Tulsi Tanti's bold gamble: Shrink to grow

Senvion's sale has drastically reduced Suzlon's global footprint, but the company believes its impact on the balance sheet will pay off in a big way

It's unusual to see someone as upbeat as Tulsi Tanti after announcing the sale of his crown jewel. Announcing Suzlon's decision to sell Senvion, one of the group's most profitable assets accounting for a bulk of orders and revenue, the Suzlon Energy chairman told journalists on video link from Davos, where he had gone to attend the World Economic Forum, that Suzlon will turn profitable and its focus would now be on India, the other emerging markets and the US. "We have not been able to tap opportunities earlier because of liquidity crunch. We have 2,500 customers in India and abroad and we will address their requirements and grow our market share," Tanti said.

Not everybody is buying into this optimism, though. Daljeet S Kohli, head of research at brokerage IndiaNivesh, told Reuters the day the deal was announced that hardly anything would remain after Suzlon sold Senvion, which was the main driver of its valuation. "It's like saying you sell your house to retire home loans and say I am richer. The fact is that you are on the road," Kohli said.

The jury is out on whose assessment of Suzlon's current situation is correct. While sympathisers say with the renewed government focus on renewable energy and support from lenders, Tanti would not have found a better climate to revive the fortunes of his company, others have dubbed the sale of the subsidiary to US private equity firm Centrebridge for euro 1.1 billion as nothing but fire-sale.

There is no doubt that over the last few years Tanti has taken quite a few hard knocks. The company's share price tanked, debt ballooned to over Rs 16,000 crore and the company defaulted on bond repayment of $209 million in 2012. It was the biggest default on convertible bonds by an Indian firm. In July last year, after some tough negotiations with bondholders, Suzlon restructured foreign currency convertible bonds valuing Rs 3,000 crore. Tanti expects bond holders to convert the bonds into equity in the next fiscal in a debt reduction measure. But analysts say that conversion would happen only if bond holders see a value proposition in the company.

Moreover, in the domestic market, competition is growing and Suzlon has been losing market share. Beset with financial problems, Suzlon has been unable to expand production and cater to demand. It will have to address the local demand fast.

Suzlon's current financial condition is nothing to write home about. It had consolidated net loss of Rs 1,400 crore in the first two quarters of FY 2015 (Rs 1,847 crore loss during the same period last year) and Rs 3,520 crore in the whole of FY14 compared to Rs 4,724 crore in the previous year.

On top of that the domestic wind energy market is crowded and competition is intense. Danish turbine maker Vestas, which is the largest wind turbine maker in the world, has returned to India. Other competitors include GE, Gamesa, Enercon, Kenersys, ReGen Powertech and others. "Suzlon will need to ramp up its product offering and sales. Its ability to command a premium has also been impacted due to competition. Also there has been attrition from Suzlon with many executives joining rival firms," an industry analyst says.

Another analyst says the main challenge for the company is to get its India business up and running. It added over 1,300 Mw wind power installations in the country in FY 2012 and it fell to 347 Mw last year. The company could not be expected to break even at that level. Various factors are responsible for it including Suzlon's own financial problems and the withdrawal of accelerated depreciation benefit to investors setting up wind energy turbines.

On the sunny side
However, there are some bright spots, too. For example, high interest costs have been a major factor for much of the financial weakness; but the company expects annual interest outgo to reduce by 50 per cent to Rs 800 crore in FY2016. Suzlon has a total debt of Rs 16,500 crore and hopes to reduce it to Rs 7,500 crore following debt repayment and bond conversion. "Reduction in annual interest payment by 50 per cent is due to repayment of high-cost rupee debt from the proceeds of the Senvion sale. It does not factor the interest savings from potential foreign currency convertible bonds (FCCB) conversions. This is an upside. The FCCB conversion to equity is the discretion and choice of the bond holders," says a Suzlon spokesperson.

Jesse Broehl, senior research analyst at US-based consultancy Navigant Research, agrees with the turnaround theory. "The sale of Senvion reduces Suzlon's global market share but it also strengthens Suzlon's balance sheet, which can drive up buyer confidence and thus potentially increase sales that can help offset the market share loss," he says.

Anil Kane, president emeritus of World Wind Energy Association, says he has no doubt about Suzlon's potential and technology but the company will have to target installation of 1200 Mw in a year to turn profitable. "At present, the main problem of Suzlon has been of finance. Banks have not been lending and whatever was being earned went into servicing debt. With the sale of Senvion and repayment of debt, the company will have funds to boost production. Suzlon's domestic sales from new installations fell in the last two-three years and the group was largely earning from operations and maintenance of existing wind turbines as a part of its management contracts," he adds.

As a part of the Senvion sale deal, Suzlon also gets the licence from the German company to manufacture wind shore turbines whose value, critics point out, would be realised only if Suzlon is able to secure orders in the offshore wind energy market. Kane says Suzlon will not be at a disadvantage after selling Senvion. "The two companies have different products. While Suzlon's focus remains onshore, it will now bring offshore wind turbines to India." The company has proposed 300 Mw offshore wind farm on a pilot basis in Gujarat. Also the company is developing larger turbines which can generate 2.5 to 3 Mw of electricity, while the prevalent turbines produce 1.6 to 2 Mw. The new turbines will be economical in areas with low wind velocity, Kane says.

That will be music to Tanti's years. "With our market leadership, right technology, proven project execution capabilities and best in class services, we are best positioned to tap the high growth potential in home market," says he.

Will the markets listen to him? So far, the market has largely been indifferent - the stock has fallen 3 per cent since the Senvion deal was announced on January 20.