rs mn)
O&M cost (Rs mn)
Interest (Rs mn)
Depreciation (Rs mn)
Pre-tax cost (Rs mn)
Pre-tax profit (Rs mn)
Tax rate %
Less: tax (Rs mn)
Net profit (Rs mn)
Cash profit (Rs mn)
Discount factor
DCF
WACC (%)
1
2.30
2
2.30
3
2.30
4
2.30
5
2.30
6
2.30
7
2.30
8
2.30
9
2.30
10
2.30
11
2.30
12
2.30
13
2.30
14
2.30
15
2.30
16
2.30
17
2.30
18
2.30
19
2.30
20
2.30
3.0
2.3
3.5
8.0
3.9
2.7
6.7
1.4
8.5
0.1
1.3
4.0
0.9
3.6
3.1
2.3
3.6
8.3
3.6
2.7
6.3
2.0
8.5
0.2
1.9
4.6
0.8
3.8
3.2
2.3
3.8
8.6
1.2
3.2
2.7
7.1
1.5
8.5
0.1
1.4
4.1
0.8
3.1
3.3
2.3
3.9
8.9
1.3
2.8
2.7
6.8
2.1
8.5
0.2
1.9
4.7
0.7
3.2
3.4
2.3
4.0
9.2
1.4
2.4
2.7
6.5
2.8
8.5
0.2
2.5
5.3
0.6
3.3
3.5
2.3
4.2
9.5
1.4
1.9
2.7
6.0
3.5
8.5
0.3
3.2
5.9
0.6
3.4
3.6
2.3
4.3
9.8
1.5
1.4
2.7
5.6
4.3
8.5
0.4
3.9
6.7
0.5
3.4
3.7
2.3
4.4
10.1
1.5
0.8
2.7
5.0
5.1
8.5
0.4
4.7
7.4
0.5
3.5
3.8
2.3
4.5
10.4
1.6
2.7
4.4
6.0
8.5
0.5
5.5
8.3
0.4
3.5
3.9
2.3
4.7
10.7
1.6
2.7
4.4
6.4
8.5
0.5
5.8
8.6
0.4
3.3
4.0
2.3
4.8
11.0
1.7
2.7
4.4
6.6
8.5
0.6
6.0
8.8
0.4
3.1
4.2
2.3
4.9
11.3
1.8
2.7
4.5
6.8
8.5
0.6
6.2
9.0
0.3
2.9
4.3
2.3
5.1
11.6
1.8
2.7
4.6
7.0
8.5
0.6
6.4
9.2
0.3
2.7
4.4
2.3
5.2
11.9
1.9
2.7
4.7
7.3
8.5
0.6
6.7
9.4
0.3
2.5
4.5
2.3
5.2
11.9
2.0
2.7
4.7
7.2
8.5
0.6
6.6
9.3
0.2
2.2
4.7
2.3
5.2
11.9
2.1
2.7
4.8
7.1
8.5
0.6
6.5
9.2
0.2
2.0
4.8
2.3
5.2
11.9
2.2
2.7
4.9
7.0
8.5
0.6
6.4
9.2
0.2
1.8
5.0
2.3
5.2
11.9
2.3
2.7
5.0
6.9
8.5
0.6
6.4
9.1
0.2
1.6
5.1
2.3
5.2
11.9
2.3
2.7
5.1
6.9
8.5
0.6
6.3
9.0
0.2
1.5
5.3
2.3
5.2
11.9
2.4
2.7
5.2
6.8
8.5
0.6
6.2
8.9
0.1
1.3
10.2
NPV calculation (Rs mn)

Initial investment
Sum of DCF
Scrap value of windmill
Land value
NPV
(62.48)
55.6
0.20
7.7
1.0
Levelised tariff (Rs/KWH)

IRR
2.68
10.1%
15
Suzlon Energy
Exhibit 15: The economics of a windmill are sensitive to PLF assumptions and
continuation of fiscal incentives
Sensitivity of IRR and levelised tariff to PLF and tax rate assumptions
Sensitivity of IRR to PLF and tax rate assumptions
PLF %
Tax rate
%
19
8.6%
7.3%
8.5
34
21
10.1%
8.4%
23
11.5%
9.4%
25
13.0%
10.4%
Sensitivity of levelised tariff to PLF and tax rate assumptions

PLF %
Tax rate
%
19
3.05
8.5
34
3.09
21
2.68
2.73
23
2.36
25
2.10
2.44
2.20
Exhibit 16: Low PLFs inherent in wind energy sector

WEG historical PLF data and MNES guidance (%)
2000
2001
2002
2003
2004
MNES
guidance
Andhra Pradesh
Gujarat
Karnataka
9.6
8.4
13.2
13.9
9.7
18.5
18.2
9.2
15.4
15.2
9.7
16.1
13.4
7.8
16.8
14-18
14-16
16-23
Kerala
Madhya Pradesh
Maharashtra
Rajasthan
10.8
11.9
6.6
14.5
14.6
8.6
13.9
14.3
9.5
13.2
4.2
16.5
19.0
4.2
10.0
18.0
1.0
NA
14-16
16-18
Tamil Nadu
West Bengal
17.1
15.4
16.6
3.3
15.0
5.3
13.4
5.4
18-23
NA
Exhibit 17: Technological advancement helps but wind

availability remains crucial for wind energy generation
Reported PLFs for wind based generation capacity
Capacity (MW)
India Cements
Tata Power
Reliance Energy
Madras Cement
Dalmia Cement
PLF %
FY2004
FY2005
10.0
17.0
9.4
34.4
16.5
20%
21%
36%
17%
26%
18%
20%
36%
15%
24%
Source: Respective companys annual reports, Kotak Institutional

Equities.
Source: MNES, Kotak Institutional Equities estimates.
3.
A state or private utility needs to efficiently deliver power to its large customer
base, and therefore seeks to add maximum baseload capacities at minimum cost and
time. Thus, coal and gas have been the preferred resources in India. Mandatory
procurement guidelines could however lead to these utilities setting up wind
capacities on their own.
State-level policies strongly influence the customer profile

For example, captive power producers are the key customers in states like TN and
Gujarat, where grid power is very expensive and the buyback rate for wind power is low,
but wheeling and banking policies are conducive. On the other hand, investors are the key
customers in Maharashtra, where buyback prices for wind power are higher than grid
power costs for industrial customers.
16
Suzlon Energy
India will likely remain a key growth market

We project 42% CAGR in cumulative wind energy installations through 2008 (Exhibit
18). We believe captive power producers and investors (who represent most of the
current demand) would add 6,062 MW of wind power between FY2006-08. Private and
state utilities, which currently constitute a negligible portion of demand, would add 600
MW of wind power capacities in FY2006-08.
Note that Indias wind potential remains adequate to accommodate strong medium-term
growth rates in the wind energy sector (Exhibit 19). Additionally, amongst nonconventional sources, we believe wind energy in India offers an optimal combination of
large potential and low tariff, and hence is likely to attract friendly regulatory policies
(Exhibit 20).
Exhibit 19: India has harnessed about 8% of its wind
energy potential
Wind energy potential v/s achievement (MW)
Exhibit 18: We forecast 42% CAGR in domestic wind

power capacity additions
Wind power capacity addition estimates
2006E
2007E
2008E
%
2009E CAGR
1,112
1,112
1,501
100
1,601
1,801
300
2,101
2,161
200
2,361
2,485
200
2,685
25
N.A.
29
3,237
3,237
4,737
100
4,837
6,538
400
6,938
8,699
600
9,299
11,184
800
11,984
39
N.A.
42
2005
State
Andhra Pradesh
Gujarat
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Orissa
Rajasthan
Tamil Nadu
West Bengal
Incremental capacity addition

Captive power users
Private and state utilities
Total
Cumulative capacity
Captive power users
Private and state utilities
Total
Total
Gross
Potential
8,275
9,675
6,620
875
5,500
3,650
1,700
5,400
3,050
450
Technical
Potential
1,920
1,780
1,180
605
845
3,040
780
910
1,880
450
45,195
13,390
Achieved
so far
100
254
411
2
29
456
285
2,037
1
3,575
Note :Gross potential is based on assuming 1% of land availability for

wind power generation in potential areas.
Source: MNES.
Exhibit 20: Wind compares well with other renewable energy sources on capital cost as
well as levelised tariff
Relative attractiveness of renewable energy sources
Wind energy
Small hydro
Biomass
MSW/IW to energy
Solar thermal
Potential in India
(MW)
Cost / MW
(Rs mn)
Possible PLF
(%)
Levelised tariff
(Rs/KWH)
45,000
15,000
3,500
45-52.5
35-62.5
35-40
22-32
30-45
60-80
2.5-3.7
1.8-3.4
2.2-3.2
1,700
Over 50,000 GW @
20 MW/sq km
50-120
60-80
2.5-3.5
100-120
14-24
8-10
Source: MNES.
17
Suzlon Energy
We see three fundamental drivers for wind energy investments in India
Catalysts in the form of regulatory and fiscal incentives will likely continue (driven
by environmental, energy security and cost considerations)
Continued industrial growth in a power deficit scenario
Near-term scarcity in competing fuels for captive use
1. Catalysts in the form of regulatory and fiscal incentives will likely continue
Fiscal incentives
Fiscal incentives, such as 80% accelerated depreciation in the first year and tax benefits
relating to infrastructure investments, will likely continue.
Price commitments
Many states have committed a long-term purchase price for electricity generated by
wind-based sources. For example, Maharashtra has fixed a purchase price of Rs3.50
/KWH for the electricity generated by wind-based sources with an escalation of 15 paisa
every year for the next 13 years.
Wind-friendly policies by state governments
The wheeling and banking system offered by state utilities is now more amenable to wind
based power projects for captive power generation (Exhibit 21)
18
Captive Use
Wheeling
Andhra Pradesh
Allowed
Gujarat
Allowed
Karnataka
Allowed
Kerala
Allowed
Madhya pradesh
Allowed
Maharashtra
Allowed
Rajasthan
Allowed
Tamil Nadu
Allowed
West Bengal
Allowed
At par with
conventional
4% of energy
5% of energy +
Rs.1.15/kWh as
cross subsidy for
3rd party sale.
To be decided by
SERC
2% of energy +
transmission charges
as per ERC
2% of Energy as
wheeling + 5% as T&D
loss.
10% of energy
5% of energy
2% of energy
6 Months
Allowed @2% of
energy input
Not Allowed
12 Months
Calender Year
5% (12 months Financial year

April to March)
6 Months
Rs2.60 per kWh, +

5p escalation p.a.
for 10 years
Rs3.40 per kWh

To be decided by
without any
SERC
escalation for 10
years of commercial
Year wise rates

specified: Rs3.97/KWH
declines to Rs2.6/KWH
towards the 20th year
Rs3.50/kWh, + 15p
escalation p.a. for 13
years
Rs2.91/kWh, + escalation Rs2.70 per kWh (Base year

of 5p p.a. thru Year 10,
2001-02); no escalation for 5
then frozen at
years
Rs3.36/KWH from Year
Banking
Buy-back Rate
by SEB
Rs3.37 per kWh

(frozen for 5 years)
operation
Third party sale
As per APERC order

dated 20-06-2001,
Non conventional
energy developers
can not sell power to
third parties.
Exhibit 21: Indian states have friendly regulatory policies that encourage wind power installations
Comparison of wind power policies in various states
To be decided
on case to
case basis
11 to 20
Allowed under Electricity Act 2003 subject to regulation framed by respective SERCs
Other Incentives
Industry Status
E.D. Exempted,
Demand cut 30% of
windfarm installed
capacity
No electricity Duty
for 5 years
No electricity Duty for 5

years
Power evacuation
arrangement, Approach
Road, Electricity Duty,
Loan to cooperative
societies
Exemption from electricity

duty at 50% for 10 years
Penalty on
10 paise per kVArh
10 paise per kVArh
40 ps / kVARh
27 paise per KVArh
25 paise per kVArh
Nil
kVArh consumption
Nil for average power factor

between 0.85 and 1.0 based
on import power
Rs0.30/- per kVArh if the ratio
of kVArh drawn to kWh
exported is upto 10% and
Re1/- per KVArh for more than
10%
Infrastructure
Development
Charges
Rs10 Lakhs/MW
Guarantee of
Through L/c
Nil
Through L/c
Rs17 Lakhs / MW
Rs28.75 Lakhs / MW
Revolving irrevocable L/c
Payment by SEB
19
Suzlon Energy
Source: MNES.
Suzlon Energy
Minimum purchase requirementsthe likely new growth driver
State regulatory commissions have advised their distcoms (distribution utilities) to

procure a minimum percentage of their consumption from renewable sources of energy
(Exhibit 22). Failure by captive power plant producers to meet this minimum guidance
might prompt state generation utilities to add renewable capacities. We forecast 600 MW
of capacity addition by private/state utilities through FY2008 in pursuit of this.
Exhibit 22: Many states have specified the minimum share of renewables
State electricity regulatory commission's guidance on share of electricity from renewable
sources
State
Regulatory guidance
Maharashtra
Karnataka
750 MW of wind capacity under fixed tariff and competitive tarriff bidding thereafter
Minimum 5% of power procured and a maximum of 10%
Rajasthan
10% of power procured subject to availability
Tamil Nadu
No limit
Andhra Pradesh
Gujarat
5% from renewables and out of that 0.5% necessarily from Wind bases sources
1% from 2006-07 and going upto 2% in 2008-09
Uttar Pradesh
5% is guideline and it is not mandatory
Madhya Pradesh
0.5% of power procured, subject to availability
Source: Orders of State Electricity Regulatory Commissions.
2. Continued industrial growth in power deficit scenario

India continues to reel under massive power deficits (Exhibits 23 and 24). At the
expected industrial growth rate of 8%, we believe supply and demand would be evenly
poised in 2012. In the interim, power shortages will likely continue, prompting private
industries to take advantage of favorable legislation and set up wind-based captive power
plants.
Exhibit 23: Total energy shortage about 7%, could get
worse
Total energy requirement and availability (mn units)
Exhibit 24: Peak shortages as high as 12% lead to

widespread power cuts
Peak demand and availability (MW)
Year
FY1998
FY1999
FY2000
FY2001
FY2002
FY2003
FY2004
FY2005 till Jan
Year
FY1998
FY1999
FY2000
FY2001
FY2002
FY2003
FY2004
FY2005 till Jan
Requirement
424,505
446,584
480,430
507,216
522,537
545,983
559,264
491,348
Availability
390,330
420,235
450,594
467,400
483,350
497,890
519,398
456,009
Shortage
34,175
26,349
29,836
39,816
39,187
48,093
39,866
35,339
Source: Ministry of Power, Annual report 2004-05.
Shortage (%)
8.1
5.9
6.2
7.8
7.5
8.8
7.1
7.2
Peak demand
65,435
67,905
72,669
78,037
78,441
81,492
84,574
87,906
Peak met
58,042
58,445
63,691
67,880
69,189
71,547
75,066
77,281
Shortage
7,393
9,460
8,978
10,157
9,252
9,945
9,508
10,625
Shortage (%)
11.3
13.9
12.4
13.0
11.8
12.2
11.2
12.1
Source: Ministry of Power, Annual report 2004-05.
3. Competing fuels for captive use are becoming costlier, difficult to get
Diesel, coal and gas remain the most preferred fuels for captive power generation. With
rising prices of diesel, DG sets are at best a good standby source of power and are no
longer used for baseload captive applications. While coal and gas-based captive power
are cheaper, India is increasingly facing an acute shortage of coal due to inadequate
investments in mining infrastructure. Recent gas discoveries in India have enhanced
possibilities for gas-based power plants. However, distribution infrastructure is not yet in
place and would require at least two years for installation, in our view.
20
Suzlon Energy
Past growth uneven, but growth has picked up sharply

Regulatory and tax related issues could partly explain erratic growth across the years.
For example, the cessation of sales tax incentives in Maharashtra in 2002 probably led to
a surge in wind capacity installations before the incentive was to be withdrawn, and a
dramatic slowdown thereafter (Exhibit 25). In the state of Tamil Nadu, concessional
interest rates for modernization projects (including captive generation) under the Textile
Upgradation Fund possibly led to strong growth in 2003-05. However, growth continues
ytd despite the exclusion of wind power from TUFs incentives in early FY2006.
Moreover, the reduction of accelerated depreciation rate from 100% to 80% in FY2003
does not seem to have had a visible impact on growth rates.
Exhibit 25: India's capacity additions have picked up significantly in FY2004 and FY2005
Year-wise capacity addition data (FY1993-FY2005, MW)
State
Andhra Pradesh
Gujarat
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Rajasthan
Tamil Nadu
West Bengal
Others
Total
As on
March 2002
0.6
14.5
0.6
0.6
1.1
22.3
1.6
41.2
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
5.4
38.9
9.4
1.5
6.0
6.0
3.8
0.7
6.2
1.6
10.6
37.7
51.2
31.1
20.1
6.2
28.9
2.0
3.3
11.2
2.6
14.6
10.4
24.0
55.7
84.9
2.0
6.3
2.7
2.7
6.2
4.1
1.5
2.8
0.2
23.3
50.3 110.6 209.4
2.0
6.3
2.0
5.3
8.8
44.6 117.8
11.1
50.5 190.9 281.7 119.8
31.1
17.8
45.7
41.9
44.9 132.8 371.3
0.5
0.6
12.7
61.1 235.5 382.1 169.0
66.8
55.9 143.0 172.5 287.4 241.3 615.3
2005
21.8
51.5
201.5
6.3
48.8
106.3
675.4
1,111.6
As On
March 2005
120.6
253.5
410.7
2.0
28.9
456.3
284.8
2,036.9
1.1
3,594.8
Cessation of sales tax incentives in 2002 possibly led

to a surge in new WEG installations
Source: MNES.
Growth for wind-based power equipment has accelerated in the recent past. We
attribute this to the following factors:
Technological advancements have led to a decline in equipment cost and higher

PLFs, resulting in lower levelised tariff for captive power producers and higher IRR
for investors.
Decline in interest rates has made IRR of ~11-13%, available from wind energy
investments, attractive for an investor.
The government is providing an impetus to renewable energy sources, in the form of

fiscal incentives and favorable policies, with the objective of deriving a certain
percentage of electricity from renewable energy resources.
Clarity in regulatory framework for the power sector (such as unbundling of

distribution, open access in transmission and distribution and captive power policy)
has improved the attractiveness of wind-based power as an investment avenue as
well as a source of captive power.
21
Suzlon Energy
Suzlons key initiatives: Integration, diversification

We like Suzlons strategies for growth and for mitigating risk, i.e. geographical
diversification into other growing countries, opening up a new revenue stream in
O&M of wind equipment and greater vertical integration into components.
Key initiative #1: vertical integration for greater control on cost, supply
Suzlon will likely invest Rs4.7 bn through FY2007 into capacities for rotor blades,
generators and other components (directly and through subsidiaries). We believe these
investments would enable the company to achieve greater control over its supply chain
while saving component and logistics costs (Exhibit 26).
Exhibit 26: Suzlon likely to invest Rs4.7 bn in expanding manufacturing and marketing capacities
Manufacturing capacity addition by Suzlon
Component
India
Rotor Blade (Sets)
Tower (MT)
Generators (MW)
Nacelle Cover
Tooling Facility
WTG assembly (Nos)
China
Integrated WTG
Manufacturing facility
USA
Rotor Blade and Tower
manufacturing facility
Location
Capacity
Operational since
420
790
200
200
45,000
45,000
22,500
1,000
100
300
720
120
FY2002
FY2004
4QFY06
3QFY06
FY2005
1QFY07
4QFY06
3QFY06
3QFY06
3QFY06
FY1997
FY2000
FY2004
FY2004
Tianjin
FY2007
Suzlon Energy Ltd's

subsidiary in China
2,200
Pipestone
FY2007
Suzlon Energy Ltd's

subsidiary in USA
1,000
Daman
Pondicherry
Bhuj, Kutch
Dhule Maharashtra
Gandhidham
Hyderabad
Dhule Maharashtra
Daman
Vadodara
Diu
Daman
Pondicherry
Daman
Investment vehicle
Suzlon Energy Ltd.

Suzlon Energy Ltd.
Suzlon Energy Ltd.

Suzlon
Suzlon
Suzlon
Suzlon
Energy
Energy
Energy
Energy
Ltd.
Ltd.
Ltd.
Ltd.
Investments (Rs mn)

NA
NA
176
208
NA
643
200
NA
88
208
NA
NA
NA
NA
Achieve greater control over its supply chain: Due to rapid growth in the market for
wind-based power equipment, component shortages have been reported in the
international market. This has recently had a debilitating effect on delivery schedules and
margins for market leader Vestas. We believe Suzlons move into vertical integration will
insulate the company from such problems.
However, Suzlon remains dependant on overseas suppliers for key components such as
yaw and pitch drives, brake calipers, gear rims and slewing rims. Pitch drive is a critical
component, particularly for WTGs of a higher rating. Thus Suzlon remains exposed to
some delays and disruptions in its component supply chain. Suzlon sources its gearboxes
from Winergy AG. The fact that Winergy has commenced production in India is
reassuring.
22
Suzlon Energy
Save component costs and logistics costs: Bulky components such as rotor blades
are manufactured close to windy locations for optimal logistics. We believe these cost
savings offer a competitive edge rather than contribute to margin improvement
(Exhibit 27).
Exhibit 27: Maximising backward area advantage while minimizing the logistics cost
Manufacturing locations of Suzlon
Source: Directory Indian wind power - 2005, Company data, Kotak Institutional Equities estimates
23
Suzlon Energy
Key initiative #2: geographical diversification

Suzlon plans to diversify its marketing presence in other fast growing markets,
particularly the US, Australia and China. Suzlon has set up its global headquarters in
Denmark for international marketing initiatives and has already established marketing
arms for USA and Australia through its 100% subsidiary, Suzlon A/S Denmark. In China,
Suzlon has opened a representative marketing office.
The company has reported some early successes in USA and China, bagging several
orders: (a) USA: 239 MW valued at US$219 mn, (b) China: 50 MW valued at US$37.4
mn and (c) South Korea: 14.7 MW valued at US$12.2 mn. These orders are executable
during FY2007. We believe these orders would provide useful references as Suzlon
expands its international presence (Exhibit 28).
Exhibit 28: We believe that the share of export revenues in the total revenue mix would
increase to about 41% by FY2008
Projection for exports by Suzlon (MW)
Country
USA
China
Australia
Total Exports
Export Realisations (Rs mn)
Export as % of total product revenue
2006E
2007E
100
100
550
50
20
620
2008E
680
75
25
780
2009E
490
100
35
626
3,809
10.4
23,562
37.9
29,652
40.6
22,591
35.1
Suzlon also plans to establish manufacturing facilities in USA and China, investing Rs1
bn and Rs2.2 bn, respectively. The company has set up a manufacturing facility in the US
driven by the need to reduce logistics cost of supplying bulky components like rotor
blades and towers in the US market to tap the huge spurt in demand because of
restoration of Production Tax Credit for wind-based power production. In China, Suzlon
is establishing an integrated manufacturing facility in Tianjin to manufacture almost all
the components to meet the 70% local content requirements.
Suzlon has consciously decided to stay away from the saturated European market, while
not missing out on utilizing the knowledge base and expertise developed in wind energy
sector in the region. Suzlon has established three subsidiaries in Europe focusing on
design and development of WTGs and rotor blades (Exhibit 29).
24
Suzlon Energy Ltd
Research
Marketing
Operations
Manufacturing
Kalthia
group
Elin, Austria
25%
Suzlon Energy A/S,
Denmark
Suzlon Windfarm
Services Ltd.
75%
Suzlon Generators
Pvt. Ltd.
75%
25%
Exhibit 29: Structure of research, marketing and manufacturing subsidiaries for Suzlon
Suzlon Structures Pvt.

Ltd.
Suzlon Energy GmBH,

WTG design
AE Rotor Holding B.V.
SE Drive Technik GmBH,

Gear boxes
AE Rotor Techniek B.V.,

Rotor blade
Suzlon Wind Energy

Corporation, USA
Suzlon Energy
Australia Pty Ltd.
Cannon Ball Wind

Energy park - 1, LLC
Source: Company data.
Suzlon Energy
25
Suzlon Energy
Key initiative #3: Take-over of O&M activities from an associate company,

into a wholly owned subsidiary
The O&M activity provides a stable, recurring and growing revenue stream for the
windmill operators. A typical O&M contract entered by Suzlon with the WTG owners
involve an initial O&M expense of 2% of capital cost and cost escalation of 3-4% p.a.
Thus with an increasing base of installed WTGs, the O&M revenues would keep on
increasing (Exhibit 30).
Exhibit 30: O&M revenue stream gains importance with the increase in cumulative
installed capacity
Projections for O& M revenues of Suzlon (Rs mn)
O&M revenues
O&M revenues as % of total revenue
2006E
578
1.6
2007E
1,055
1.7
2008E
1,827
2.5
2009E
2,584
4.0
Suzlon acquired a 100% ownership interest in Suzlon Windfarm Services Ltd.(SWSL),

which provides O&M services to Suzlons customers.
Providing O&M services has dual benefits:
26
A one-stop shop including O&M services helps in bringing new customers. Most
small companies looking for wind energy as a source of captive power may not be
interested in running the windmill, which apart from being far-away from their other
facilities is also not their core business activity.
Eliminates the risk of default by the customers. As the WTGS are located at distant
places, the WTG under an O&M contract with Suzlon is practically an asset
controlled by Suzlon.
Suzlon Energy
Key risks: Competitive pressures, regulatory changes

Key risks include (a) intensifying competitive pressures impacting domestic market
share and/or margins, (b) inability to successfully establish a presence in
international markets and (c) less friendly regulatory policies.
Suzlons earnings are most sensitive to domestic market share and price
assumptions
All things being equal, 5% lower-than-expected domestic market share could lower our
EPS estimate by 7.1%, while 5% lower-than-expected price realization (per MW
installed) could depress our EPS estimate by 6.4%. Withdrawal of friendly tax sop by the
Indian government could impact a wind power generators IRR, depressing our current
estimate of 10.1% by 1.7%. This would in turn lead to a likely decline in domestic
capacity additions by 5%, lowering our EPS estimate for Suzlon by 3.2% (Exhibit 31).
Exhibit 31: Suzlon's earnings are most sensitive to domestic market share and price
realization assumptions
Sensitivity of Suzlon's EPS to key variables
Domestic market share (%)

Overseas revenues (Rs mn)
Domestic capacity addition (GW)
Overall price realisation (Rs mn/MW)
EPS (Rs)
Base case
2007E
2008E
45.0
45.0
23,562
2.1
39.7
29,652
2.4
39.6
45.7
53.7
If nos are 5% less

2007E
2008E
40.0
40.0
22,384
2.0
37.7
28,170
2.2
37.7
Corresponding EPS
impact (%)
2007E
2008E
(7.9)
(7.1)
(2.4)
(3.5)
(6.6)
(2.6)
(3.2)
(6.4)
0.0
0.0
Intensifying domestic competitive pressures could lower margins

Global wind energy majors such as GE, Vestas, Gamesa and Enercon appear to
eye a higher share of the Indian wind energy market, which is large, fast-growing
and has attractive margins. While most global players are already present in India
(Enercon through Enercon (India) Ltd., GE through GE Wind Energy India Ltd., Gamesa
through Gamesa Pioneer Wind India Pvt Ltd., and Vestas through Vestas RRB India
Ltd.), an increased interest of these players could toughen the environment for Suzlon.
Global players could have a technology edge over Suzlon. Global players have, until
now marketed their well proven and cost-efficient larger-sized WTGs (2 MW, 3 MW etc)
mainly in developed markets and have not brought these into India. Should this change,
Suzlon would need to develop and market competitive products in order to retain its
market share.
However, we do not expect Suzlons 50% market share to fall dramatically. We
foresee a sustainable market share of 35% for Suzlon, and believe the loss of share would
be gradual, over a 5-year period. Suzlon has several factors that will help sustain its
market:
27
Suzlon Energy
First-mover advantage of having mapped out the wind patterns at key windy
locations in India.
In a much better position to provide end-to-end solutions to customers.
Established domestic manufacturing facilities close to windy locations (freight being

a critical cost component in the cost of installing WTGs, the global majors would
need to establish local manufacturing facilities if they were to price their products
competitively against Suzlon).
Inability to successfully establish presence in international markets

Our base case market share estimates for Suzlon in its targeted geographies of USA,
China and Australia are given in Exhibit 32.
Exhibit 32: We expect Suzlon to gain a further foothold in overseas markets while
yielding some ground to competition in the home market
Suzlon market share assumptions (%)
Country
India
USA
China
Australia
2006E
52
5
2007E
45
16
15
7
2008E
45
17
16
6
2009E
40
20
17
6
Competition is however intensifying across all geographies as traditional industry leaders

seek to extend their stronghold in Europe to other geographies, notably USA and China.
General Electric is firmly entrenched as the domestic leader in the US market. GE
entered the wind energy market in 2002 by snapping up Enron Wind. Vestas and
Gamesa, the two traditional wind energy heavyweights from Europe, are expanding their
footprint in the US by establishing manufacturing facilities. Siemens has entered the wind
energy market by acquiring the Danish company Bonus Energy, becoming the industry's
fifth largest player.
China has stipulated local content as a pre-qualification requirement. Wind-based power
equipment market is growing off a smaller base and industry majors clearly see it is as a
big opportunity and are expanding their presence and increasing local content to cater to
this growing market. Many companies (for instance, Vestas) may not be able to meet this
requirement till the end of calendar year 2006. Suzlon has the chance to be an early bird
in this market by setting up its manufacturing facilities before others.
Less friendly regulatory regime

Regulatory changes favoring larger captive plants
Indias current state-level regulation is not clear about the third party sale of power,
group captives and open access to transmission lines, although enabling provisions are
contained in the Electricity Act, 2003. In the absence of clear legislation, captive power
producers prefer to own limited capacities serving their own requirements, and hence
favor wind, which is suitable for very small applications. Once the regulations become
clear, captive producers may switch to fuels like coal and gas that offer economies of
scale. Factors that could urge captive power producers to look at coal and gas as fuels
include:
28
Suzlon Energy
Regulatory clarity on the third party sale of power, group captives and open access to
transmission lines
Clarity on captive coal mining policy
Clarity on gas pricing policy
Increased availability of coal (once domestic mining infrastructure comes to speed)

and
Increased availability of gas (when gas distribution pipelines come in place).
Withdrawal of fiscal incentives

Wind based captive power producers pay a minimum alternate tax (MAT) of 8.5%
instead of the peak level of 34%. Key fiscal incentives contributing to this are:
(a) accelerated depreciation allowance at 80% for year 1 and (b) tax benefits u/s 80IA for
infrastructure facilities. Withdrawal of these incentives could result in higher tax rates
and lower IRR to 8.4% (v/s base case of 10.1%) see Exhibit 15 on page 16.
Withdrawal of mandated purchase price

Attractiveness of wind energy based electricity generation, particularly as an investment
avenue, depends upon the continuation of attractive per unit purchase price, which is
typically mandated by the State Electricity Regulatory Commissions. Wind-based power
is also exempt from the Merit order dispatch system and most states mandate that wind
power will be evacuated whenever it is available.
However, this policy may not continue forever. For instance, in Maharashtra, this
preferential tariff is available only for the first 750 MW installed within the time period
of the tenth five-year plan (by FY2007). Tariffs for any additional capacity will be
decided on a commercial bidding basis.
Unfair wheeling and banking charges

The attractiveness of wind-based power as a captive source also depends upon wheeling
and banking charges levied in a particular state. High wheeling and banking charges may
make wind-based power commercially unviable vis--vis regular grid based electricity or
other alternatives for captive power.
29
Suzlon Energy
Financials: Strong earnings growth likely

We forecast 59% PAT CAGR between 2006-2008 led by 56% revenue CAGR and
stable margins. A large part of the growth comes from exports, which we believe
would constitute 41% of revenues by FY2008. We see RoE declining from the 66%
at present to 32% by FY2008 the decline mainly due to Suzlons equity expansion
in early FY2006.
We forecast strong earnings growth through FY2008

Building the blocks of Suzlons revenues
We forecast 28.5% CAGR in domestic wind power installations in FY2006-08. We
believe Suzlon would derive a market share of 45% on the incremental capacity growth
in the country, compared to a 50%+ share in the recent past. This would drive 31.3%
domestic revenue CAGR in product sales (Exhibit 33).
Additionally, we believe Suzlons efforts at seeding markets in the US, China and
Australia will begin to bear fruit and we estimate that overseas revenues would constitute
41% of revenues by 2008.
Lastly, commencement of meaningful O&M revenues, starting FY2007, would drive
growth thereafter.
Exhibit 33: Exports increase in importance, accounting for more than 40% of FY2008 revenues
Key assumptions for Suzlon's revenue forecasts
2005
New installed capacity (MW)
India
USA
China
Australia / others
Market share (%)
India
USA
China
Australia / others
Product sales (MW)
India
USA
China
Australia / others
Total
Product revenues (Rs mn)
India
USA
China
Australia / others
Total
Domestic (Rs mn)
Export (Rs mn)
Domestic (%)
Export (%)
2006E
2007E
2008E
2009E
1,112
389
198
161
1,601
2,025
308
222
2,101
3,510
348
307
2,361
4,054
460
424
2,685
2,451
609
587
46
52
5
45
16
15
7
45
17
16
6
40
20
17
6
507
507
830
100
930
945
550
50
20
1,565
1,062
680
75
25
1,843
1,074
490
100
35
1,700
19,154
19,154
32,922
3,809
36,731
38,626
20,887
1,916
759
62,188
43,409
25,835
2,850
968
73,061
41,689
17,695
3,625
1,271
64,281
19,154
32,922
3,809
38,626
23,562
43,409
29,652
41,689
22,591
100.0
89.6
10.4
62.1
37.9
59.4
40.6
64.9
35.1
O&M revenues (Rs mn)
578
1,055
1,827
2,584
Total revenues (Rs mn)
19,154
37,309
63,243
74,888
66,864
30
Suzlon Energy
Tax rates are likely to remain low through 2008

We estimate low effective tax rates at 10-12% through 2008, due to continued backward
area-related tax benefits under section 80IB of the Indian Income Tax Act. The tax rate is
likely to increase substantially in FY2009 (Exhibit 10 on page 9).
Unraveling Suzlons high operating margin v/s peers

Investors frequently question Suzlons operating margin, which appears unduly high
compared to its global peers like Vestas and Gamesa, and also vis--vis BHEL
(manufacturing complex steam and gas-based power plant equipment). The key variable
influencing operating margin is internal efficiency, where we believe Suzlon compares
favourably to PSU BHEL and its European counterparts, whose manufacturing locations
are mostly in Europe and labor costs are correspondingly higher too. Operating margins
also depend upon vertical integration levels and credit periods offered to customers by
suppliers. Hence, in isolation, OPM is not as reliable a metric as the RoE, which captures
vertical integration and credit period variables (reflected in asset turnover ratio) as well.
RoE likely to settle at lower (but healthy) levels

Suzlons Dupont analysis reveals that a low equity base (before the company went
public) was the primary contributing factor to its unsustainably high RoE of 66% (Exhibit
34). By FY2008, we see RoE declining to a more reasonable level of 32% due to:
1.
Recent equity dilution, where Suzlon issued 26.7 mn new shares and raised Rs13.1
bn.
2.
Increasing capital intensity of the business driven by the companys conscious

strategy to adopt a low-risk vertically integrated model (Exhibit 35).
Exhibit 34: Suzlon's RoE is likely to decline to reasonable levels of 38% by FY2007 and 32% by FY2008 due to
increasing capital intensity
Dupont analysis for Vestas, Gamesa and Suzlon
Vestas
CY2003 CY2004
0.04
(0.00)
Gamesa
CY2003 CY2004
0.16
0.13
Suzlon
FY2005 FY2006E FY2007E
24.2
25.6
24.7
BHEL
FY2005 FY2006E FY2007E
17.4
20.6
20.7
Parameter
EBIT Margin
Ratio
EBIT/Revenue (a)
Asset turnover
Financial Leverage
Interest burden
Tax burden
Revenue / Capital Emp (b)

Capital Employed / Equity (c)
Pre-tax Profit/EBIT (d)
PAT/Pre-tax Profit (e)
1.19
2.27
0.73
0.66
0.88
2.34
5.46
0.76
0.75
2.00
0.84
0.96
0.65
1.94
1.06
0.91
2.0
1.7
0.9
0.9
1.6
1.2
0.9
0.9
1.6
1.1
1.0
0.9
1.5
1.1
1.0
0.6
1.7
1.1
1.0
0.6
1.7
1.1
1.0
0.6
RoE
PAT/Equity (a*b*c*d*e)
0.06
(0.03)
0.19
0.16
66.7
42.7
37.6
16.9
22.5
23.3
Exhibit 35: Capex likely to remain high near term and stabilize thereafter
Projected capital expenditure for Suzlon (Rs mn)
2005
2006E
2007E
2008E
2009E
Maintenance capital expenditure

Capacity expansion
Corporate office premises
Total capital expenditure
100
594
694
100
1,575
268
1,675
100
1,343
700
1,443
125
731
856
200
643
843
Add: investments through subsidiaries

Total capex
694
2,285
3,960
1,240
2,683
856
843
31
Suzlon Energy
Tax benefits available to Suzlon are tapering off post FY2008, resulting in higher
effective tax rates. Consequently, we see further RoE dip to a sustainable (and
healthy) level of around 20%.
Exhibit 36: SuzlonProfit model, March fiscal year-ends, 2003-2009E (Rs mn)
Net revenues
Total RM & erection exps
Employee expenses
Preliminary expenses w/o
Other expenses (admin)
Total expenditure
Operating profit
Other income
EBIDTA
Interest
PBDT
Depreciation
PRETAX PROFITS
Tax (incl deferred tax provision)
PAT (A)
Adj for minority interest etc
Preference dividend
Extraordinary items, net of tax
PAT (R)
Dividend (Incl tax)
Retained earnings
Per share (Rs)
EPS
DPS
% of sales
Raw material & erection expenses
Employee expenses
Other expenses
OPM
Pre-tax margin
PAT margin
Effective tax rate
Dividend payout ratio
Div tax rate
Growth (%)
Net revenues
PAT
EPS
Weighted avg. shares o/s (mn)
Period end outstanding shares (mn)
2003
2,606
(1,548)
(123)
(1)
(717)
(2,388)
217
91
309
(89)
220
(114)
107
(13)
93
4
(3)
172
269
(69)
200
2004
8,575
(5,541)
(269)
(1)
(1,525)
(7,336)
1,239
174
1,412
(276)
1,137
(177)
960
24
984
(5)
267
1,251
(276)
975
2005
19,425
(11,377)
(618)
(2)
(2,533)
(14,530)
4,895
234
5,130
(458)
4,671
(424)
4,248
(391)
3,856
2
(20)
(1)
3,858
(399)
3,459
2006E
37,191
(21,864)
(839)
(4,732)
(27,436)
9,755
342
10,097
(555)
9,542
(579)
8,963
(945)
8,018
(2)
(20)
8,018
(1,617)
6,401
2007E
62,965
(38,028)
(1,127)
(7,711)
(46,866)
16,099
338
16,437
(692)
15,745
(909)
14,837
(1,664)
13,173
(11)
(20)
13,173
(2,264)
10,909
2008E
74,414
(45,546)
(1,495)
(8,575)
(55,616)
18,798
486
19,283
(757)
18,526
(1,102)
17,425
(1,958)
15,467
(32)
(20)
15,467
(2,587)
12,880
2009E
66,593
(39,687)
(1,952)
(7,283)
(48,923)
17,670
807
18,478
(723)
17,754
(1,104)
16,650
(4,432)
12,219
(77)
(20)
12,219
(2,587)
9,631
7.7
5.0
40.2
10.0
44.2
4.0
27.8
5.0
45.7
7.0
53.7
8.0
42.4
8.0
59.4
4.7
27.5
64.6
3.1
17.8
58.6
3.2
13.0
58.8
2.3
12.7
60.4
1.8
12.2
61.2
2.0
11.5
59.6
2.9
10.9
8.3
4.1
3.6
14.4
11.2
11.5
25.2
21.9
19.9
26.2
24.1
21.6
25.6
23.6
20.9
25.3
23.4
20.8
26.5
25.0
18.3
12.6
22.6
13.7
(2.5)
19.5
13.3
9.2
9.0
14.7
10.5
17.9
12.5
11.2
15.3
12.5
11.2
14.9
12.5
26.6
18.8
12.5
229.1
944.7
422.4
18.3
24.3
126.5
292.2
9.8
55.6
86.9
91.5
108.3
(37.0)
187.2
287.5
69.3
64.5
64.5
287.5
287.5
18.2
17.4
17.4
287.5
287.5
(10.5)
(21.0)
(21.0)
287.5
287.5
(50.4)
(92.3)
12.2
12.2
32
Suzlon Energy
Exhibit 37: SuzlonBalance sheet, March fiscal year-ends, 2003-2009E (Rs mn)
2004
243
3,305
3,548
2005
869
7,089
7,958
2006E
2,875
26,671
29,547
40
180
1,153
153
153
153
153
Secured loans
Unsecured loans
Total debt
931
105
1,036
1,879
505
2,384
3,567
391
3,958
3,667
391
4,058
3,817
391
4,208
3,917
391
4,308
4,017
391
4,408
Total liabilities
3,663
6,112
13,069
33,758
44,816
57,796
67,527
Gross block
Less: accum. depreciation
Net block
Capital work in progress
Investments
1,108
(212)
896
72
50
1,912
(384)
1,528
124
143
6,915
(2,295)
4,620
289
3,753
7,871
(3,397)
4,474
289
3,778
8,814
(4,501)
4,313
289
3,778
Current assets
of which, cash
Less: Current liabilities
Net current assets
4,892
560
2,283
2,609
8,138
681
3,997
4,141
17,477
1,545
7,809
9,668
39,637
5,711
13,129
26,508
57,377
55
22,421
34,956
73,676
5,924
26,575
47,101
79,504
18,543
23,318
56,187
Misc expenses
Deferred tax assets
Total assets
2
34
3,663
2
174
6,112
4
241
13,069
4
483
33,758
4
1,194
44,816
4
2,150
57,796
4
2,957
67,527
212.5
1.7
28.9
24.5
145.7
1.5
31.5
25.1
91.5
2.0
66.1
43.6
102.8
2.5
42.6
35.9
140.7
3.4
37.3
34.6
185.5
3.8
32.3
30.6
219.0
3.4
19.7
19.0
Share capital
Reserves & surplus
Total shareholders funds
Preference capital
2003
122
2,465
2,587
3,597
(808)
2,789
289
78
5,372
(1,387)
3,985
289
2,488
2007E
2,875
37,580
40,455
2008E
2,875
50,459
53,335
2009E
2,875
60,091
62,966
Ratios
BVPS
Fixed asset T/O ratio
RoE
RoCE
33
Suzlon Energy
Exhibit 38: SuzlonCash flow, March fiscal year-ends, 2003-2009E (Rs mn)
2003
2004
2005
2006E
2007E
2008E
2009E
Operating
Net profit before tax and extraordinary items
Add: Depreciation / amortisation / non-cash prov
Tax paid (incl dividend tax)
Operating profit before working capital changes
Change in working capital / other adj
Net cashflow from operating activites
391
285
58
618
(577)
41
960
177
(116)
1,021
(1,411)
(390)
4,248
424
(490)
4,182
(4,662)
(481)
8,963
579
(1,187)
8,354
(12,674)
(4,319)
14,837
909
(2,375)
13,370
(14,104)
(734)
17,425
1,102
(2,914)
15,613
(6,276)
9,336
16,650
1,104
(5,238)
12,516
3,534
16,050
Investing
Fixed assets
Investments
Cash (used) / realised in investing activities
Free Cash Flow
(310)
(221)
(532)
(491)
(861)
(93)
(954)
(1,344)
(1,850)
65
(1,785)
(2,266)
(1,775)
(2,410)
(4,185)
(8,504)
(1,543)
(1,265)
(2,808)
(3,542)
(956)
(25)
(981)
8,356
(943)
(943)
15,107
Financing
Issue of share capital
Dividend paid
Borrowings
Cash (used) / realised in financing activities
(1)
(0)
407
406
(13)
(276)
1,487
1,198
950
(399)
2,547
3,099
15,188
(1,617)
(900)
12,671
(2,264)
150
(2,114)
(2,587)
100
(2,487)
(2,587)
100
(2,487)
Extraordinary receipts / payments
172
267
Cash generated /utilised

Net cash at begn of year
Net cash at end of year
87
435
522
121
560
681
(1)
832
681
1,545
4,167
1,545
5,711
(5,656)
5,711
55
5,868
55
5,924
12,620
5,924
18,543
34
Suzlon Energy
Appendix 1: Wind energy market basics

We discuss the Why, Where, Who, How and What of wind power. We also
demystify oft-used terms like PTC, RPS and carbon credits.
Why wind? Clean and renewable but costlier

Wind-based power generation has many advantages:
It is a renewable resource, abundantly available year after year.
There is no fuel cost, thus insulating the consumer from vagaries related to fuel price
fluctuations and availability issues.
Wind is a clean source of power that does not involve CO2 emissions.
The gestation period is short, at 3-6 months.
It is suitable for small industries, as the unit size can be as low as 300 KW. This is a
peculiar advantage in the Indian context, where captive users are the main investors.
The limitations of wind power (which governments and equipment manufacturers are
increasingly trying to overcome) are:
It is costlier than conventional power, as a result of higher capital cost (Rs50 mn per
MW compared to Rs40 mn per MW) and low plant load factor (PLF).
Not suitable for baseload applications.
Wind is seasonal and erratic, creating (a) grid balancing issues and (b) inability to
source more than a part of a nations power needs from wind.
Where? Europe is the hotbed of activity

Europe is the traditional hotbed of wind energy installations. European countries, led by
Germany, Spain and Denmark, account for 57% of the global installed capacity of wind
energy (Exhibit 39). However, in terms of incremental capacity additions, the top 3
countries in CY2004 were Spain, Germany and India (Exhibit 40). Germany and Spain
continued to show strong growth in the recent past while India and China are growing
faster on a comparatively smaller base (Exhibit 41).
35
Suzlon Energy
Exhibit 39: Germany, Spain, USA, Denmark and India: >75% of total wind power
installed capacity
Country-wise cumulative wind power installed capacity as on March 31, 2005 (MW)
Country
Germany
Total installed capacity (MW)

17,000
Spain
USA
India
Denmark
Italy
Netherlands
UK
Portugal
Japan
China
Others
Total
8,959
7,000
3,595
3,115
1,392
1,160
1,045
1,000
942
765
4,657
50,630
Source: Global Wind Energy Council.
Growth rate 2003-04 (%)
36
27
18
9
China
UK
Japan
Netherlands
Italy
India
0
Denmark
3 year CAGR (%)
45
USA
Capacity installed
2,064
2,054
875
389
357
274
253
230
199
198
6,893
Spain
Country
Spain
Germany
India
USA
Italy
Portugal
UK
Japan
Netherlands
China
Total
Exhibit 41: Strong growth in Germany and Spain, the

traditional wind energy leaders, continues while it is
accelerating in India & China
2003-04 and 3 year cumulative average growth rate for
wind power equipment demand in various countries
Germany
Exhibit 40: Spain and Germany are big markets while

USA, India, China are picking up
Country wise wind power installation in 2004 (MW)
India is the fourth-largest and among the fastest growing markets

As on March 31, 2005, India had the fourth-largest installed capacity of wind power
(Exhibit 40), preceded by Germany, Spain and USA. In terms of new capacity
installations, India was the third largest market in the world after Germany and Spain,
with a total installation of 875 MW in CY2004.
Within India, wind capacities are concentrated in windy states

India has nine states endowed with wind resources i.e. Andhra Pradesh, Gujarat,
Karnataka, Kerala, Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu and West
Bengal. Tamil Nadu accounted for 57% of total installed capacity of wind-based power in
India till March 2005 with a total installed capacity of 2037 MW (Exhibit 42).
36
Suzlon Energy
Exhibit 42: Installed WEG capacity grew at 40% CAGR between 1992 and 2005, growth
led by Tamil Nadu, Rajasthan and Karnataka
Growth in cumulative installations (1992-2005, MW)
4,000
3,595 MW
3,500
3,000
2,500
Tamil Nadu (2037MW)
2,000
Rajasthan (285MW)
1,500
Maharashtra (456MW)
1,000
Madhya Pradesh (29MW)
500
Karnataka (411MW)
Gujarat (254MW)
Andhra Pradesh (100MW)
42MW
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
Source: Ministry of Non-conventional Energy Sources.
Who? Customers and vendors

Globally, state and private utilities comprise the wind project developers (and hence
customers for wind energy equipment). However, the Indian market is very different
because the main customers are captive power producers.
Top vendors of wind equipment are Vestas, Gamesa and Enercon (Exhibit 43).
Exhibit 43: Vestas, Gamesa and Enercon are the top 3 global players while Suzlon's
domestic gains catapulted it to global top 6 in CY2004
Global market share of wind power majors
Cumulative installations
MW
% mkt share
New installations - CY2004

MW
% mkt share
Vestas
Gamesa
17,580
6,439
34.6
12.7
2,783
1,474
32.7
17.3
Enercon
GE Wind
Siemens
Suzlon
7,046
5,346
3,874
785
13.9
10.5
7.6
1.5
1,288
918
507
322
15.1
10.8
6.0
3.8
Repower
Mitsubishi
Ecotnia
1,169
1,020
745
2.3
2.0
1.5
276
214
214
3.2
2.5
2.5
Nordex
Others
2,405
4,360
4.7
8.6
186
334
2.2
3.9
Source: BTM-Aps.
Vestas is Denmark-based pure-play wind energy equipment major, with 32.7%
market share in the new installations in 2004 and 34.6% market share in cumulative
installations through end-2004. It has production facilities in Denmark, Germany, India,
Italy, Scotland, England, Spain, Sweden, Norway and Australia, and is in the process of
setting up manufacturing facilities in USA and China.
37
Suzlon Energy
Even though the wind-based power equipment market has been growing, Vestas has been
facing margin pressures owing to severe component shortages, warranty provisions,
revised product development plans and cost overruns on projects, particularly in the US.
In its analyst call held in November 2005, Vestas reduced its EBIT margin guidance from
4% to -3% for 2005, which triggered a sharp decline in stock prices and brought to the
fore profitability concerns regarding wind-based power equipment players even amidst
the rapidly growing industry. However, the company expects margins to return to 4-7%
levels in CY2006.
Gamesa is a Spain-based wind equipment and wind farm development company,
which is also into aerospace products. Wind accounts for 83% of Gamesas revenues. It is
the worlds second biggest manufacturer of wind turbines with a 17.3% market share in
new installations in 2004 and 12.7% market share in cumulative installations through
end-2004.
Gamesa has so far concentrated mainly on the Spanish market and international sales
contributed about only 27% to its revenues in 2004. The fact that the Spanish government
has set a target to install about 13 GW of wind turbines by 2010 and has publicly stated
its desire to increase the target to 20 GW has buoyed the companys prospects.
Gamesa is expanding its footprint across other geographies. It installed its wind turbines
for the first time in key markets like Germany & India during the year 2004.
Enercon is a Germany-based wind energy equipment company, having a market
share of 15.1% in new installations in 2004 and 13.9% market share in cumulative
installations through end-2004. Enercon is firmly entrenched in German market with a
41.8% market share. Germany is also the biggest wind energy equipment market in terms
of cumulative installed capacity and was a close second to Spanish market in terms of
new installations in 2004 with total installations of about 2,054 MW.
Enercon is the third largest player in Indian wind-based power equipment market after
Suzlon and Vestas, with a market share of 15.4%. Enercon operates in India through its
56% JV with an Indian textile company. Enercon (India) Power Development Private
Limited, a wholly-owned subsidiary of Enercon India Ltd. is a front-end project
developing company set up to manage the IPP business for the Enercon group in India
and select world markets. Enercon Power is targeting to develop, establish, own and
operate 1,000 MW of wind energy by the year 2010 and thereby become the largest
renewable energy based IPP in India.
How? Converting the winds kinetic energy into electrical energy

A wind turbine generator converts the kinetic energy of the wind into electrical energy. A
Wind Turbine Generator (WTG) comprises a tower (or mast), rotor blades, a nacelle,
which contains the required mechanical and electrical parts including gearbox and
generator (Exhibit 44).
38
Suzlon Energy
Exhibit 44: Basic technology of wind power equipment is fairly simple and modular as
compared to large thermal/hydro/nuclear power plants
Schematic diagram of a wind power turbine
Commonly called a "weather vane," the wind vane indicates wind direction
Anemometer is used to measure wind speed
Source: Wind Energy Development Programmatic EIS Information Center USA, www.windeis.anl.gov.
The amount of kinetic energy carried by the wind depends on wind speed, intercepting
rotor area and density of the air. At a given site, wind speeds are generally higher at
greater heights and larger blades could be used if they are mounted at a higher level
leading to larger swept area of the rotor (square of the blade length). However, the
benefits accruing from the increased height of the tower have to be optimized against
increased capital cost.
Recent trendsincreasing height, higher capacity rating and offshore

Concomitant with the increasing height of the tower, there is a clearly discernible
movement towards higher capacity WTGs (above 1MW rating) in both India and abroad.
Although no offshore wind farm has been set up in India, offshore wind farms are
becoming increasingly popular worldwide in order to tap ocean winds, particularly so in
Europe. Offshore wind farms typically use WTGs of higher capacity in the 2-5 MW
range.
While capable of harnessing powerful and consistent sea breezes, offshore projects
require higher capital expenditures to plant windmills on the sea floor and connect them
to infrastructure on land. We do not foresee any investment in offshore wind power in
India in the near future.
39
Suzlon Energy
What? Wind energy solutions entail a range of activities

Wind resource mapping studies
Steps to harness wind power start from mapping the potential of wind resource areas in
terms of quality as well as quantity so that it can be established that it is techno
economically feasible to use wind energy in that area to generate electrical power.
Identifying suitable sites and acquiring land

Based on data generated in the first step, suitable sites have to be marked for
development of wind farm after inspection. Land acquisition and other associated
clearances for developing a wind farm have to be completed.
Designing the solution

This involves customization of individual WTGs and micrositing of each individual
WTG on the site identified in step 2 to optimally utilize land and wind resources. Sizing
of the associated infrastructure requirements for evacuation of power, accessibility etc.
Infrastructure development and installation

Actual development, construction and installation work including development of
associated infrastructure such as road, transmission system is carried out at the site.
Operation and maintenance

Round the clock remote and onsite monitoring as well as preventive, planned and
incident-based maintenance of WTGs and other associated infrastructure.
Demystifying PTC, RPS and carbon credits

Carbon Credits
Under the Kyoto Protocol, developed nations have agreed to limit their greenhouse gas
emissions relative to the levels emitted in 1990. The Kyoto Protocol came into force on
Feb 16, 2005, subsequent to its ratification by Russia. As a result of the Kyoto Protocol,
carbon emissions have become a tradable commodity with an associated market value.
Certified reduction in emission (CERs) of CO2 (carbon dioxide) by one tonne can be
traded and revenue from CERs can form part of project's annual cash inflow (Exhibit 45)
Exhibit 45: A 1 MW wind energy unit could reduce emissions of CO2 by 1862 tonnes
and if traded, add Rs0.5 mn revenues p.a.
Estimated value of reduction in Carbon emissions vis--vis coal based power generation
Windmill power rating (MW) (a)
Assumed PLF (%) (b)
1.0
21.00
Electricity generated (mn units) (c = (a*1000*24*365*b)/(10^6))

Calorific value of Coal (KCal/Kg) (d)
Station heat rate (KCal/KWh) (e)
Electricity produced per Kg of Coal (Units/Kg coal) (f = d/e)
CO2 produced per Kg of Coal (Kg CO2/Kg Coal) (h)
1.84
3,600
2,449
1.47
1.49
CO2 produced to produce power equivalent to one year output of a wind mill (Tonne) (i = (h/f)*(c*10^3))
Prevailing tradable value of CO2 certificate ($/tonne CO2) (j)
1,862
6.00
Carbon trading revenues per year (Rs mn) (K=(i*j*45)/(10^6))
0.50
Source: Climate Change Projects Office UK, TRAI paper, Kotak Institutional Equities estimates
40
Suzlon Energy
Production Tax Credit (PTC)

In the USA, wind-based power plants are entitled to a tax credit of 1.9 cents/KWH
(adjusted for inflation) of electricity generated over the first ten years of a projects
operations. This is a major driver of wind power demand in USA and its successive
expiration and reintroduction has been a cause of many boom-and-bust cycles in demand
for wind power installation.
This time, PTC was scheduled to expire on December 31, 2005 but it has been extended
through December 2007. With the timely extension of the PTC, the American Wind
Energy Association anticipates that strong growth momentum in wind power installations
would continue in the years 2006 and 2007.
Renewable Portfolio Standards (RPS)

The Renewables Portfolio Standard (RPS) is a policy instrument that ensures that a
minimum amount of renewable energy is included in the portfolio of electricity resources
serving a state or country. It is widely used in the USA and as many as 21 states and
District of Columbia have enacted such legislations (although the federal energy bill does
not include such a provision).
In the USA, RPS works by a system of credits called Renewable Energy Credits. A
Credit is a tradable certificate of proof that a renewable generator has generated one kWh
of electricity. The RPS requires all electricity generators (or electricity retailers,
depending on the policy design) to demonstrate, through ownership of credits, that they
have supported an amount of renewable energy generation equivalent to some specified
percentage of their total annual kWh sales (Exhibit 46).
Such a standard has been adopted in many other countries as part of their long-term
energy planning. Many Indian State Electricity Regulatory Commissions have also taken
enacted such standards. However, the design and implementation of such legislation
varies widely.
Exhibit 46: US requirements for renewable under RPS, mandated timelines
State
Arizona
California
Connecticut
Delaware
Colorado
District of Columbia
Hawaii
Iowa
Illinois
Texas
Renewables requirement
15% by 2025
20% by 2017
6% by July 2009
10% by 2019
10% by 2015
11% by 2022
7% by end of 2003; 8% by end of 2005, 10% by end of 2010, 15% by end of
2015, 20% by end of 2020 (including existing renewables)
105 megawatts (MW)
8% by 2013. 75% of this should come from wind.
5,580 MW by 2015
Source: American Wind Energy Association.
41
Suzlon Energy
Appendix 2: Suzloncompany profile

Suzlon is Indias domestic wind equipment market leader with over 50% market
share. An established domestic manufacturing base and the ability to provide total
solutions (along with associates) are amongst the key strengths.
Company background: Steady rise

Suzlon Energy Limited was incorporated in 1995 by Mr.Tulsi Tanti, a textile industry
veteran who struck upon the idea after a wind power project was commissioned for his
own textile factory.
Suzlon initially operated through a technical advisory and services agreement with a
German company, Sudwind Energiesysteme GmbH. In 1996, Sudwind proposed to share
the technical know-how in return for royalty to be paid on the basis of each WTG sold
over a period of five years. Suzlon also obtained a license for manufacturing, marketing,
dealing and servicing of rotor blades from Aerpac B.V. and acquired moulds and
production line for rotor type blades from Enron Wind Rotor Production B.V. Suzlon has
now graduated to independent design, development and production of MW and Multi
MW series of WTGs and rotor blades.
Suzlon is the domestic wind energy equipment market leader

Suzlon commanded 42.8% market share of the total capacity installed during CY2004.
(Exhibit 47). In 1HFY06, it installed 305 MW of wind energy capacity in India,
accounting for more than 50% share of the Indian wind energy market.
Exhibit 47: Suzlon is the largest manufacturer of windmills in India
Market shares of wind power manufacturers in India in CY2004 (%)
Company
% market share in
2004
Suzlon
Vestas (JV with NEG Micon)
Enercon
42.8
32
15.4
NEPC
Gamesa
7.8
0.8
GE Wind
1.2
Suzlon is one of the select group of wind energy equipment vendors and the only one
from India to have WTGs of rating upto 2 MW (Exhibit 48). However, the 1.25 MW
remains the most sought-after model in India and the multi-MW series is yet to pick up
(Exhibit 49). Suzlon developed its 2 MW series mainly for the overseas markets.
42
Suzlon Energy
Exhibit 48: Suzlon compares favorably with competitors in the capacity range of its
India product offerings
Indian wind energy manufacturersproduct range
Type
certificate
available
ISO
certificate
available
230
330
600
800
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Capacity
(KW)
Indian Manufacturers
Foreign collaborator
Enercon (India) Ltd.
Enercon Gmbh., Germany
GE India
GE Wind Energy Gmbh
1,500
Yes
No
NEG Micon (India) Pvt. Ltd.
NEG Micon A/s, Denmark
750
950
1,650
1,500
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
NEPC India Ltd.
None
225
600/750
225
Yes
No
No
Yes
Yes
Yes
Pioneer Asia Wind Turbines
Gamesa, Eolica S.A. Spain
250
850
No
Yes
No
No
Suzlon Energy Ltd.
None
300
350
1,000
1,250
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Vestas RRB India Ltd.
Vestas Wind Systems A/s, Denmark
225
500
600
Yes
Yes
No
Yes
Yes
Yes
Chiranjeevi Wind Energy Ltd.

Pollachi, Tamil Nadu
None
250
No
No
Pioneer Wincon Ltd.
None
250
No
No
TTG Industries Ltd.
None
250
No
No
Source: Centre for Wind Energy Technology (C-WET).
Exhibit 49: The 1.25 MW set is the leading product for Suzlon, 2 MW yet to pick up
2
Maharashtra
TN
1.25
No
MW
No
MW
161
402
0.95
No
MW
0.35
No
MW
0.27
No
MW
Total
No
MW
No
MW
201
67
67
556
195
667
317
503
51
18
363
408
166
Rajasthan
108
135
82
29
193
Gujarat
41
51
98
34
134
79
Karnataka
116
145
95
119
AP
MP
2
5
3
6
8
5
9
6
USA - Minn
24
23
24
23
43
Suzlon Energy
Buoyed by strong growth registered in India, Suzlon is now placed sixth in terms of both
cumulative installed capacity as well as new capacity installation in 2004 (Exhibit 43 on
page 37 in previous section on Wind energy market basics). It has reported some early
successes in USA and China, bagging the following orders: (a) USA: 239 MW valued at
US$219 mn, (b) China: 50 MW valued at US$37.4 mn and (c) South Korea: 14.7 MW
valued at US$12.2 mn. These orders are executable during FY2007.
Suzlon and its associates provide holistic wind energy solutions

Suzlon Energy Ltd., along with its associates and subsidiaries, provides complete wind
energy solutions, ranging from wind resource studies, land acquisition and infrastructure
development to operation and maintenance of a wind farm (Exhibit 50).
Exhibit 50: Suzlonalong with unlisted associate companiesprovides total wind energy solutions
Wind energy solutions structure
Major activities
Sub activities
Entities
Identifying sites
MNES along with CWET
Inspection, assesment, analysis
MNES, CWET, assocaite companies
Acquisition of windy sites
Sarjan Realities Ltd
% value of
the project
Planning of wind farm systems
Land acquisition
2-3%
Samiran Associate Companies
Identifying exact location

Development & technical design
Suzlon Energy Ltd
80-85%
Suzlon Infrastructure Ltd
12-18%
Design, manufacture and delivery of WTG at site
Building roads, land levelling etc
Infrastructure development & installation
Installation & commissioning of WTG
Power evacuation facilities
Round the clock monitoring

Earlier SWSL (an associate)
O&M services
preventive & planned maintenance
SWSL is a subsidiary now
Operational warranties
Source: Company data.
I, Shilpa Krishnan, hereby certify that all of the views expressed in this report accurately
reflect my personal views about the subject company or companies and its or their
securities. I also certify that no part of my compensation was, is or will be, directly or
indirectly, related to the specific recommendations or views expressed in this report.
44
Suzlon Energy
Disclosures
45
Suzlon Energy
46
Suzlon Energy
Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional Equities,
within the specified category.
70%
60%
Percentage of companies within each category for which Kotak

Institutional Equities and or its affiliates has provided investment
banking services within the previous 12 months.
47.4%
50%
38.1%
40%
* The above categories are defined as follows: Buy = OP;

Hold = IL; Sell = U. Buy, Hold and Sell are not defined
Kotak Institutional Equities ratings and should not be
constructed as investment opinions. Rather, these ratings
are used illustratively to comply with applicable NASD and
NYSE regulations. As of 3/31/05 Kotak Institutional Equities
Investment Research had investment ratings on 90 equity
securities.
30%
20%
14.4%
10%
6.2%
6.2%
1.0%
0%
Buy
Hold
Sell
Source: Kotak Institutional Equities.
Suzlon Energy
As of September 30, 2005
(SUZL.BO)
Kotak Institutional Equities rating and stock price target history
1,000
11,000
900
10,000
800
9,000
700
8,000
600
7,000
500
6,000
400
5,000
300
4,000
100
3,000
Dec-05
Nov-05
Sep-05
Jul-05
Aug-05
May-05
Apr-05
Mar-05
Jan-05
Dec-04
Oct-04
Sep-04
Aug-04
Jun-04
Apr-04
May-04
Feb-04
Jan-04
Dec-03
Oct-03
Sep-03
Jul-03
Jun-03
May-03
Mar-03
Feb-03
2,000
Jan-03
Index
Price
Stock Price
200
Source: Kotak Institutional Equities Research for ratings and price targets, Bloomberg for daily closing prices.
Rating
Covered by current Shilpa Krishnan
Price target
Price target removal
Not covered by current analyst

BSE-30 Index (RHS)
The price targets shown should be considered in the context of all prior published Kotak Institutional Equities research, which may or may not
have included price targets, as well as developments relating to the company, its industry and financial markets
47
Suzlon Energy
Analyst coverage
Companies that the analyst mentioned in this document follow
Covering Analyst: Shilpa Krishnan
Company name
Ticker
ABB
ABB.BO
Bharat Electronics
BAJE.BO
BHEL
BHEL.BO
Concor
CCRI.BO
Dredging Corporation of India
DRDG.BO
Great Eastern Shipping
GESC.BO
Jet Airways
JET.BO
Larsen & Toubro
LART.BO
Suzlon Energy
SUZL.BO
Source: Kotak Institutional Equities Research.
48
Suzlon Energy
Ratings and other definitions/identifiers

Current rating system
Definitions of ratings
OP = Outperform. We expect this stock to outperform the BSE Sensex over the next 12 months.
IL = In-Line. We expect this stock to perform in line with the BSE Sensex over the next 12 months.
U = Underperform. We expect this stock to underperform the BSE Sensex over the next 12 months.
Other definitions
Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector.
The coverage view will consist of one of the following designations: Attractive (A), Neutral (N),
Cautious (C).
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such
suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances
when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price
target, if any, for this stock, because there is not a sufficient fundamental basis for determining an
investment rating or target. The previous investment rating and price target, if any, are no longer in effect
for this stock and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
Kotak Securities Limited and Goldman Sachs at times produce joint co-covered reports which are currently rated on
regional sectoral basis.
Previous rating system

BUY = Buy. Expected to outperform the BSE Sensex by more than 10% over a 12 months time frame
MO= Market Outperformer Expected to outperform the BSE Sensex by less than 10% over a 12 months
time frame
MP = Market Performer. Expected to be a neutral performer relative to the BSE Sensex over a 12 months
time frame
MU = Market Underperformer. Expected to underperform the BSE Sensex by more than 5% over a 12
months time frame
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such
suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances
when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.
49
Suzlon Energy
As to the Goldman Sachs & Co. data that appears in this document, Goldman Sachs & Co. does not assume liability for these data.
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Suzlon Energy (SUZL.

Riding a tailwind . We expect rising global investment in wind

energy to drive strong growth for Suzlon, Indias largest wind

Target price: Rs1,040

News flow catalysts

Suzlon Indias largest wind energy equipment manufacturer

Likely strong growth in global wind energy investments to benefit Suzlon

We rate Suzlon an Outperformer with a price target of Rs1,040/share

Key risks: increasing multinational competition, regulatory changes

Kotak Institutional Equities

Rel. to BSE-30 (%)

Free float (%)

Source: Company data, Kotak Institutional Equities estimates.

Industrials / Electrical equipment

Expected news flow/events

Concrete moves to trade in carbon entitlements as

Could lead to increase in wind energy installations in

Source: Kotak Institutional Equities estimates.

Kotak Institutional Equities Research

Industrials / Electrical equipment

Overview: Riding a tailwind

Source: Company data, Kotak Institutional Equities estimates.

Suzlon: Indias largest wind energy equipment manufacturer

Additionally, we forecast 600 MW of capacity addition by Indian private/state utilities

Suzlons key initiatives: vertical integration, geographical diversification, O&M

Kotak Institutional Equities Research

Industrials / Electrical equipment

We believe overseas revenues could constitute 41% of revenues by FY2008, though

Key risks: competitive pressures, regulatory changes

We estimate 56% and 59% CAGR in Suzlons revenues and earnings

Valuation: Relative valuation based on near-term earnings growth, news flow

Kotak Institutional Equities Research

Industrials / Electrical equipment

Valuation and timing

Relative valuation based on near-term earnings growth, news flow

Selecting peers: BHEL, Vestas the best comparables

qualitative factors comparing BHEL with Suzlon in Exhibit 3.

Kotak Institutional Equities Research

Industrials / Electrical equipment

Exhibit 2: Kotak Institutional Equities industrials sector coverage universe

KIE sector aggregate

EPS growth (%)

Electrical equipment aggregate

Engineering & construction aggregate

Electrical equipment aggregate

Engineering & construction aggregate

KIE sector aggregate

KIE sector aggregate

Electrical equipment aggregate

Engineering & construction aggregate

KIE sector aggregate

Engineering & construction aggregate

KIE sector aggregate

Source: Kotak Institutional Equities estimates.

Kotak Institutional Equities Research

Industrials / Electrical equipment

Exhibit 3: A qualitative assessment of BHEL v/s Suzlon

Navratna PSU under the Ministry of Heavy Industries

Private corporate majority owned by Tanti family

Has some degree of autonomy in capex and M&A. Has been