 "Troubled Suzlon still to catch tailwinds")
The transaction marks the end of Suzlon's two-year effort to recover $228 million, or Rs 1,358 crore, that Edison Energy owed to the Pune-based company for buying equipment for its Big Sky wind farm. The delay in payment by Edison had triggered the country's biggest foreign currency convertible bond default after Suzlon failed to repay $209 million in October 2012, and subsequently led to Suzlon restructuring its debt of Rs 9,000 crore last year.
Over the past year, Suzlon has taken several steps to restructure its finances. It sold off its assets in China and is considering listing its German subsidiary, REpower (now called Senvion), in London. This is one of the avenues that Suzlon is looking at to fulfil its payment obligations, which have become very stringent after it went into corporate debt restructuring (CDR) last year.
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However, given the scale of Suzlon's problems, bankers are not too enthused about the progress so far. They say Suzlon may have to put more assets on the block to repay its debt and reduce its losses.
"The payments are on course but the company clearly is under financial strain as its cash flows are still weak. We do not know how long it can keep up with it. In addition to recovering its dues from Edison, it should also consider exiting REpower partially," says the chairman of a public sector bank who was a part of the consortium which restructured the company's debt which it piled up after two international acquisitions in 2008 even as the prices of wind turbines slumped globally. (How it landed in CDR, see box)
Not so optimistic
While Suzlon's management was confident that the company's business would normalise following the debt restructuring, a year later the company appears to be little closer to it. The CDR gave the company a two-year interest holiday and lowered rates by three percentage points, thereby helping it save Rs 285 crore annually in interests on its Rs 14, 500 crore debt.
The management was also optimistic about bagging more orders for wind turbines and improving cash flows by selling off assets. It has been able to achieve only some of these targets . Last year, it sold its 75 per cent stake in Chinese manufacturing facility Poly LongMa Energy for Rs 176 crore. At the same time, it won orders of 913 megawatts last year and grew its order book to 5,500 megawatts. But its turnaround plan has failed to impress bankers and analysts.
"The problem is that most of the orders that it is bagging are international. Its domestic business is weak, and its capacity utilisation is lower than 30 per cent," says Ruchir Khare, senior analyst at Kotak Securities. He adds that international orders, which the company is winning on behalf of REPower, could dry up in the future, given the volatile economic scenario in Europe.
Khare also believes Suzlon's weak financial position could keep it from winning big orders in the future as customers may overlook it in favour of companies which are financially more sound. "The gestation period of wind farms is 10-15 years. Companies would rather go to vendors with healthy balance sheets and those which have sound financial health to sustain that," he says.
The interest rate reduction as a part of CDR has not helped much either. In the quarter ended December, Suzlon's net loss widened to Rs 1,000 crore as compared to Rs 800 crore in the same quarter last year. The increase was partly because of low operating margins that resulted from working in a highly competitive market.
Suzlon officials agree the environment has not been conducive to growth but say the company has made progress on certain parameters. "Our working capital to revenue was at 15 per cent a year back, it has come to 8.6 per cent. We have also reduced our fixed costs by 20-30 per cent," says a senior finance executive of the company who does not want to be identified.
Suzlon is also looking at raising equity to pay off its obligations, but analysts doubt the benefits of the move in the absence of a strong order book. "Most large capital goods companies, including BHEL and Larsen & Toubro, have secured orders that give a visibility of revenues that they can generate for the next two to three years," says a research report by Kotak Securities.
Another concern for analysts is that the company has not been able to generate enough cash to pay its foreign currency convertible bond holders, which it had defaulted on over a year back. Until it fulfils its payment obligations, analysts will continue to tread cautiously on its stock.
In this scenario, an immediate solution to Suzlon's woes, many say, could be a fresh round of retrenchment at its various divisions. Last year, Suzlon slashed 750 jobs in REpower, which accounted for 20 per cent of its employee strength. The company then called it a necessary but painful development in view of the volatile market.
Suzlon would have to go through more such pains believe experts. The company's debt was restructured as the company had assets which it hoped would generate cash. However, that is yet to be realised and may take more than three years to show its impact. "Value cannot be generated from restructuring liabilities," says Khare.
HOW SUZLON LANDED IN CDR
Suzlon's troubles began nearly a decade ago after the Pune-based company went ahead with two international acquisitions: Belgian gearbox maker Hansen Transmissions in 2006 and REpower in 2007. The acquisitions propelled Suzlon to the fifth spot in the world of wind-turbine makers and made its founder chairman and promoter, Tulsi Tanti, the poster boy of Indian ingenuity. The story of how he had hit upon the idea of setting-up a wind turbine company in order to supply electricity to his textile units in Gujarat became legendary.
The glee was short-lived, though. Soon after entering the international markets, Suzlon had to take a financial hit to replace the faulty blades of one of the batches of turbines in the US in 2008. The company's plan of transferring technology from REpower was also blocked by strict German regulations. REpower, which accounts for the bulk of Suzlon's orders and revenue, is considered as the "crown jewel" of the group. However, Suzlon has not been able to use the cash on REpower's books to pay its debt.
While Tanti took personal responsibility for the problems (he took a 75 per cent pay cut in 2012), he was left with no choice but to sell assets in some of the acquired companies. Suzlon sold its 25 per cent stake in Hansen in multiple tranches, the last one being in 2011. The amount was used to pay its debt but it did not bring much relief. In December 2009, Suzlon went through its first round of refinancing, but the push was not enough to pull it out of the morass. With the sector going through a tough time, it was left with no choice but to restructure its debt.