Suzlon: Where Did I Go Wrong? 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

Suzlon Energy Ltd is clearly one of the biggest success stories of the current bull market.

The stock is up almost 36x since its lows in March 2020.

This is significantly better than the 6x returns earned by the BSE Small Cap index in the same period.

In other words, Suzlon Energy has given more than 6x the returns that one would have earned from the small cap index.

To be honest, not many saw this gain in Suzlon Energy coming. At least I didn't.

After all, the company's financials back in March 2020 were down in the dumps. They were in a very poor state. The company was about to record its biggest loss in history, and it was loss making in six of the last 8 years.

Besides, not only did have a huge amount of debt on its balance sheet, its net worth had also gone into the negative.

Hence, no one in their right mind would have dared to bet on the stock, especially when the economy was going through a crisis of its own due to the Covid pandemic.

However, those who did, would be laughing all the way to the bank right now.

The stock has scripted a phenomenal turnaround, going up 36x over the last 4.5 years as I just highlighted.

To be honest, even I was among the ones who did not believe in buying Suzlon shares. In fact, I even wrote an article almost a year back, outlining my reasons.

Here's what I had said back then.

• I'm of the firm belief that every investor should have his or her own circle of competence.
  
  The most successful investors are the ones who know the boundaries of their circle of competence really well and have the discipline to invest within those boundaries.
  
  They rarely venture outside their circle of competence. My circle of competence are stocks with good balance sheets and decent, if not the best track records.
  
  Unfortunately, Suzlon, despite strong signs of a turnaround and concrete plans for de-leveraging, falls outside my circle of competence.
  
  It hasn't turned consistently profitable yet and still has high debt. So, I may still not call it an 'investment'. At best, it could be termed as an 'intelligent speculation' based on how I define my own circle of competence.

So, the reason I was not so bullish on Suzlon was because it fell outside my circle of competence.

Let me explain with an example.

Suppose you want to lend out Rs 100 crores and you get offers from two firms.

The first firm runs a solid business with a yearly profit of Rs 50 crores and is willing to pay you an interest rate of 10%. Now, this is a pretty safe deal. Even if this firm's profits were to fall by 50%, he would still be able to afford your interest payment of Rs 10 crores.

The second firm makes profits of only Rs 30 crores but is ready to offer you an interest rate of 20%. The firm is also confident of doubling its profits 2-3 years down the line.

So, if it doubles his profits to Rs 60 crores, it can easily afford to pay you an interest of 20% i.e. 20 crores.

But if its profits fall by 50% to Rs 15 crores for some reason, then it may default on the interest payment to you. The move may backfire big time.

Therefore, the choice is between a safe, low risk 10% returns or a lucrative high risk 20% return.

So, who would you lend to, the first or the second firm?

Well, let me tell you my preference.

I will go with option one 10 times out of 10. Yes, that's correct. If given a chance, I will prefer earning 10% interest over and over again because of two reasons.

First, it will keep my principal safe and second, I won't have to do a lot of research on the company.

I will know from the company's past and present performance that it is a good, solid company and even if the profits fall 50% in the future, my 10% return on my investment is still safe.

Option 2 on the other hand is risky and requires a good amount of research on the company.

One will have to speak to the company's management, understand the business model in detail and try and figure out why it is so confident of doubling its profits over the next 2-3 years.

In fact, even after you do all the research, there is no guarantee that you will earn your 20% return on investment. This option is therefore much more difficult to analyse than the first option.

I hope you now understood why I called Suzlon as outside my circle of competence. As I mentioned just now, I am happy to earn lower returns if they come with less stress and relatively less effort.

Till about a couple of years back, Suzlon's past and present performance wasn't good and solid by any stretch of imagination.

It was struggling to record a positive bottomline and the balance sheet was loaded with debt. Hence, it was no option 1 company that I like to invest in.

Although things have changed for the better since then, I would like to see Suzlon staying profitable for a few more years before I get comfortable with the stock.

However, the stock turned out to be a gold mine for those investors who were willing to take the risk in exchange for a much higher return and were also willing to do a lot more research on the company.

For them, it was all worth it as the returns from the stock have been fabulous.

So, in the end, it all boils down to whether you want to earn 'sure' money from stocks or 'big' money.

If you want to earn 'sure' money like I want to do, then you should invest in fundamentally sound companies with solid balance sheets and be happy with the 50%-100% upside over a period of 2-3 years. This method is not very research intensive though.

However, if you want to earn the 'big' money then you have to take a call on the company's future and whether it can do some great things. This requires a lot more research and a thorough understanding of the company's business model and its growth prospects and, the quality of its management. If done right however, this approach can lead to multibagger returns.

But you also have to be careful that you don't go wrong because the downside could also be significant.

Hence, in conclusion, I wasn't bullish on Suzlon because as I said, I am more about 'sure' returns than 'big' returns. However, I am happy for those who earned the 'big' returns on the stock by putting in the extra effort.

So, it is all about your underlying philosophy and setting the right expectations.

Happy Investing.