Has the wind changed direction to favour Suzlon?

Even as the demand for wind projects decline, the company looks to be in a better position to handle the crisis than in the past

Wind Turbine manufacturers across the globe have been in trouble over the past few years. One of the cleanest source of energy, wind power is heavily dependent on subsidies from government. While some governments (western countries) provided direct subsidy in the form of generation based incentives (GBI), some like the Indian government used to provide indirect subsidy, in the form of accelerated depreciation (AD) benefits to those players setting up wind turbines.

A slowdown in the economy and rising fiscal deficit forced countries to withdraw these benefits. Indian government too, in order to increase its tax collection withdrew the AD benefits.

The synchronised withdrawal of benefits severely impacted the wind turbine manufacturers. Suzlon, the fifth largest player in the world was one of the worst impacted. For Suzlon, the slowdown came just after it had acquired RE Power (name changed to Senvion SE) and financing its acquisition through debt. Ultimately Suzlon defaulted on $209 million of debt after its bondholders rejected its request for a four month extension for repayment.

Over the last fortnight, a series of reports have appeared in the media which has resulted in Suzlon's price shooting up from Rs 9.50 to nearly Rs 15 in a span of eight trading days.

What led to the rise were three sets of news, but will these be sufficient to reverse the tide of the company needs to be looked closely.

One of the first news trigger that ignited the rally was the news that the German subsidiary will be listed. The company is expecting to raise around $600-700 million from the public, valuing Senvion SE (erstwhile RE Power) at $2 billion. This development is a big positive for the company as the parent company in India is presently valued at only Rs 3,700 crore, while its holding in Senvion will be valued around Rs 8,500-9,000 crore. Further, the IPO would result in the company reducing its debt sharply, especially its foreign debt.

However, the amount so raised will not be enough to take care of a huge pile of debt of nearly Rs 15,190.77 crore (March 2013) out of which the Indian arm has a debt of Rs 8980 crore. There were issues raised earlier which prevented Suzlon to transfer money raised through Senvion (financially stronger than the parent company) to be transferred to repay debt of its Indian parent. European investors of Senvion too would not like the idea of their funds being used to repay the loans of the parent company as no benefits would accrue to them.

A way out could be that a part of Suzlon's manufacturing business in India could be 'sold' to the German subsidiary and the proceeds of the issue be used to pay the parent company. That way the balance sheet of the German company too would be stronger and the issue of transferring money to India can also be resolved.

The second news was that the company sold a newly acquired 240 MW wind farm. But this farm was acquired from one of its customers who could not afford to pay Suzlon for its turbine and instead sold it to Suzlon. This plant was then re-sold giving Suzlon a small profit. This event will not have too much of an impact on the financials of Suzlon.

The third news was that the German subsidiary of Suzlon has signed a fresh agreement to raise Euro 850 million. If Senvion is planning an IPO, this line of credit from 19 banks will help install confidence in the company.

While these developments will definitely make Suzlon's financials healthier, the key issue of a shrinking market remains. After the US Congress withdrew the Production Tax Credit handout for wind farms, construction of such farms plunged by 92 per cent. Even in India, domestic sales fell from Rs 6,853.52 crore to Rs 1,748.11 crore. China, the largest market wind power generator, has switched off 11 per cent of their existing turbine capacity as government cut incentives for the sector.

Incentive cuts in European Union, one of the fastest growing markets, also saw a sharp drop in installation in Spain, Italy and France by 84 per cent, 65 per cent and 24 per cent respectively.The European Commission has also watered down its earlier estimate of planned renewable targets.  

So while all is not well with Suzlon, the company will be in a much better state to face the rising challenging climate. The company has got another lease of life.