Over a decade in financial journalism, I have specialized in covering news that matters to India Inc. and its stakeholders, including developments at India's largest corporations and and MNCs. The subject of my writing has been analysis of strategy, financial performance, M&A and fundraising activity, consumption behaviour and emerging trends in management and leadership. Industry verticals that I have written on include oil & gas, power, infra, metals & mining, auto, telecom, FMCG & retail, and start-ups. I also play the role of an editorial lead for proprietary events like the Forbes India Leadership Award and the Forbes India CEO Dialogues. An alumnus of Asian College of Journalism, Chennai and Jadavpur University, Kolkata, I have worked for publications such as Mint, The Financial Express and The Indian Express before this.
Earlier this year, Tulsi Tanti, the 57-year-old chairman and managing director of Suzlon Energy, moved into his renovated office at One Earth, the company’s headquarters in Pune. The redesigned office in a sprawling, ten-acre campus in the city’s Hadapsar area is better compliant with Vastu—the Hindu science of architecture that is supposed to channel positive natural energy to the benefit of those inhabiting the physical space. And Tanti’s stars do appear to be better aligned at present than they have been in the past. His company, which has been struggling with losses since FY2009, posted its first quarterly operating profit in three years in the April-June 2015 period.
Though battle-scarred, Suzlon’s chairman appears more relaxed now than he was a year ago when the company was overleveraged and operations were at a near standstill. Tanti has since been painstakingly trying to restore the credibility that he had lost with stakeholders like lenders and customers due to an infamous debt default that led to a restructuring of the company’s borrowings and hamstrung its ability to sustain business operations at the same scale as before. “The last 36 months have been the most turbulent times that we have experienced,” says Tanti, a mechanical engineer by education.
Suzlon, a manufacturer of wind turbines and an end-to-end turnkey engineering, procurement and construction (EPC) player in the wind energy space, holds the dubious distinction of being the largest defaulter on repayment of foreign currency convertible bonds (FCCBs) issued by any Indian company to date: In October 2012, it defaulted on the repayment of FCCBs worth $209 million, which were due for redemption.
This was on the back of operational challenges at home and abroad arising from the economic downturn that followed the collapse of Lehman Brothers in September 2008, and a debt-funded international expansion strategy that didn’t go as per plan. Suzlon, which used to rank among the top three wind turbine makers in the world, saw its business shrink rapidly due to liquidity constraints.
It wasn’t alone in the adversities it faced during this period: Several Indian firms in the metal and mining sectors, especially those with significant exposure to international markets, burnt their fingers. But not everyone has been able to script a recovery like Suzlon has.
Its turnaround is a story of how lenders can work with their borrowers to help a company get back on its feet while ensuring they recover their dues; a story of how a well-meaning white knight with deep pockets can change the tide of fortune; and, most importantly, of how a promoter can redeem himself by setting his ego aside, putting the company’s interests before his own, and selling assets that may have been the crown jewels of his business. Suzlon was able to halve its debt from Rs 14,281 crore as of March 31, 2015, to a current Rs 7,010 crore. (This is excluding FCCBs that were restructured.)
The growth phase
Till 2007-08, Suzlon was a healthy company. In FY2008, it posted a consolidated net profit of Rs 1,017 crore on a turnover of Rs 13,679 crore. Over 20 years since Tanti founded it in 1995, the company has been supplying wind turbines to customers across 32 countries, in North and South America, Europe and the Asia-Pacific region. Through its wind turbines, it has helped establish a wind power generation capacity of 26,000 MW the world over. In doing so, Suzlon had positioned itself as a competitive global player in this space. In India specifically, government incentives to promote wind power generation, including accelerated depreciation (AD) on wind power assets and generation-based incentives (GBI), attracted various companies towards creating wind power capacity. This meant brisk business for Suzlon.
With the Indian business doing well, Suzlon made some big-ticket global acquisitions. In 2006, it acquired Belgian wind turbine gearbox manufacturing firm, Hansen Transmissions International NV, for around €431 million. In 2007, it bought a majority stake in the German wind turbine maker REPower (renamed Senvion in 2014). Between 2007 and 2011, Suzlon progressively ramped up its stake in Senvion and eventually bought out the whole company. Through several tranches, it paid around €1.4 billion to acquire Senvion. Most of this expenditure was funded through debt raised internationally.
Senvion gave Suzlon access to new and better technology, especially in the offshore wind energy space, and greater access to international markets. The German firm soon accounted for a majority of Suzlon’s consolidated turnover. In the nine-month period ending December 31, 2014, Senvion contributed as much as 73.5 percent to Suzlon’s consolidated revenues of Rs 14,928 crore. Also, while the standalone Indian business called Suzlon Wind reported a loss, Senvion’s operations helped the consolidated business report earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 482 crore.
But when the world economy took a turn for the worse in 2008, Suzlon got caught in a tailspin. A liquidity crunch in the global financial system meant that orders for wind turbines from international clients disappeared. In some instances, receivables from clients were delayed. The after-effect of the crisis was to last for a few years to come. “We were in a globalisation phase and the collapse of the financial market impacted our industry,” says Tanti.
To demonstrate the extent to which the global wind power sector stood beleaguered, Tanti notes that the top five wind turbine makers in the world, including Vestas and GE, posted a combined loss of €2.5 billion in the calendar year 2013, the highest level of losses witnessed by the industry in the last two decades. The situation could have been better for Suzlon had the Indian business continued to perform well. But that wasn’t to be. The AD and GBI benefits that were extended to wind power developers in India were suddenly withdrawn in 2012 and Indian firms didn’t have any further incentive to invest in this sector. As a result, wind turbine orders from India dried up.
When AD and GBI benefits were available to the wind power sector in India, capacity to the tune of 3,000 MW was being added per year. This fell dramatically to 1,500 MW after these incentives were withdrawn.
In the five years between FY2010 and FY2015, Suzlon’s losses widened nearly ten times to Rs 9,157.60 crore. Its turnover in the same period declined marginally by 3.7 percent, to Rs 19,954 crore.
The debt conundrum
Despite the challenges in the US and India, Senvion continued to do well in Europe. But the German company posed a unique problem for its Indian acquirer. Suzlon had borrowed money from the European market to finance the Senvion acquisition, but following the financial crisis, the company had to transfer the debt to India. In the process, its cost of borrowing went up, but Suzlon managed to service this debt till its Indian operations were generating enough cash. However, when the Indian market slumped, Suzlon’s ability to service debt suffered as well.
“The main constraint that we faced was in Germany,” Tanti says. “It wasn’t because it (Senvion) was a bad investment. But the banks there didn’t support our investment. Senvion was a debt-free company, but neither did they allow us to raise any debt on Senvion’s balance sheet nor were we allowed to repatriate the cash profits from the company to India, which could have then been used to service the debt related to the acquisition that we transferred. Senvion had a cash reserve of around €300 million, but this money couldn’t be utilised to pare the group’s debt.”
Meanwhile, in 2007, Suzlon also raised five-year FCCBs to the tune of $300 million to finance its expansion in India. As these FCCBs neared maturity, Suzlon managed to pay off a small tranche that fell due in June 2012 with money borrowed from its consortium of lenders, led by the State Bank of India (SBI). But the banks made it clear that Suzlon would have to fend for itself when it came to repaying the remaining FCCBs that were due for redemption in October 2012, says Supratim Sarkar, executive vice president at SBI Capital Markets, SBI’s investment banking arm that has been actively involved in restructuring Suzlon’s finances. Hectic negotiations between bondholders and the company failed to secure Suzlon a four-month extension for debt repayment that it sought and the company defaulted on the redemption of FCCBs worth $208 million.
The writing on the wall could not have been clearer: Suzlon could no longer service its debts and the company went for corporate debt restructuring (CDR) in January 2013.
What also encouraged Tanti to accept Shanghvi’s proposal was what the latter told him during the course of their discussions preceding the deal. “Dilipbhai said that he wanted to invest in the company as he wants to see Indian promoters position themselves as global leaders in the international marketplace and he believed that Suzlon and I have the capability to achieve that,” Tanti says.
Tanti and Shanghvi’s association isn’t limited to the Rs 1,800 crore investment in Suzlon alone. Shanghvi has also invested Rs 400 crore in an equal joint venture (JV) created by the two entities that will develop wind power projects in India. DSA has also committed working capital loans to support the development of 1,200 MW of wind power generation capacity over a two-year period.
Back on the growth path
For the first quarter of FY2016, Suzlon posted a healthy net profit of Rs 1,079 crore. However, this net profit was largely the result of a one-time gain arising from an accounting treatment of foreign exchange translation due to the sale of Senvion. But what is encouraging is that the company reported an operating profit apart from this one-off item as well, its first in three years. Its revenues stood at Rs 1,542 crore in the June quarter this year, up 66 percent over the preceding quarter. The company’s Ebitda stood at Rs 146 crore during the same quarter, versus a loss of Rs 554 crore in the March quarter. This is the highest quarterly Ebitda reported by the company in the last three years. Significantly, Suzlon reported a profit before interest and tax (PBIT) of Rs 85 crore during the June quarter, its first in three years.
At the same time, Suzlon has accumulated losses of around Rs 4,000 crore, according to a Nomura Research report dated June 5, 2015. It needs to recoup and the company may well do so if it can sustain the momentum it has displayed in the first quarter of the current fiscal.
Tanti is confident that as business picks up, Suzlon will turn in a net profit for the entire year. If it succeeds in doing so, the company would have reported an annual net profit for the first time in six years. Suzlon aims to get there through a recalibrated approach to international expansion as well as by growing its existing and new lines of businesses in India.
Tanti says his ambition is to help Suzlon regain the 50 percent global market share that it once enjoyed. In FY2015, Suzlon had a market share of 25 percent, Tanti says. “This year (FY2016), we are targeting a 35 percent market share and want to take it up to 45 percent next year,” he adds.
Though Suzlon has been operational in 32 countries in the past, it only wants to focus on four international markets—India, China, North America (US, Mexico and Canada) and Latin America (Brazil, Argentina and Chile). These four regions, according to Tanti, represent 70 percent of the global wind energy market.
“Merely catering to the 3,000 MW market in India won’t be enough to justify the $50 million per year-investment that Suzlon will be putting in upgrading its technology each year. We need to be present in other markets as well to make this investment viable,” Tanti says.
At the same time, Suzlon is willing to forego smaller markets like South Africa and Australia where it was the market leader earlier, but which aren’t as lucrative as the four regions it is currently focusing on.