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Suzlon charts out debt repayment plan, but analysts sceptical

According to reports, Wind power firm Suzlon Energy Ltd, which needs to repay Rs.3,000 crore debt between June and October, is hopeful of meeting its obligations by selling non-core assets, comprising wind farms and land; increasing order inflow; and recovering dues from a customer.

Analysts, however, are not sure whether Suzlon will be able to generate enough cash and they expect the company to seek additional sources of funding, including selling a stake in its wholly owned subsidiary REpower Systems SE.

The first tranche of Suzlon’s foreign currency convertible bonds (FCCBs) are due for redemption in June.

“Given the company’s improving performance, impressive order inflow, potential collection of funds from a specific customer, and the progress we are making with the sale of non-core assets, we continue to believe we will meet our obligations in full,” a Suzlon spokesman said. “We have a wind farm asset of about $60 million, which we can sell, and there are a few other non-core or non-critical assets, which also we are exploring the possibility to sell.”

The company is also banking on getting about $200 million from US wind developer Edison Mission relating to turbine contracts signed in 2007. In that year, Suzlon had signed a contract with Edison for the supply of 300 wind turbines. In 2008, Edison cancelled the order for 150 turbines after the blades of some turbines were found to be defective. Suzlon claimed the $200 million payment is for the project that includes manufacturing, running and maintenance of turbines.

In the bull run between 2005 to 2008, at least 200 Indian firms raised money through FCCBs. With the fall in the market, most of these cannot be converted into equities. This means the quasi-equity instrument will turn into debt and firms will have to redeem it by paying cash.

Indian companies may default on 20% of $7 billion in dollar-denominated convertible bond payments due in 2012, according to Fitch Ratings, as the slowest economic growth since 2009 erodes earnings.

Suzlon is also in talks with banks and financial institutions for debt consolidation and refinancing its existing debt. As part of the plan, it wants to redeem FCCBs by raising money from banks. State Bank of India, the country’s largest lender, which has given money to Suzlon earlier, will not give fresh money, a bank official said on condition of anonymity.

Suzlon said it already has cash of $100 million and expects the capital flow from its business to bring in $200-250 million. For the next 12 months, its order book has business worth $5-6 billion, the company told analysts in February.

“We believe that there remains significant uncertainty around the sources of cash… especially in terms of timing, and we expect this will likely remain an overhang around the stock until the management is able to demonstrate a more tangible plan towards debt repayment,” said analysts Rupesh Madlani and Christopher Smith of Barclays Capital Equity Research, in a 14 February report on Suzlon.

The Suzlon stock lost 1.27% on Friday to close at Rs.28.75 even as BSE’s benchmark index, Sensex, rose marginally. Since January, the Suzlon stock has risen 62%, outperforming the Sensex.

“We believe that the company may seek additional sources of funding, including selling a stake in REpower or relisting the business,,” Barclays Capital said in the report, adding that it believes selling 30% in REpower can generate some $225-275 million in cash.

“In addition, promoters may seek to sell about 2-3% of their stake in Suzlon, as they have in the past, and loan the money back to the company, and this may generate an additional $20-30 million in cash,” Madlani and Smith said.

Analysts are seeing REpower’s raising of bank loans of €750 million last week in a positive light. “Definitely, it is positive for the company,” S.P. Tulsian of said in an interview with CNBC-TV18 last week, adding that REpower has a cash balance of about $1 billion, while Suzlon needs $600 million for debt repayment.

“There the amounts must have got blocked and the company wanted to get rid of this bond redemption liability,” Tulsian said.

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