Suzlon Energy: Doing a tightrope act

Suzlon Energy, hit by liquidity issues, took a 20 per cent cut on sales in the December 2012 quarter. Compared to last year, total income was lower by about Rs 1,000 crore at Rs 4,074 crore. This was not even enough to cover the operating expenses of Rs 4,563, leading to an operating loss of Rs 516 crore. Add to it interest cost and other non-operating expenses, and losses totalled a whopping Rs 1,155 crore. Not surprising then that the stock tanked nine per cent on Friday before closing at Rs 21.70 a share.

The poor financial performance is attributed to liquidity woes. Despite Suzlon’s huge order book position, it is unable to convert these into sales. Every additional unit of sales requires more funds due to the high working capital needs. Annualising the December sales, the working capital was almost 27 per cent of sales. In the present scenario, the company is unable to commit more funds to the business and thus grow revenues. Instead, its funds are used servicing debt and paying interest costs.

Importantly, prior to the corporate debt restructuring (CDR) approval, the company was facing difficulty in raising fresh funds. Also, in October it had to redeem foreign currency convertible bonds worth $221 million (Rs 1,160 crore). By the end of December 2012, the company’s debt stood at Rs 13,587 crore, on which it incurred an interest cost of Rs 457 crore.

To break even at the operating level and return to profitability, the company will have to book more revenues for which it needs more funds. For instance, last year in the December quarter, on total income of Rs 5,071 crore, Suzlon was able to cover operating expenses as well as interest cost of Rs 441 crore.

Interestingly, it has a strong order book of 5,700 Mw worth $7.7 billion (Rs 42,000 crore), about two times its financial year 2012 sales. If funding is in place the company can focus on execution as there are enough orders in hand. Also, the clients are more confident in awarding projects and helping with receivables following the approval of CDR. Thankfully, under CDR, Suzlon is expected to get enhanced working capital to the tune of about Rs 1,800 crore. Theoretically, going by the working capital to sales ratio, this could mean an additional Rs 6,000-8,000 crore revenue.

Further, under the CDR, there’s a two-year moratorium on principal and interest payments on term loans, a three per cent reduction in interest rates and a six-month moratorium on working capital interest. So, one can hope interest burden would ease in the coming months. It has also identified non-critical assets worth Rs 2,200-2,700 crore, that could be sold to help meet its liquidity needs. “There is some improvement in Q4FY13, but normal operations will start only in the first quarter of the next financial year,” said the company in its analyst conference call. Overall, things could get better based on the assumptions of higher liquidity and lower interest cost. Meanwhile, managing the huge debt and current liquidity situation will be an uphill task for the company.