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Suzlon: The sword hangs over - Views on News from Equitymaster
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Suzlon: The sword hangs over
Feb 16, 2009

Market leader in India, and fifth largest in the world in the wind turbine manufacturing industry, Suzlon energy currently finds itself in a tight spot. It books are heavy on debt and its financial obligations are many. More so, due to its ambitious acquisition of REpower, many of those obligations are maturing in the near future. That is the reason why the next few months are extremely critical for the company. This article aims to give you a glimpse of the position of the company in terms of what it needs and what are the different avenues it is looking at to meet those needs. Whether it will be successful at making the ends meet is the million dollar question.

Suzlon was scheduled to acquire the REpower stake from Martifer in three tranches by payment of Euro 65 m in December 2008, Euro 30 m in April 2009 and the final tranche of Euro 175 m in May 2009, which will take Suzlonís stake to approximately 91% in REpower. With the payment of the first tranche having been completed in December 2008, the rest of the two tranches of a total value of Euro 205 m (about Rs 13 bn), needs to be paid by May. It also requires funds to the tune of Rs 2.5 bn for capital expenditure during 4QFY09 to support the construction of an ongoing integrated WTG (wind turbine generator) unit, a forging foundry & machining unit, and a Suzlon campus. That takes its requirement for funds over the next 4 months to a total if Rs 15.5 bn.

Till the end of January 2009, Suzlonís management was still not completely sure as to the exact mode of funding. It hoped to raise funds through a combination of internal accruals, inventory cost cutting, asset sales, and through fund raising of either debt or equity at the parent level.

Inventory: Suzlon held a total of Rs 55 bn worth of inventory at the end of last quarter. It plans to cut down on this to get some cash and has actually stopped procurement of any non-essential inventory items. Thus it plans to run down the inventory dramatically over the current 3 month period to raise some of the cash needed. It also has about Rs 48 bn of receivables that too would be attempted to be cut down.

Asset sales: The management has hinted at further stake sales in one of its subsidiaries if needed. Suzlon currently has three major subsidiaries Ė SE Forge, Hansen, and Repower. Since it is looking to acquire shares in REpower, that leaves it with either of the other two for further divesting stake. The company has recently sold 10% stake in Hansen Transmissions to Ecofin, UK to raise funds, following which its stake in Hansen stands at 61.3%. Any more divestment in it, or SE Forge would further take down its stake in the respective companies.

Fund raising: As per the management, if need be, the company may explore both the options of raising debt and equity as per the scope for each. Earlier this month the company got regulatory approval to raise up to Rs 18 bn through a depositary share offer overseas. The Foreign Investment Promotion Board (FIPB) approved the company's proposal in place of a rights issue that Suzlon cancelled in October 2008 due to a crash in its stock price and weak sentiment in the secondary market. The company has still not decided on whether to go for American or global depositary receipts (ADR/GDR). Neither the plans nor the timeline has been is firmed up yet. Considering the sorry state of secondary markets the world over, issuing ADR/GDR seems to be a difficult proposition.

It should be noted that at the end of 2QFY09 the companyís gross debt stood at Rs 103 bn. That increased to Rs 122 bn at the end of 3QFY09 which means the company took on a further Rs 19 bn of debt during the December 2008 quarter. Out of that, as per the management the increase of Rs 3 bn was attributable to currency movements on foreign loans. Majority of the rest of the amount (about Rs 12 bn) went towards meeting working capital needs. Thus if the company has needed to raise working capital to such an extent during 3QFY09, the potential to actually significantly cut down on working capital in such a short time seems implausible. How adeptly the management executes the above plans remains to be seen. Overall, the fate of the company continues to hang in the balance. We maintain a cautious view on the stock.

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