Suzlon News

Suzlon has presence in all key markets that have actively provided policy support for renewable sources of energy. A number of States in the US and few other nations have initiated Renewable Portfolio Standard — a tool that facilitates countries to set targets to enhance their renewable energy portfolio. Similarly, the European Union has an aggressive target of generating 20 per cent of its energy needs through renewable sources by 2020 with major contribution expected to arise from wind power.

China too is looking to expand its wind power capacity to 1,00,000 MW by 2020. India’s planned targets and fiscal supports are also not any less when compared to these nations. With a global market share of 10.5 per cent, low cost bases in India and China and a local manufacturing centre for blades in the US, Suzlon appears well placed to tap these markets. Hansen’s gear box facility has provided an edge for Suzlon at a time when most global players are suffering from shortage in component supply.

Suzlon has also resorted to backward integration by setting up its own foundry, forging and machining units — key areas that cause supply disruption globally. And, now, with a majority stake in REpower, Suzlon can be expected to improve its presence in Europe and possibly access its high end technology at a later date.

Financials

Post its acquisition of Hansen, Suzlon had to deal with a cash-strapped company generating poor profit margins. Hence while the initial quarters of 2007-08 witnessed dip in operating profit margins, the end of FY08 saw the company’s OPMs at 13 per cent, still superior to industry averages. The sales realisation of the company’s wind business also improved to Rs 6.2 crore per MW in the first quarter of FY-09 from Rs 4.7 crore per MW a year ago.

In the coming years, Suzlon’s consolidated profitability could be further supported by REpower’s lucrative offshore wind farm segment. While the current depreciating rupee would favour the company’s export-tilted revenues, local base in countries such as the US may provide natural hedge to some extent against foreign currency fluctuations.

Concerns

Suzlon has planned a rights issue for Rs 1,800 crore to fund its stake acquisition from Martifer. Assuming it is at the current market price, the offer could lead to a 12-14 per cent expansion of equity base. While in a different market, the company would have typically resorted to debt, in a high interest and low liquidity scenario, the option of tapping the equity market and keeping leverage under check (given that Suzlon has traditionally remained highly leveraged) appears prudent. However, recent rights offers have faced hardships in the current challenging stock market conditions. Given this risk, Suzlon may have to look at alternative financing options as well. Interestingly, even in difficult times such as this, the company’s forging subsidiary has received Rs 400 crore through a 17 per cent stake sale to IDFC Private Equity, suggesting that the company’s business may yet have other funding channels.

Suzlon appears to have also cleaned up its quality issues on defective blades to some extent, by obtaining certification from Germanischer Lloyd, a certification body accredited to certify in accordance with relevant global wind energy standards. This may provide it an image boost especially in the US.


Suzlon has issued bonds convertible into equity at Rs 360-371. While this does pose a threat, given the stock’s current market price, its expiry date (2012), still a couple of years away, provides comfort on the conversion front.