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Suzlon: the net tightens on FCCB repayment

According to reports, for a while this year, Suzlon Energy Ltd’s stock trended upwards as news about order flows sparked investor interest. However, since the start of this month, the stock has lost some 12%, underperforming both the BSE Power index and the broader markets. Even the latest news about the firm partnering a Chinese company to develop a 800 MW project and its unit REPower getting another 332 MW project has failed to stem the decline.

The reason: Time is running out for Suzlon to repay foreign currency convertible bonds worth $569 million in the next 7 months. On Wednesday, Bloomberg reported that Suzlon’s US customer Edison International had said that the earliest it will be able to pay for a contract is around February 2013. That is likely to deal a major shock to its repayment plan as Edison was supposed to pay $200 million. Not only that, things could go pear shaped with the other sources of funds the company has lined up.

For one, the company plans to use $100 million cash from the Suzlon wind balance sheet. However, cash balances have steadily reduced to Rs. 678 crore by the end of December 2011 compared to Rs. 1023 crore at the end of the previous financial year. All these new orders mean that Suzlon’s working capital requirement may increase in the near term which will put pressure on using this cash.

Secondly, the company reckons on sourcing some $200-250 million from internal cash flows. But will it be able to generate that much cash given that it has made losses in most quarters in the past three years? For the nine months ended December, Suzlon reported losses of Rs. 178 crore. JP Morgan India Pvt Ltd estimates that the company may generate free cash flows of $200 mn in FY13, but that is spread throughout the year while Suzlon needs cash by October.

The only recourse then is for the company is to sell assets. It has already factored in $100 million from sale of non-core assets in its repayment plan. With banks unlikely to cough up the money and bondholders unlikely to agree for another round of restructuring, the only recourse now for the company is selling a stake in its unit REPower or list the unit again.

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