REpower gives Suzlon edge in Europe

The Rs 6,130 crore Suzlon Energy's acquisition of the Hamburg-based REpower will position it among the top four wind turbine manufacturers in the world and make it a strong contender in Europe, the single-biggest market.

A presence in Europe is critical for the wind turbine player: of the 15,000 mw capacity set up last year, around 7,600 mw was in Europe.

REpower's technology will help Suzlon upgrade its facilities and together they should sell over 3,000 mw of capacity in 2007. Had Suzlon attempted to achieve this scale and customer base on its own, it would have taken it at least another four years.

Suzlon will also have a strong competitive edge in the offshore market (turbines installed in water). Thanks to the 5 mw offshore turbines that REpower has installed in four test fields, it is now in pole position.

Moreover, REpower is also working on a 6 mw turbine which, if found successful, will give Suzlon a further advantage. That apart, the Suzlon-REpower combine also has the advantage of working with Areva, which will be the preferred supplier of equipment in the transmission and distribution space.

Suzlon, which is in better financial shape than REpower, can help the latter improve its top line and operating margins, from the current levels to at least 10-11 per cent by FY09.

Says Chairman Tulsi Tanti, "Demand for wind energy is expected to grow at around 20 -25 per cent between 2005 and 2010 driven by demand from Europe, the US and Asia, but we hope to do better than the industry average."

According to Shriram Iyer, Head, Research, Edelweiss Securities, the complementary strengths that REpower and Suzlon enjoy in terms of their product portfolios, markets in more geographies, research & development skills and the supply chain clearly justify the acquisition.

"While the synergies and financial benefits may take about a year to come through, there's no denying that the alliance is formidable," he observes.

To begin with Suzlon will start supplying gear boxes, rotor blades and bearings to REpower which has been facing a shortage of these critical components. That should help REpower scale up production and moreover as Arvind Mahajan , executive director, KPMG points out, REpower's raw material costs which are very high at 82 per cent of sales, can be brought down to around 62-63 per cent.

"Cost structures in Europe are very high and Suzlon can address that, " he explains.

At the same time higher volumes of components for Suzlon would help bring down its cost of operations.

"We will also gain from lower procurement costs for some common components since the combined volumes would be far larger than they have been," says Tanti. Suzlon's operating margins which are around 16 per cent should see a rise as the operating leverage improves.

KPMG's Mahajan also observes that while REpower primarily caters for markets such as Europe, Suzlon has been focusing on Asia.

"By integrating their research efforts, the two could come up with better products in the future and cater for more geographies," he observes.