Former senior principal correspondent at Forbes (India). Since 2008, I have been writing on corporate strategy in the automobiles, clean technology and supply chain space. Before I got onto this assignment, I was part of the team that covered feature articles at The Economic Times. I actually started out as a trainee journalist on the ET desk in 2006. I graduated in commerce from Shri Ram College of Commerce in New Delhi and now live in Mumbai. I love automobiles and spend hours reading up on them and then devote painfully long hours to work on old cars that attract my fancy. Right now I own four cars (my colleagues call them fancy, junk or whatever) and a bicycle which outside my work hours get most of my attention.
Suzlon Energy’s last quarter results have been disappointing. Adding insult to injury the auditors felt the need to emphasize that its continuation as a `going concern' will depend on its ability to repay debt. From June and October this year, Foreign Currency Convertible Bonds (FCCB) are due to mature and an amount of about Rs. 3, 000 crore is up for redemption.
The big question is- Does Suzlon have the money? If not, how does it get over this hump?
The simple answer to the first question is No. As of today, Suzlon does not have the money to make good its FCCB commitment. The company is struggling to arrange for working capital in order execute its orders and push customers to pay up.
Now, before we jump to answer the second question, let’s spend a moment to understand Suzlon’s current business situation. The company’s management believes that Suzlon should be analyzed as a projects company and over a 12 month horizon. They say that “results may vary from quarter to quarter but the most representative way to look at our business is to review the previous 12 months”. Fair enough. For January-December 2011, Suzlon does seem to have done well. Revenues grew 30 percent year-on-year to Rs. 21, 660 crore, orders were booked of over US$ 5.6 bn / Rs. 30,000 crore. REpower, their acquisition in Germany was sorted and Hansen was sold. Basically, they got a lot of good work done. “We achieved an EBIT margin of 7 per cent—perhaps the best in the industry today. These figures compare favorably with the previous calendar year,” say senior executives.
Suzlon would have you believe that they did okay in Q3 too. The company posted a cash profit of Rs. 26 crore in the quarter but the net loss was primarily due to non-cash items like international deferred tax liabilities of Rs. 121 crore and depreciation of Rs. 170 crore. “Plus, higher interest cost (as most of the debt is in India). Interest cost increased by Rs 190 crore for the first nine months of the fiscal, and is affecting the business results adversely. The company also said though orders were good, execution suffered because of an extended monsoon and a “procedural delay in closing our new working capital facilities.”
Now therein lies the rub. Analysts believe the extended monsoon was just about 10 percent of the problem. The biggest struggle is the fight for working capital. It is not helping that customers are not paying up. They obviously would like to see a certain level of execution, a little over 40 percent. Also many of the customers too are not sitting on piles of cash. The wind energy industry is still not out of the woods. So Suzlon must push its lenders for more money which you would know is a painstaking process.
So what are the options? The official line is-- “Given our improving performance, impressive order inflow and our record US$7.5 bn orderbook, potential collection of funds from a specific customer, and the progress we are making with the sale of non-core assets, we believe we will have the means to meet our obligations.” But that’s not good enough. And here’s why.
The $ 7.5 bn or 5, 755 MW order book gets executed over a year or two and not in the three months which Suzlon has before the first tranche of FCCB repayment is due. Potential collection of funds, which is about Rs. 993 crore from Edison Mission energy? That’s a tough call and would involve a lot of negotiating. In fact the last time Edison and Suzlon were in news together was in 2008 when Suzlon’s blade failure led to Edison canceling a major order.
Sale of non core assets? Well, that’s a grey area too and analysts are wondering what’s left to sell after Hansen? There are some talks about SE Forge, Suzlon’s subsidiary which makes forgings and castings for the wind business. Cash from REPower and Suzlon’s own business would be better deployed for execution of orders. Suzlon has already renegotiated its FCCB payments twice in the recent past. A third time looks unlikely. Analysts are skeptical but expect more clarity by March 2012.
P.S: Also read our earlier stories on Suzlon 1. Tulsi Tanti; Reviving Suzlon; http://forbesindia.com/article/richest-indians-11/tulsi-tanti-reviving-suzlon/29972/1
2. Saving Suzlon; http://forbesindia.com/article/cross-border/saving-suzlon/302/1