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Can Tulsi Tanti salvage debt ridden Suzlon Energy?

According to reports, can Tulsi Tanti salvage Suzlon Energy ? Will he lose control over the world’s fifth-largest wind turbine maker, which he built from scratch? The company, which defaulted on a $209-million foreign currency convertible bond repayment on Thursday, has piled up Rs 14,000 crore in debt – almost twice its equity base. It has reported losses for the past three years.

Sales and order growth remain muted as investments in the sector have slowed. It is fighting customers to recover dues and is under pressure from vendors to pay up. And if that’s not enough, it is yet to get its arm around its prized acquisition, and also the reason for its debt, Germany’s REpower Systems. So, is last week’s default a harbinger for more bad news?

“It’s bad news, but it won’t break us,” a key Suzlon official, who is also very close to Tanti, told ET.

The Suzlon official was speaking to ET after the company announced its inability to repay foreign lenders. Emboldened by the Wockhardt experience, where bondholders got a favourable court verdict to recover their money after the Mumbai-based generic drugmaker defaulted on FCCB repayments in 2009, Suzlon’s bondholders may file a winding up petition to put pressure on Tanti.

“Liquidating a company in India is not easy. Even if the bondholders file a winding up petition, they may not be able to recover the money for another 2-2.5 years,” said Bhargav Buddhadev, an analyst with Mumbai-based Ambit Capital. “This is the biggest financial crisis for Suzlon. Banks may restructure loans and give them some relief, but their problems will only be solved if REpower is merged with Suzlon,” he said.

Experts tracking the company and industry players believe Suzlon would require drastic measures to survive this storm. “I am an admirer of Tulsi Tanti. But Suzlon’s management lacks depth to handle a financial crisis, especially at a time the industry is going through a tough time,” said Ramesh Kymal, chairman & managing director of the Indian subsidiary of Spain’s Gamesa. “If domestic banks don’t pull them out or they don’t get access to REpower’s cash, they would need a miracle to survive,” said Kymal.
Suzlon’s Chief Financial Officer Kirti Vagadia said the company was optimistic about raising funds to meet obligations. But the optimism will face a big test as cynics point out that the company’s standalone cash flow has remained muted while it has not been able to lay its hands on the cash at REpower, which is being ring-fenced by German banks.

The company plans to sell ‘noncritical’ assets to raise funds, but the slowdown in the industry has hurt the valuation of its businesses. It does not even have the option to sell stake at the parent level since the shares of the company have eroded and raising a substantial amount would lead to serious dilution. It does not help that promoters have pledged 96% of their holding with lenders. Suzlon’s shares have plummeted 60% in the past one year, trading at Rs 16, compared to a 10% decline in the Sensex.

Chances of roping in new investors are remote. “Where are the investors with deep pockets? With so much uncertainty in the wind energy sector, why would an investor consider acquiring a debt ridden company,” an industry player said.

Experts anticipate global wind installations to contract by almost 10% in 2012 due to lower demand from two of the biggest markets — Europe and the US. The European economic crisis and uncertainty over extension of the Production Tax Credit in the US, which was the key driver for wind energy in the world’s largest economy, have hurt investments in the sector. India, too, has withdrawn key incentives for wind energy. “These are tough times. The current year would be a complete washout for India’s wind energy sector due to the absence of any incentives,” Kymal of Gamesa said

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