Shanghvi's entry gives new lease of life to Suzlon

Reduced debt, sufficient working capital could prop growth

The acquisition of one billion shares (23 per cent) in Suzlon by Sun Pharmaceutical’s promoter firm, Dilip Shanghvi Family and Associates (DSA), through fresh issue of shares worth Rs 1,800 crore galvanises fresh vigour into the company’s fortunes. Although the market had prior knowledge of the deal, Suzlon’s stock zoomed 20 per cent to close at Rs 23 on Monday. The coming on-board of DSA will not only help Suzlon reduce debt further but will help it in many ways.

Although the move will lead to equity dilution of 22.7 per cent, it will help Suzlon advance the turnaround of its already improving operations. The infusion will help Suzlon bid and bag more orders, which it was earlier unable to do due to lack of funds, something the management has said repeatedly.

The deal also includes collaboration between DSA and Suzlon for developing a 450 Mw wind energy farm through an equal joint venture. DSA will also lend support to raise non-fund based working capital to execute the project besides credit enhancement to lenders of Suzlon for additional project-specific working capital facilities. These moves will boost liquidity and act as a catalyst for volume ramp up and in turn lower break-even levels.

Recently, Suzlon had also struck a deal to sell Senvion SE, which, once complete, would cut its high interest debt by Rs 7,000 crore and overall debt to Rs 9,500 crore (estimates prior to DSA deal). The move had initially raised concerns given Senvion’s highly profitable operations and significant contribution to Suzlon. For FY14, Senvion contributed about 70 per cent of Suzlon’s consolidated revenues of Rs 20,212 crore as well as order book, while of total earnings before Interest, taxes, depreciation and amortisation of Rs 115 crore before forex losses, €146 million (Rs 1,168 crore) came from Senvion.

While Suzlon’s own prowess in the business and tech licensing tie-ups with Senvion provide comfort, the DSA deal adds to it. More importantly, the latter is also expected to strengthen Suzlon’s corporate governance practices, leading to better investor confidence. Hopefully, it should encourage foreign currency convertible bond (FCCB) holders to opt for conversion into equity, further lower Suzlon’s debt.

All these come at a time when macro environment is also improving. The re-introduction of policy allowing wind power equipment makers to sell their units as a tax-saving financial product and user companies to claim tax benefits is also positive. The policy will benefit Suzlon as renewable energy and wind turbine generators will also qualify as corporate social responsibility activity.

For Suzlon, this should mean more orders. Although it might take 12-18 months for the gains to fully reflect, Suzlon is getting into a sweet spot. All now depends on Tulsi Tanti, who has no excuses not to deliver.