Suzlon – What happened and where to go next?
In the wind power industry, Suzlon Energy is known for its aggression. And, a lot of it can be directly attributed to its Chairman and Managing Director Tulsi Tanti who started the company in the mid-1990s.
It is this trait that has taken the Pune-headquartered Suzlon to where it is now — market leadership in India and among the top wind turbine manufacturers globally. Suzlon has aggressively pushed for growth, setting up manufacturing units across the country and globally too, and buying international companies.
Industry experts say that it is this aggression that has got Suzlon into a spot of bother. The company’s lenders are working on restructuring the over Rs 10,000 crore of debt Suzlon has on its books. While the details are being worked out, the lenders have asked the promoters to bring in Rs 250 crore of their funds as a condition for making it easier for Suzlon to repay its loans. The lenders have also asked Suzlon to sell some of its assets, including a manufacturing plant in China. Suzlon has signed an agreement with China Power (Tianjin) New Energy Development Company Ltd to sell the Chinese subsidiary — Suzlon Energy Tianjin Ltd — for about Rs 340 crore ($60 million).
Much of Suzlon’s debt had to do with two major and ambitious acquisitions it made — one was Hansen Transmission International of Belgium, a leading gear manufacturer for wind turbines. And, the other, REpower Systems of Germany, a wind turbine manufacturer with capability to make offshore wind turbines.
Experts say both these acquisitions made within a few years of each other showed Tulsi Tanti’s brio. They feel that he should have consolidated first before going in for the more expensive and time-consuming REpower buy.
According to reliable sources, Suzlon spent nearly Rs 10,500 crore ( €1.5 billion) on buying REpower and another Rs 2,500 crore on buying Hansen. The Hansen acquisition, according to Suzlon, helped the company achieve significant cost reduction of gear boxes. Suzlon sold its stake in Hansen in three tranches and made a profit of about Rs 900 crore on the deal.
However, it was the REpower acquisition that has been weighing it down. Suzlon entered into a bidding war for the first part of the stake-buy in the German wind turbine manufacturer, whose technology it hoped to acquire and sell. German law made it difficult for Suzlon to do this, because of which it had to increase its stake beyond 90 per cent. It now owns about 94 per cent of REpower.
Sources say REpower’s finances are ring-fenced, which means that Suzlon cannot use the cash reserves the German subsidiary has to pay off the debt.
According to the sources, Suzlon is discussing with its lenders, as part of its corporate debt restructuring package, to take over the loans REpower has obtained from German banks and include them in the CDR. REpower had, earlier this year, obtained a €750 million loan from a couple of German banks.
Suzlon’s heavy reliance on REpower can be seen from the fact that the German subsidiary accounts for more than half of its order book at the end of October. The group has an order book of nearly Rs 37,000 crore ($6.5 billion), of which the India business accounts for 27 per cent, international business 16 per cent and REpower 57 per cent.
The company points to this robust order book to reiterate its point that its business is well and truly on track and that it has been bogged by the huge cost of its acquisitions, and a simultaneous global economic crisis.
The crash of the financial services firm Lehman Brothers in September 2008 resulted in a global economic crisis, from which the US and Europe — two of the largest wind power markets, at least for REpower — have not yet recovered. This has added to Suzlon’s woes.
PROBLEMS IN REPAYING BONDHOLDERS
All of these have contributed to Suzlon defaulting on the redemption of an instalment of foreign currency convertible bonds, for which it had sought an extension of time from the bondholders. The bondholders refused to extend the deadline. Suzlon repaid an earlier instalment of foreign currency bonds after the bondholders gave it a 45-day extension. The company has said that it is in “active dialogue with over 80 per cent of bondholders” and that it is confident of achieving a resolution at the earliest, for the bonds due for repayment in October.
Suzlon acquired REpower because of its complementary geographical presence, product portfolio and supply chain strategies. Besides, REpower had a strong offshore presence, which Suzlon wanted to tap. REpower is a technology leader in Europe and controls about 10 per cent of the German market. The REpower deal was partially financed in tranches with loan repayment up to seven years, which got partly refinanced through convertible bonds issue and follow-on equity offering proceeds. According to the sources, the lenders are convinced that the business is operationally viable and that it is a matter of time before the developed economies pick up. Suzlon will be in a stronger position to capitalise on this.
The company has also re-worked its strategy. While REpower will focus on the developed economies of Europe and the US, Suzlon will concentrate on the emerging markets, which include Brazil, India, China, West Asia and North Africa.
Industry experts feel that Suzlon may try to renegotiate the sale of its Chinese subsidiary, even though it has signed an agreement to sell it. China, the experts say, is an important market, not just for selling to, but for sourcing parts from. Also, it is on the major shipping routes and there will be significant logistics benefits in shipping turbines or parts from China, according to them. Any renegotiation, however, will depend on what the lenders say, as selling this subsidiary is part of the CDR process.
Till very recently, the market used to speculate that a sale of Suzlon was imminent. Many of the global wind turbine manufacturers were touted as potential buyers. But, now with the promoters owning about 53 per cent of Suzlon’s equity, that buzz has now died down.
BOUNCE BACK? YES, HE CAN
That things are not as bleak for Suzlon is evident from the fact that its competitors too have stopped talking of the promoters selling out as a possible solution to its problems.
One of the competitors, who did not want to be named, went even a step further to say that it is a matter of time before Tanti bounced back. “He is an entrepreneur and he will bounce back,” he said, requesting not to be identified.
However, others say that it is this entrepreneurial streak in Tanti that has caused some of the problems. Tanti, they say, always wanted to be compared with the best and the biggest in the world of wind energy. That is why he bought companies paying a huge price.
He is still a hands-on person and if Suzlon is to grow and remain strong, he has to bring in more senior management talent and also learn to delegate responsibilities, the competitors say.
As one competitor said, “The industry needs Suzlon. After all it is the market leader.” The Indian wind power market too is going through turbulent times, what with the Government withdrawing two incentives — the generation-based incentive and accelerated depreciation — almost at the same time.
The result of this is that installations in India this year will be much lower than the 3,000-odd MW that it added last fiscal.