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Rs 110 billion debt: Can Suzlon Energy weather the big storm?

According to reports, Tulsi Tanti dropped off the Forbes billionaire list three years ago, but the founder-chairman of wind turbinemaker Suzlon Energy is an incorrigible optimist, at least when he talks.

“Nothing can deter entrepreneurs like us from forging ahead,” he told ET last year in an exclusive interview. “The worst is behind us,” he declared with his trademark “you-thought-we-went-bust-but-we-haven’t” smile. The smile made sense because despite odds, Suzlon managed to stay alive. A year on, his smile may not have disappeared, but looks like, for the world’s sixth-largest wind-power company by market capitalisation, the worst isn’t over yet.

For a company saddled with a humongous debt of more than Rs 11,000 crore, Suzlon has to immediately raise $360 million (Rs 2,000 crore) before foreign currency convertible bonds (FCCBs) it had issued mature on July 27. In fact, the bonds were to mature last month, but bondholders approved the company’s proposal for a 45-day extension. But where will the money come from before July 27?

More than a week ago, a Suzlon spokesperson told ET Magazine that the company expects to tie up funds of $300 million “in the next few days”. So far, no announcement has come from the company.

“The best option [for Suzlon] is to convince hesitant domestic banks to lend them money. But whether they are ready to give fresh funds is the question,” says a Hong Kong-based analyst who has long tracked the wind energy company.

According to a person close to the matter, the company is “actively pursuing multiple options to meet its immediate need for funds, including possible sale of its stake in [its 100% German subsidiary] REpower”. He asked not to be named. Suzlon Energy’s spokesperson, however, denied any such move on the part of the company.

Grim Forecasts

Charanjit Singh, vice-president at HSBC, says even if Suzlon manages to raise $300 million in the short term, meeting annual repayments will be “tricky”. Suzlon has loan repayments of around $700 million in this fiscal and $250 million in the next fiscal.

In a note to investors, HSBC Global Research said, “…Nor do we see Suzlon generating enough cash to meet its FY14 repayment obligation….” The situation would be worse if there are any scheduled payments for $300 million refinancing, it warned. Suzlon got a refinancing deal from a consortia of 24 banks; as per the agreement, Suzlon was to start repaying debt over a six-year period from 2012-13.

A Copenhagen-based alternative energy consultant says most wind power firms across the world are finding it tough to raise funds “at a time when the industry is expected to experience a decline in orders, especially from the US”.

He adds, “Typically, Suzlon, like other wind power firms, has seen a huge correction in its share price. Plus, it has huge debt. The situation is tougher than it looks,” he says suggesting that selling part of its stake in REpower “isn’t a bad option”. On the Bombay Stock Exchange, from a high of Rs 446 on January 9, 2008, Suzlon’s stock price fell to Rs 19.75 at close on Friday.

Suzlon officials can’t tolerate any talk of sale of its stake in REpower, an entity that Tanti once called the jewel in the crown of Suzlon. “We said we are planning to sell non-critical assets, not critical assets [such as stake in REpower],” the spokesperson insists.

“That Vinod R Tanti [Tulsi’s brother] has been named the chief operating officer of REpower shows how critical the company is for Suzlon,” he argues. However, according to many reports, Suzlon has been in talks with rivals such as Alstom and GE besides others to sell a part of its hard-earned stake in REpower as part of an all-out effort to pare its debt. German media reports had said Alstom was willing to pay as much as $2 billion for REpower.

“It is absolutely not for sale,” repeats the spokesperson. Suzlon Energy had spent e1.5 billion between 2007 and 2011 to pick up 100% stake in REpower, which makes the world’s largest commercially available, 6.15 MW offshore turbines.

Instead, as announced, he notes, the company plans to tide over head winds in the segment through a series of “serious” measures. They include issuing high-yield bonds, disposing of non-critical assets, reducing working capital requirements, internal accruals and so on besides “raising a $300 million new [loan] facility from our senior secured lenders”.

More, More Plans

So far, Suzlon has raised $100 million through the sale of what it calls non-critical assets – such as a wind farm in India for $40 million and the China manufacturing facility for $60 million. Going forward, as announced by the company’s chief financial officer, it expects to raise between $100 million and $200 million this fiscal from disposal of non-critical assets.

For its part, HSBC expects Suzlon to raise $100 million this year from such sales and $50 million next year. The Hong Kong-based analyst says it makes good business sense for Suzlon Energy to relocate some manufacturing units to India. However, asked if there are any such plans – so that it can make turbines at a much cheaper cost – the company spokesperson said, “There are no such moves.” “The fact is Suzlon isn’t in a comfortable situation at all,” the Hong Kong analyst adds, referring to its loan servicing capabilities. Meanwhile, financial services firm CLSA’s analyst Rajesh Panjwani said Suzlon cannot use a e750-million loan that REPower has availed of recently for repaying loans.

CLSA was one of the first agencies to downgrade Suzlon a few years ago from outperform to underperform in the wake of news reports of problems in the turbine blades it had sold in the US. Around that time, the market capitalisation of Suzlon was higher than the combined market capitalisation of Vestas, now the world’s largest wind power company, and Gamesa, now the fourth-largest wind power firm.HSBC Global Research expects Suzlon to continue to make a loss of Rs 200 crore in the next fiscal as opposed to market expectations of a net profit of Rs 300 crore. This means the agency expects Suzlon to make a loss for the fourth consecutive year.

All this doesn’t look good for a company that at its peak of 2007-08 earned a net profit of Rs 1,017 crore; in 2009-10 it made a loss of Rs 982 crore and Rs 1,096 crore in 2010-11. For the quarter ended March 31, 2012, it made a loss of Rs 309 crore. In the full year ended March 2012, Suzlon brought down its net losses to Rs 478.58 crore from Rs 1,323.97 crore a year earlier.

Analysts such as HSBC’s Singh attribute several reasons for this massive slide in fortunes. Its huge debt, without doubt, stems from its 2007 bidding war with Areva on REpower stake purchase, which resulted in higher cost of acquisition and hence higher debt on Suzlon’s balance sheet. “This is why the best way out for Suzlon is to sell its jewel,” notes the Hong Kong-based analyst.

Then came allegations of low-quality products. Reports of cracks in many of its turbine blades in 2008 led to a temporary decline in orders for the company in the US. Negative publicity, sometimes orchestrated by its western rivals, hurt it very badly in other regions as well, analysts say.

“We were expanding and then came the unexpected global meltdown. But then we entrepreneurs are always prepared for the worst,” Tanti had told ET Magazine. Following the 2008 global financial meltdown, Suzlon was forced to restructure its loan a year later. Panjwani says most wind power companies saw their share price “corrected by 80-90% after 2008”. The Hong Kong analyst agrees and adds, “Suzlon’s problems resulted from high valuation [for REpower], high gearing [high level of debt compared with its stock price] and the worldwide economic slowdown.” Four years on, forecasts don’t look good at all. Most agencies watching the renewable energy sector expect a decline in the US, especially for the sale of wind turbines.

For Suzlon, there is a double whammy, too. Its market share has been declining in India. It had a 58% market share in the Indian wind turbine market in 2008. Though it still remains the leader, its share has dropped to as low as 35%. Enercon is nipping at its heels with a 24% share. Currently, ReGen has a 14% share, Gamesa 10%, Vestas 9% and others 8%. HSBC expects competition to intensify with the entry of new players.

Fight for Survival, New Markets

“While it is true that Suzlon isn’t out of the woods yet, the company that Tanti built from scratch won’t be blown away that easily despite all the problems,” argues an analyst with a Mumbai-based consultancy. “REpower acquisition has given them a lot of scope for expanding into new markets thanks to new technologies,” he says, requesting anonymity, because he isn’t authorised to speak to the media. Well, that is exactly what Tanti also has in mind. “We continue to explore high growth/ high margin markets, like Mexico, with large wind potential, but from an asset-light or cost-neutral perspective,” Tanti told ET Magazine in a pithy response.

The company spokesperson notes that Suzlon wants to enter high growth markets in a smart way. “Mexico will soon be a significant wind market,” says he. “We [also] do have some key issues to be bullish about: best-in-class Ebit [earnings before interest and taxes]; best-in-class gross margins; robust $7.4-billion order book; and through our subsidiary REpower the number two leadership position in offshore,” he adds.

Tanti has often said that he has ultimate faith in what he is doing when he does things right. “He has a very clear view of what the industry will be like in five, 10, 15 years and that is a source of confidence for him,” explains the spokesperson. For Tanti, the wind power business was an accidental discovery. The story of his rise as an entrepreneur is an oft-told one – he was briefly talked about in the same breath as that of Ratan Tata and other business icons. Of course, that one is worth re-telling.

Tanti, who used to manage his family’s textile business in Surat, had to confront power outage problems in the 1990s. Out of frustration, he bought two wind turbines from Vestas. It struck him that wind power could be a lucrative business. Soon, he took the plunge by raising $600,000 with the help of his brothers and founded Suzlon Energy and relocated to Pune.

By 2001, he had sold off his textile business, and within the next few years he was on the list of India’s top billionaires with his company doing business in 32 countries. But now, his family’s 53% stake in Suzlon (90% of which is pledged) is valued at less than `2,000 crore and the company’s debt is more than three times its market cap. True, odds seem insurmountable, coupled with expiry of tax breaks for wind farms in many markets, including India and Spain.

But Tanti is undeterred. “It is a long-haul game,” he loves to say. “We remain extremely confident of the business’ performance over the mid-term,” says the company spokesperson. Is it hope against hope? We may soon know.

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