Gone With The Wind.

     Alternative energy. It’s a subject that seems to be in vogue these days, from being the centrepiece of the G20 summits to the main theme of the Michael Douglas-starrer, Wall Street 2: Money Never Sleeps. Indeed, non-conventional sources of energy are being touted as the Next Big Thing, in a world that is fast running out of black gold. The general perception then would be that any company that could capitalize on this vast, virtually untapped market would certainly be on its way to making a fortune. Unfortunately, the general perception is, more often than not, wrong. This would particularly apply in the case of a company that the world now knows as Suzlon.

     Suzlon is India’s largest wind turbine manufacturer and it holds the distinction of being the fifth largest in the global pecking order. In its heyday, Suzlon was seen as the poster boy of the nascent but fast-growing wind turbine industry in India and its promoter was even hailed as a visionary. It was a darling of the stock market and a company that everyone expected to transform into a global behemoth that would eventually dethrone the likes of Areva, Gamesa, Vestas and General Electric. Suzlon was founded in 1995 and the company rose to prominence in the short span of a decade. Its collapse, however, was far quicker. In 2006, a cataclysmic chain of events was set in motion and it brought Suzlon crashing down. It was the classic case of a company that was once soaring high, turning out to be a victim of euphoria, overaggressive expansion and the unbridled ambition of its own promoter. This is the rags-to-riches-to-rags tale of an ill-fated company that was once expected to take the world by storm. This is the saga of Suzlon.

    

Powering Up.

     Surprisingly, Suzlon’s humble beginnings had little to do with the wind turbine business. As a matter of fact, its founder and chairman, Tulsi Tanti started out as a textile entrepreneur in the city of Pune. In an endeavour to reduce his textile mills’ power costs, he set up a few windmills and soon enough, he was supplying power to most of the textile mills in the vicinity. Sensing a business opportunity in a market that had barely been penetrated in India, Tanti sold his textile mill and ploughed the cash into his new venture. Thus, Suzlon Energy was born and it was on its way to becoming a force to reckon with, one that would power a greener tomorrow.

     In many ways, Tanti can very well be considered a pioneer in his field. In the 1990s, India Inc. was in desperate need of alternate sources of power and there were no companies that could feed that demand. Thermal and hydro-power projects needed massive amounts of capital investment and had long gestation periods, while nuclear energy was nowhere on the radar screen in India. When it came to wind power, there were few companies in the market. BHEL and Alstom were marginal players at best. Suzlon thus found itself in a sweet spot and it had a first-mover advantage. Tanti, to his credit, was quick to capitalize and soon, Suzlon was commanding a market share of over 50%. A few years later, the company went public and upon its listing, the Suzlon scrip virtually had a one-way ride and it was going nowhere but up. Like moths to a candle flame, investors flocked to the company and its shares were lapped up like there was no tomorrow. And with good reason too. With consolidated revenues of over $2 billion (Rs. 10,000 crores) and a praiseworthy net profit margin, both of which were clocking healthy year-on-year growth rates, Suzlon had metamorphosed into one of India’s foremost capital goods companies and it was the undisputed leader in the wind energy business. Indeed, those were the years during which Suzlon could do no wrong.  

     With its order books filling up at a fast pace, Suzlon set out on a major debt-powered expansion drive. With a large capital expenditure outlay, it set up several manufacturing facilities in the country and began supplying windmills to dozens of wind farm projects in India. It soon became a vertically-integrated wind turbine manufacturer, handling everything from the manufacture of wind turbines, to their installation and upkeep. With a strong revenue stream assured, the company now began looking overseas for new opportunities. Sanguine, upbeat and with its future looking bright, Suzlon was slowly beginning to throw caution to the wind.      

A Storm Is Coming.

     After having secured the lion’s share of the wind turbine market in India, Suzlon began expanding into other countries. A manufacturing facility came up in China and soon, the company was supplying windmills to several countries in the West. It entered countries such as Romania and Bulgaria, which were virgin markets at that time. The Suzlon story was blowing along quite smoothly but something was still amiss. Suzlon, in spite of its commendable size and scale, still lacked the technological edge that would have placed it on a par with Areva and General Electric. In order to overcome its Achilles’ heel, it decided to pursue the inorganic expansion route in its new markets and Tanti began eyeing potential takeover targets. It is often said that necessity is the mother of invention. Well, in Suzlon’s case, necessity turned out to be the mother of acquisition.

     In 2006, Suzlon signed on the dotted line to acquire Hansen Transmissions, for a sum of $600 million (approximately Rs. 3000 crores). Hansen was a Belgian company that engaged in the manufacture of cutting-edge turbine gear boxes, a domain in which Suzlon was found sorely wanting. Suzlon funded the deal through debt raised from several Indian banks. Initially, it seemed as if the Hansen acquisition would reap rich dividends, for Suzlon’s order book began to grow expeditiously. But the company wasn’t done there. With Hansen in the bag, Suzlon was still scouting around for potential acquisitions. And sure enough, it found one.

     In 2007, the mother of all deals was signed when Suzlon paid $1.6 billion (Rs. 8000 crores) to buy an over 90% stake in REpower Systems, a German company. REpower was one of the few companies in the world at that time that manufactured offshore wind turbine units, a niche market. Moreover, REpower was cash-rich and virtually debt-free. This deal too was entirely funded using debt and as a result, Suzlon’s balance sheet was soon leveraged to the hilt. Suzlon’s debt, which comprised mainly of high-cost Rupee loans, was topping Rs. 14,000 crores and in a matter of months, both the interest and capital repayments began to weigh down heavily on the company, despite its strong cash flows. To ease the pressure on its cash flows, Suzlon converted a large chunk of its Rupee debt into foreign currency convertible bonds (FCCBs) but that move provided little relief. Now, much to its horror, the blue-chip wind energy giant, which had been in the black for a number of years, began to discover that a large component of debt on its balance sheet was the perfect recipe for disaster, one that would eventually take the wind out of its sails.

    

The Beginning Of The End.

     The year 2007 will go down in the corporate journals as the year in which Suzlon clinched the REpower deal. However, 2007 was also the year in which Suzlon began to crumble like a house of cards. A couple of months into the year, Suzlon’s customers began complaining that their windmill blades were developing cracks. Moreover, this wasn’t a one-off issue, as similar complaints began to pour in from many of Suzlon’s pre-eminent clients and some of these complaints were even tailed by lawsuits against the company. Suzlon, on its part, agreed to replace the faulty windmill blades and it settled all the lawsuits, paying for both damages and revenue loss. The entire episode cost the company a little over $100 million but as far as Suzlon’s management was concerned, the quality control issue was now water under the bridge. After all, Suzlon’s future was still promising and the company would surely reach the pinnacle of success someday. But would it really? Had both Suzlon and Tanti failed to see the dark storm clouds that were looming large on the horizon? For now, it was only Suzlon’s turbine blades that seemed to be cracking but there were whispers in the wind that soon, very soon in fact, cracks would begin to appear all over Suzlon.

           

Blown Away.

    In late 2008, economic chaos descended on the corporate world. As more and more of its clients began putting their wind energy plans on the back burner, Suzlon’s revenues began to dry up. Also, it was apparent that new customers were favouring competitors like Areva, which had stronger financial muscle, superior execution and better technological capabilities. The fact that Suzlon had had quality control issues in the past certainly didn’t help its cause either. Furthermore, some of its stalwart clients like Edison Energy began defaulting on their dues to Suzlon and adverse foreign currency rate movements began to hit Suzlon in the form of hundreds of millions of Dollars in forex losses. With each passing quarter, Suzlon’s losses were ballooning and soon enough, it began defaulting on several of its interest and loan repayments. What was worse was that a large chunk of its borrowings was in the form of FCCBs and while foreign debt may come cheap, defaults in repayment are taken very seriously. Suzlon learnt that the hard way when it began receiving loan recalls from its foreign creditors. Besides, Suzlon’s cascading stock price rendered FCCB conversions impossible and its creditors were unwilling to roll the FCCBs over. Many of its lenders initiated legal proceedings and filed winding-up petitions against the company. With its creditors hounding it, the battle to save Suzlon was escalating. The winds had changed course and now, they were blowing squarely in Tanti’s face.

     In 2009, in what can be termed a distress sale, Suzlon hived off Hansen, its Belgian subsidiary, for a consideration of around $400 million and used the proceeds to retire some of its high cost debt. Suzlon stumbled through the next two years with multiple defaults and quarter after quarter of widening losses. In mid-2012, after defaulting on a crucial FCCB redemption of $240 million, Suzlon was awarded a corporate debt restructuring (CDR) package by its banks. The company has been given a 2 year moratorium on its interest payments and loans of Rs. 10,000 crores have to be repaid in a staggered manner, over the course of a 10 year period. Banks have also granted Suzlon working capital loans to the tune of Rs. 2000 crores to help it tide over its immediate crisis, thus giving it some breathing space. Of course, the million dollar question is whether the banks are merely spitting into the wind or whether all these measures will indeed help Suzlon ride out the storm.

Saving Suzlon.

     The Suzlon that we see today is a mere shadow of its former self. Suzlon, which was once in the reckoning for the top-spot in the wind energy business, was a company that was widely expected to give Areva, the French wind energy giant, a run for its money. But now, with a debt load of over Rs. 13,000 crores, operational losses, strained cash flows, a completely eroded net worth and a 100% pledge of its promoter shareholding, Suzlon is fighting for its survival. In the first 2 quarters of FY13, it raked up losses of Rs. 850 crores and Rs. 800 crores. Its stock price is languishing in the range of Rs. 20 (compare that to a euphoric high of Rs. 460, in early 2008) and its market capitalization, which stands at around Rs. 3,500 crores, is a mere fraction of its all-time high. Both literally and figuratively, Suzlon is indeed a company that is encountering some powerful headwinds.  

     However, a merger with REpower, its subsidiary could result in a drastic change of fortune for Suzlon. After all, the German subsidiary is said to have substantial cash reserves that its parent company could put to good use. So what’s preventing the merger, you might ask? Well, it just so happens that a consortium of German banks has ring-fenced REpower, thus preventing a merger or consolidation of any kind from taking place. Germany’s business laws state that a foreign company that acquires a German company cannot absorb the German company if the latter carries any debt or unless the acquirer has a 100% stake in the German company. In this particular case, Suzlon appears to be caught between a rock and a hard place. REpower does carry some debt and Suzlon does not have the requisite 100% stake, thus ruling out the possibility of a merger for now. Unfortunately, due to its liquidity crunch, Suzlon does not have the cash needed to settle REpower’s debt or to buy out the remainder stake. For now, a strong order book of Rs. 38,000 crores and installed capacity of over 20,000MW are the only things propelling Suzlon’s turbine blades, providing revenue visibility for a few years at least. In a worst case scenario, Suzlon could resort to an outright sale of its subsidiary in China or even REpower but if it does that, a large chunk of its order book would have to be given up as well. For now, REpower is indeed the wind powering Suzlon’s sails.

On A Wind And A Prayer.

     The global economic environment is certainly not aiding Suzlon. With the American economy barely registering a 2% annual growth rate and with Europe still in the doldrums, a recovery in the wind turbine market isn’t likely to happen any time soon. Suzlon is going to have to ride out the storm and hope that a mighty gust of wind lifts the entire sector, sooner rather than later. After all, just like Gordon Gekko said in Wall Street 2, alternative energy might very well turn out to be the next big bubble. Fortunately for Suzlon, that bubble hasn’t even begun to grow yet and there’s a long way to go before it bursts.

     Suzlon’s tagline happens to be ‘Powering A Greener Tomorrow’. The cruel irony is that the company may not be around much longer to witness that tomorrow. The next 18 months will be crucial in determining whether Suzlon will finally crumble and bite the dust or whether it will eventually pull through and live to power that greener tomorrow. Like that old Irish saying goes, may the wind always be at its back. For if it isn’t, well then, Suzlon might soon be…..gone with the wind.