Cash from both the REpower acquisition as well as the sale of Hansen has revived this wind giant. Yet, cash-strapped SEBs and Europe add to its woes.
POWERING UP WITH REPOWER
This is sweet victory for a company that has had a rough past few years, starting with cracks discovered in its blades to crippling debt. REpower brings with it a cashbox of around euro 320 million (Rs 2,000 crore) which it will now add on to Suzlon’s own balance sheet. The company has recently started posting profits in the last two quarters after making a loss of Rs 1,103 crore for financial year ending 2010-11. The German wind power maker also has annual cash accruals of €80-100 million (Rs 660 crore) which Suzlon will be eyeing with great interest.
The RE-Power acquisition comes as a big relief for a company with current obligations of $660 million (Rs 3,100 crore) and a total debt of of around Rs 12,000 crore, resulting in huge interest outflows. Increased management control will also help Suzlon reduce the costs of REpower, by shifting a part of its manufacturing to India.
The complete acquisition of REpower, and subsequent transfer of technology will also help Suzlon launch REpower’s products in India. While the intended technology transfer was meant to be completed much earlier, the move was thwarted by tough German regulations. But analysts say that the impact might be minimal because most of the technology of REpower is for offshore wind turbines, which has no market in India as yet.
Re Power’s acquisition may not also prove to be the kind of shot in the arm that its new owners hoped for because of serious problems that the European economy is facing, which will cause a further slowdown in orders. “It’s like a cycle. REpower was doing well last year when Suzlon was not doing well, and now that Suzlon is doing well, REpower’s outlook is not so good,” said Rabindra Nath Nayak, senior analyst at SBI Cap Securities.
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LOOKING EAST
Tough times in Europe and US have caused Suzlon to shift its focus to emerging markets like China, Brazil and India. Aided by a manufacturing facility in China, Suzlon is also make headway in the local Chinese market which is adding huge amounts of power generating capacity, as well as export China-made turbines. “Our focus remains on markets that offer good margins for our business,” says Robin Banerjee, the chief financial officer of Suzlon Energy. “We are seeing strong movement in our India business and similarly, we are focused on other emerging markets which offer enormous potential,” he says. The company has already given out an earnings forecast that is 33-44 per cent higher in revenues for the current financial year and plans on maintaining its EBIT margin at 7-8 per cent.
Suzlon’s confidence in posting strong growth numbers is undoubtedly rooted in macro-economic fundamentals. The wind industry is growing at around 12 per cent annually in India, and can contribute as much as 24 per cent of energy by 2030. In the short-term, however the outlook has been bleak. “In the last few months, there were hardly any financial closures of power projects. In this scenario, it is tough for them to bag new orders,” said an analyst who declined to be named. “Order inflow in the first quarter was weak at 237 megawatt(MW), which went down 50 per cent on a year-on-year comparison. (It) has remained weak for two consecutive quarters,” said a report by international broking firm Macquarie. Suzlon has an orderbook of around 2,030 megawatts and REPower’s orderbook is at 2,710 megawatts. But while these orders might take care of 2011-12, the next financial year may not be so peachy.
Suzlon has one thing on its side in India: a good regulatory environment and tariff structure for setting-up projects. But after many state electricity boards (SEB’s) in the country have ended up in a financial soup, the proposed high tariffs for renewable power, seem like a tough proposition. “We have all seen how tough it has become to acquire land for projects. In these times, one should note that a coal-based power project will require less than half of the land used by a wind power project,” said an industry expert.
The SEB of Tamil Nadu is one such utility which is under stress. To make things worse the state is home to around 40 per cent of the country's wind capacity. “High feed-in tariffs for wind power, at Rs 3.5-4 per unit, is putting the burden on cash-strapped SEBs,” the Macquarie report said. These factors, added to slower financial closures of power projects, might affect future orders in the pipeline.
FACING COMPETITION WINNING TECHNOLOGY
To add to Suzlon’s challenges, its competitors Veritas and Gamesa have made their presence felt in the Indian market, along with German major Siemens. Suzlon does have an advantage in that they already have a land bank in place—wind projects are turnkey models where the turbine seller also acquires the land, sets-up the plant and takes care of operations and maintenance. These foreign players don’t have one and therefore cannot operate projects that bring in the real money. A top official of the company claims that foreign companies who want to only sell equipment, might find it tough to stay in the Indian market. However, Suzlon’s advantage has, in a cruel twist, turned into a liability. Last month, the Kerala government said that the company encroached on tribal land in the state, and wants to reclaim the 85 acres it gave Suzlon.
However, where land is proving problematic, new technology hopes to rescue it. Suzlon is also adding new products to its portfolio, to catch up with technological changes in the sector. The company’s new S9X series of wind turbine generators is based on Doubly Fed Induction Generator (DFIG) technology. The turbines have a larger rotor diameter and higher hub height, which can help generate more power in areas which do not have very heavy wind. “It also offers better grid compatibility in line with grid compliance norms in India. The DFIG technology facilitates extracting maximum energy from the wind at low wind speeds by optimising the turbine speed, while minimising mechanical stresses on the turbine during gusts of wind – leading to 14 to 19 per cent increase in the power output,” said Banerjee. According to the company, its new product strategy, will also maintain its pricing in the market. Globally, wind power equipment might see a price decline of around 25 per cent. But analysts feel that the growth market in India might insulate it from these changes.
No More Forex Woes
Another drag for the company is its susceptibility due to foreign exchange fluctuations on account of its of German company REpower and Belgian turbine gearbox manufacturer Hansen Transmissions. After selling off its stake in Hansen a few months back, analysts say that a major part of the volatility has been taken care of. “Also the currency has not been as volatile as it was a few years back, that makes the company a little stable,” said a sector analyst with a stock broker.
A bonus from the sale of this stake, is a cash flow of $187 million (Rs 830 crore) which is a vital boost for this debt laden company and will contribute to the Rs 2100 crore $500 million slated to be redeemed next year. As the FCCB conversion price is 75-125 per cent higher than the current stock price, analysts say that their conversion into equity is highly unlikely.
In August, the company’s stock fell by around 30 per cent. Brokerages, however, are impressed enough to issue a buy call on the basis of a structural turnaround. “In business, visibility has improved with Suzlon winning orders worth 214 megawatts, of which, 163 Mw of orders were won in India. REpower too won a 51 mw order, adding around two per cent to its backlog,” said a report by Meryl Lynch last month.
But the company needs to do much more than that in the long run if it hopes to make a phoenix-like ascent from the ashes of its past problems.