A nacelle containing a Suzlon Energy Ltd. turbine is prepared to be raised during the construction of a wind turbine at the Edison Mission Group Big Sky wind farm in Ohio, Illinois, U.S. (Photographer: Daniel Acker/Bloomberg)

Suzlon Struggles To Shake Off Its Debt Demons

Once tipped to be a global powerhouse of renewables, Suzlon Energy Ltd. has been battling debt demons for more than six years.

Beset by the fallout of boom-year excesses, the maker of wind turbines was working on a turnaround by selling assets and cutting costs. It even brought in a white knight in billionaire Dilip Shanghvi. But then India shifted from a subsidy-based programme to competitive auctions for wind farms, driving tariffs to record lows and eroding volumes and profits of Suzlon.

Shares of the company tumbled as much as 42.1 percent on Feb. 5 amid rumours about default. The management tried to allay fears, calling them baseless and stressing that it has been regular in repaying debt. But the speculation would have reminded investors of a string of defaults starting 2011-12, including a missed payment on foreign currency debt. Even its auditor is concerned. In the report for quarter ended December 2018, Deloitte Haskins & Sells LLP raised doubts about the company’s ability to stay afloat—as a going concern.

That comes as the wind power industry has slowed. Tariffs fell by over 50 percent in 2017-18 as the industry moved to competitive bidding, HSBC said in a note. Projects designed for the earlier regime didn’t get honoured and were shelved, resulting in a sharp fall in installation volumes to 1.8 gigawatts compared with 5.5GW in the previous fiscal, it said. Orders dried for turbine makers.

The wind industry is passing through a transition phase, Kriti Vagadia, group chief financial officer at Suzlon, said in an emailed response to BloombergQuint’s queries. That has resulted in a virtual standstill, he said. “But it’s nearing the end of transition with significant capacity bid out now coming up for execution and installation.”

Lofty Ambition

Suzlon, founded by Tulsi Tanti in 1995, has lost nearly 99 percent of its market value since its peak in January 2008. The debt-fuelled expansion and asset-buying spree proved unstainable after the global meltdown triggered by the collapse of Lehman Brothers. Compared with a record of about Rs 460, the stock now trades at less than Rs 5.

Suzlon Struggles To Shake Off Its Debt Demons

Part of Suzlon’s debacle can be attributed to lofty ambitions that investors bought into initially. Suzlon made its market debut in 2005 after an initial public offering that was, according to Bloomberg data, subscribed more than 45 times. Tanti, according to Suzlon’s annual report, had bet that wind power’s contribution to global energy will rise from 0.69 percent in 2005 to 2.93 percent in 2015. And he expanded globally from the U.S. to Australia to build a global giant. From 2005-07, it bought Belgium’s Hansen Transmissions and Germany’s REpower Systems (now called Senvion) for more than $2.1 billion—nearly all of it funded by debt.

The first signs of trouble emerged in 2008.

A wind turbine manufactured by Suzlon Energy Ltd. operates beyond an electricity pylon and coal pile at the Ostro Energy Pvt. Dewas Wind Project in Dewas, Madhya Pradesh. (Source: Dhiraj Singh/Bloomberg)
A wind turbine manufactured by Suzlon Energy Ltd. operates beyond an electricity pylon and coal pile at the Ostro Energy Pvt. Dewas Wind Project in Dewas, Madhya Pradesh. (Source: Dhiraj Singh/Bloomberg)

Ominous Sign

In January 2008, reports emerged that blades of some of the windmills built by Suzlon cracked. It forced the company to initiate a retrofit programme for S88 V2 turbines in the U.S. and Europe, increasing costs. That proved ominous.

The same year, Suzlon raised $500 million through zero-coupon convertible bonds in two traches of $300 million and $200 million to fund acquisitions.

But as the global economy took a tumble and asset prices fell, the company had to record a mark-to-market loss on the bonds in 2009 and recognise an exceptional loss in its bottom line. In 2010, it restructured the bonds at a lower conversion price with the Reserve Bank of India’s approval.

Still, orders for new turbines didn’t pick up and finance costs rose because of the money it had borrowed for expansion. Things came to a head when Suzlon defaulted on foreign currency convertible bond repayments worth $209 million in October 2012 after failing to get more time from lenders.

Defaults on FCCB repayment continued till the year ended March 2014 even as the renewable energy company recast liabilities under the erstwhile Corporate Debt Restructuring. In July 2014, it restructured FCCBs worth $546.92 million that are due for payment in July this year.

It also defaulted on repayment on a term loan in 2011-12 and then again on repayment of term loans and letters of credit worth Rs 159.92 crore in 2014-15.

Suzlon told BloombergQuint in its statement that its past defaults came prior to sale of assets at the end of 2014-15, and it has since been regular in servicing debt.

But the company will find itself stretched. It has a cash of Rs 120 crore on its books, according to its filings. And cash flow from operations is negative.

Sale Of Crown Jewel

Suzlon sold its 35.22 stake in Hansen Transmission International NV in 2009-10 to repay outstanding loans. As debt didn’t come down, it was forced put its crown jewel Senvion SE on the block in January 2015. A substantial portion of the Rs 7,000-crore sale went into reducing debt. And Shanghvi, the controlling shareholder of India’s largest drugmaker Sun Pharmaceutical Industries Ltd., pitched in with Rs 1,800 crore in February that year, giving him 23 percent ownership. Tanti owned 19.79 percent in the company as of December. Nearly 77 percent of that pledged with lenders.

The company’s financials also remain stressed.

Where It Stands

In the last financial year 2017-18, Suzlon’s revenue tumbled 35 percent over the previous fiscal and its consolidated Ebitda dropped from Rs 2,479 crore to Rs 977 crore. For the first nine months of this fiscal, it reported an operating loss of Rs 118 crore and a net loss of Rs 1,238 crore.

The turbine maker attributes its recent woes to lower volumes on account of transition from feed-in tariff to competitive bidding. Auctions have slowed as record-low tariffs made projects unviable.

And debt still stands at Rs 10,000 crore as of December. Its net debt to Ebitda ratio, according to HSBC, is 11.4 times.

Vagadia admitted that debt is high but stressed that the company is working on an asset-monetisation plan to pare it by 30-40 percent. The company didn’t specify which assets it plans to sell.

Suzlon’s optimism also stems from 10.7 gigawatts of wind capacity auctioned since India moved to bidding in 2017. A large portion of that—about 8GW—is likely to be commissioned in the next financial year starting April, he said. About 45 percent more than a year ago, according to Vagadia. That, he said, would increase orders for turbine makers.

But it’s not the only one vying for those orders. Global giants like Siemens Gamesa and Vestas will offer stiff competition along with domestic peers.

Tanti has his job cut out.