Favourable winds for Suzlon

Last Updated: Mon, Jan 28, 2013 20:10 hrs

Last Thursday's approval of the corporate debt restructuring (CDR) package of Suzlon Energy'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 about 95 per cent below its all-time high of Rs 460 (made in January 2008), even after Friday's 17 per cent spike, should also get a boost from this latest move by the bankers.

Unlike companies like Kingfisher, which recorded huge losses at the operating level and has only a few assets to bank on, Suzlon's task is relatively easy. In 2011-12, it had reported a consolidated profit before interest, depreciation and tax (PBIDT) of Rs 520 crore on a turnover of Rs 21,360 crore. But owing to a 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 quarters ended June and September, respectively, the company reported higher revenues (up 12 per cent year-on-year and 21 per cent quarter-on-quarter) in the September quarter. Analysts believe that with a pick-up in execution and efforts towards improving cost efficiency, the company would again be able to report profits at the operating level.

With the CDR package effective October 1 2012, the company has secured a moratorium on the repayment of its term loans, as well as interest thereon for two years, along with a six-month moratorium on working capital interest. Interest rates have also been lowered by three percentage points from 14 per cent to an average of 11 per cent. This would lead to Rs 285 crore annual savings in interest costs on Rs 9,500 crore of debt. The comfort also stems from the fact that about Rs 1,500 crore of interest payable on loans during the initial two years will be converted into equity/equity related instruments - which means though its equity base will expand, the P&L will get a boost, helping Suzlon return to profits..

Lastly, promoters would bring in Rs 250 crore (Rs 60 crore was already infused last quarter). Suzlon's working capital facility has been enhanced by $350 million (Rs 1,925 crore) and debt repayment also spread through 10 years. Together, these would significantly ease Suzlon's cash flow and financials.

In the past, Suzlon had suffered losses due to faulty equipment, a problem the company has now resolved. The slowdown in Europe and the US, key markets for the company, only made things worse. But with the recovery in the US, Europe slowly inching towards stability and China's economic growth also bottoming out, order inflows for the company would improve. Currently, it has orders worth about $6 billion, with 20,000 Mw of installations across the world to its credit, which proves its expertise in the business.

With the debt issue behind, the management would now be able to focus on improving operations and containing costs. Against this backdrop, the Street is hoping Suzlon's performance would improve. And, if the company is able to pull up its socks, which it should hopefully, the stock performance should improve, giving more room (in terms of equity-based fund raising) to reduce its debt further.

All this is without assuming any extraordinary benefit the company could extract from its 100 per cent subsidiary REpower, valued at about $2.5 billion. With market sentiment improving, any move by Suzlon to sell minority stake (say 20-25 per cent) could fetch it $500-625 million, which could be used to reduce debt. Overall, the winds seem to be turning in favour of Suzlon.

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