CASE Suzlon Energy: Wind energy running out of wind

Suzlon Energy's promoter and Chairman Tulsi Tanti took pay cut of Rs 1.46 crore last year as the company grappled with losses, according to the wind turbine maker's annual report. For the year ended March 31, Suzlon incurred a net loss of Rs 479 crore. It was once the darling among new renewable energy companies. But despite being among the world's top wind turbine makers, today it is bogged down under mountains of debt and uncertainties if it will be able to honor its FCCB (foreign currency convertible bonds) holders. Add to that slowdown in demand amid the overall global economic crisis has made matters worse. So what went wrong?

Suzlon was built from scratch by Tanti and by 2008, the company was the world's fifth wind turbine maker. In its efforts to scale up, it acquired Belgium-based Hansen Transmissions International in 2006 and Germany's REpower Systems in 2007 among other companies.

But cracks began to appear in 2008. A customer Edison International complained that windmill blades it had bought from Suzlon had begun to split at some sites. This became a major embarrassment for Suzlon, which had to rectify the manufacturing defect and compensate customers for cracked blades. The comprehensive retrofit programme cost Suzlon over USD 100 million. The company has managed to put that issue behind its back. However, it is now facing a bigger issue of huge debt of over Rs 11,000 crore and repayment of FCCBs even as there has been a slowdown in demand, especially in US and Europe and delay in payments by some customers amid the global economic downturn.

Suzlon had raised funds via FCCBs to acquire REpower. But now its shares are at over 70% discount to the conversion price of FCCBs, so it has no choice but to repay the bond holders. But for that it will need to raise more funds. However, it has loan repayments of around Rs 3,700 crore due in the current financial year, including FCCB

payments.

Debt-laden Suzlon sold its 26% stake in Hansen in 2011. Recently, it agreed to sell a stake in its China manufacturing unit to China Power New Energy Development Co for around Rs 340 crore. Suzlon also said towards June-end that it is in advanced stage to raise USD 300 million from its senior secured lenders and its bond holders approved extension of repayment date of USD 360 million to July 27. The company is optimistic it will be able to meet its commitments. Also its CFO Kirti Vagadia points out that on the operations front, it has no worries, with a strong order backlog, which gives it visibility through this fiscal year and beyond.

Analysts and the street don't seem very confident. Suzlon shares have slumped 62% over the last one year.

Citigroup last month downgraded the stock to "sell" from "neutral." Among various issues, it said that refinancing of FCCBs might prove a breather but doesn't solve its leverage issue. Further unfavourable regulatory environment in India (government has withdrawn generation based incentives, ended accelerated depreciation of 80% by restricting it to 15%) is also a big blow to Suzlon's India business, it pointed out. HSBC also has an "underweight" rating on Suzlon. Despite the USD 300 million bank refinancing, HSBC still sees Suzlon "having a tough time" with debt repayments. It has cut its target price on the stock to just Rs 10. Suzlons revival strategy is a multi-pronged oneits reducing debt through promoters, bringing in equity and selling bonds to refinance existing loans to improve cash flows. Its also building wind turbines to order, unlike the previous practice of making them first and then trying to sell the devices. The company is aiming for a 20% cut each in operating expenditure, staff costs and headcount, besides selling non-critical assets.

Summary
Suzlon Energy was built from scratch by Tulsi Tanti and was the worlds fifth largest wind turbine maker. The Pune-based wind turbine maker and wind energy developer is faced with an unprecedented cash crunch that has crippled its ability to complete projects in time. The cash crisis has been brewing at Suzlon for some time, and the company did take a few measures to ease the situation - like sale of some of its non-core assets and pushing for recovering receivables. In June this year, it sold its manufacturing subsidiary in China for Rs 340 crore, but the cash is yet to come in. Its efforts at recovering $208 million (Rs 1,081 crore) from a customer, the US-based Edison Mission, have come to naught with the latter refusing payment, saying the turbines supplied were faulty. Suzlon has filed a suit to recover the dues. In a period of 12 months, shares of the company dropped from a high of Rs 39.10 (October 31, 2011) to a low of Rs 15.90 (October 12, 2012) on the National Stock Exchange. Having made losses for three years, Suzlon failed to repay $209 million of debt on 11 October 2012, after bondholders rejected its request for a four-month extension, the biggest convertible bond default by an Indian firm. It has loan repayments of around Rs 3,700 crore due in the current financial year, including FCCB payments. On the positive, the total debt of Suzlon has seen a significant decline of 47.8 per cent since March 2009, according to Business Today Research Bureau. Also, unlike some other wind turbine manufacturers, Suzlon has had no problems with its order book position - it had orders worth $7.2 billion (Rs 37,400 crore) as of the end of June 2012. Its German subsidiary REpower itself accounted for orders of $5.1 billion (Rs 26,500 crore). REpower is debt-free and has cash reserves, but Suzlon has been unable to repatriate them to the group yet over some legal hurdles.

The options before Tanti are not many. He needs fresh cash - from equity investors, from lenders or from his assets sold - desperately to bail his baby out of the crisis.

Questions and Answers

(1) What are the reasons behind the cash crises at Suzlon? Much of Suzlons debt had to do with two major and ambitious acquisitions it made one was Hansen Transmission International of Belgium, a leading gear manufacturer for wind turbines. And, the other, REpower Systems of Germany, a wind turbine manufacturer with capability to make offshore wind turbines. Suzlon spent nearly Rs 10,500 crore ( 1.5 billion) on buying REpower and another Rs 2,500 crore on buying Hansen. REpowers finances are ring-fenced, which means that Suzlon cannot use the cash reserves the German subsidiary has to pay off the debt. The crash of the financial services firm Lehman Brothers in September 2008 resulted in a global economic crisis, from which the US and Europe two of the largest wind power markets, at least for REpower have not yet recovered. This has added to Suzlons woes. All of these have contributed to Suzlon defaulting on the redemption of an instalment of foreign currency convertible bonds, for which it had sought an extension of time from the bondholders. The bondholders refused to extend the deadline.The groups net loss widened to Rs.1,154.53 crore in the quarter ended 31 December from a net loss ofRs.286.46 crore a year ago. Sales fell 19.58% to Rs.4,047.71 crore from Rs.5,033.45 crore.

(2) Discuss the consequences faced by Suzlon on acquiring the German Company Repower. Suzlons heavy reliance on REpower can be seen from the fact that the German subsidiary accounts for more than half of its order book at the end of October. The group has an order book of nearly Rs 37,000 crore ($6.5 billion), of which the India business accounts for 27 per cent, international business 16 per cent and REpower 57 per cent. However, it was the REpower acquisition that has

been weighing it down . Suzlon entered into a bidding war for the first part of the stake-buy in the German wind turbine manufacturer, whose technology it hoped to acquire and sell. German law made it difficult for Suzlon to do this, because of which it had to increase its stake beyond 90 per cent. It now owns about 94 per cent of REpower. A fire sale of REpower might help Suzlon raise cash and retire a part of its debt, but, it would mean foregoing three-fourths of its consolidated order book and a near exit from the European market, where REpower is a leading equipment supplier. REpower is a critical asset for the group. Rumours regarding a possible sale of the company, or plans to re-list it, are totally speculative. Suzlons head of finance, firmly dismissed speculation that the REpower unit would be sold to help repay debt. Sources say REpowers finances are ring-fenced, which means that Suzlon cannot use the cash reserves the German subsidiary has to pay off the debt.

(3) What strategies has Suzlon Energy taken to deal with its financial crises?

The company will need a favourable business cycle in wind energy and lots of luck to come out of this situation. Suzlon plans to reduce its fixed costs by 20 per cent, including manpower costs, and cut its working capital intensity to 20 per cent, from the current 27 per cent. It also rubbishes analysts claims about macroeconomic headwinds. Suzlons revival strategy is a multi-pronged oneits reducing debt through promoters, bringing in equity and selling bonds to refinance existing loans to improve cash flows. Its also building wind turbines to order, unlike the previous practice of making them first and then trying to sell the devices. The company is aiming for a 20% cut each in operating expenditure, staff costs and headcount, besides selling non-critical assets.Also, REpower is debt-free and has huge cash balance. But it is ringfenced by German banks. If the company is able to merge these two firms or bring the cash from that (German) company, the overall cost and debt will come down. REpower's local banks are believed to be blocking the merger, so this would require replacing those banks with Indian lenders.

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