News Analysis: The wind is turning in favour of Suzlon

The approval of its corporate debt restructuring should help the company improve its earnings

 

Last Thursday’s approval of the restructuring of Suzlon’s Rs 9,500 crore domestic debt should set the ball rolling for the world’s fifth largest wind energy equipment maker. Its stock, which is current quoting more than 95 per cent below its all-time high of Rs 460 (made in January 2008), even after Friday’s 17 per cent spike, should get a boost from this latest move by bankers.

 

Unlike companies like Kingfisher which made huge losses at the operating level, Suzlon’s task is relatively easier. It had reported a consolidated profit before interest, depreciation and tax (PBIDT) of Rs 520 crore in 2011-12 on a turnover of Rs 21,360 crore. But, thanks to depreciation charge of Rs 661 crore and interest outgo of Rs 1,655 crore, it ended the year with a net loss of Rs 473 crore. Though the situation has worsened a bit since then with Suzlon reporting a loss of Rs 135 crore and Rs 108 crore at the PBIDT level for June 2012 and September 2012 quarters, respectively, the company has reported higher revenues (up 12 per cent y-o-y and 21 per cent q-o-q) in September quarter.

With the corporate debt restructuring effective October 1, 2012, the company will not have to make repayment of its term loans as well as interest thereon for the next two years. Besides, interest rates have also been lowered by three percentage points – from 14 per cent to 11 per cent, which would mean a Rs 300 crore annual saving on interest costs on its Rs 9,500 crore worth of debt. The comfort also stems from the fact that Rs 1,800 crore of interest will be converted into equity and promoters will bring in Rs 250 crore (Rs 60 crore already brought in last quarter). All this put together will significantly ease Suzlon’s cash flow and financials.

In the past, due to faulty equipment Suzlon had suffered losses, a problem the company has resolved since then. The slowdown in Europe and the US, its key markets, only made things worse. But, as economic recovery is happening in the US, Europe slowing inching towards stability and China’s economic growth is also bottoming, order inflows for Suzlon should improve. The company already has orders of over $6 billion in hand and 20,000mw of installed capacity.

With the debt issue behind, the management should now be able to focus on its operations. In this backdrop, the Street is also hoping that Suzlon’s performance should improve. And, if the company is able to pull up its socks, which it should, the stock performance should improve giving more room (in terms of equity-based fund raising) to Suzlon to lower its debt further.

And all this is without assuming any extraordinary benefits which the company could extract from its 100 per cent subsidiary, REpower. For instance, REpower is valued at over $2.5 billion. With market sentiments improving, any move by Suzlon to sell a minority stake – say 20-25% -- could fetch it up to $500 million, which the company could use to cut its debt further. On the whole, it seems the wind is turning in favour of Suzlon.