Buy or Sell -Suzlon Energy

Suzlon was once the darling of the bull market but had come crashing down in 2008.The company posted quarterly results yesterday and had a net loss.

The problem with Suzlon is the high debt it used to fuel its growth. That went well till the cost of debt was low and the global growth in Wind energy was good. As soon as the growth slowed and the cost of debt became to rise, it was double trouble for Suzlon. That’s what happens when companies aim for exponential growth path based on cheap debt.

My sense is that it will take for the company to get out of this mess. As most of its business is global, the global growth needs to return to 2006-2007 levels before the company can sell its pretty wind farms. Also company needs to do a lot of work on its receivables as they have really ballooned.Working capital managment has become a real challenge for the company.

Coming to the stock price, the stock is a sell on rallies kind of stock. The stock can pick some momentum only after it crosses 125 levels. On the downside, 80 is the critical level to watch, below which, the stock can fall very badly. The stock can be a good short sell candidate after that.

This is a big lesson for investors- Not everything that goes down comes up. Use this rally to get out of bad apples in your portfolio.