According to reports, the Suzlon Energy Ltd initial public offering (IPO) opened on 23 September 2008 and closed six days later, oversubscribed by more than 40 times and raising $340 million (around Rs.1,870 crore today). Shares of the wind turbine maker listed at Rs.510 at the upper end of the price band, then surged to Rs.1,407.60 in six months before the stock split, turning founder Tulsi Tanti into a billionaire. Citigroup and other investors also did extremely well out of the IPO.
Six years down the line, things have changed. The stock ended Friday at Rs.13.59. The difference between that close and its all-time high represents a loss of Rs.65,650.5 crore in market value. From $17.33 billion at its height, Suzlon now has a market cap of $440.59 million.
There is a mountain of debt—Rs.13,017 crore at the end of June last year. Lenders agreed on 24 January to recast Rs.9,500 crore of this as part of a corporate debt restructuring (CDR) programme. They have also converted the interest payable on loans for two years into equity of 32.1% in the company. The lenders, a consortium of 19 banks, have also agreed to enhance working capital facilities to the group by Rs.1,800 crore and a 10-year, back-ended repayment plan as part of the exercise. The company is also India’s biggest convertible bond defaulter.Suzlon’s revival strategy is a multi-pronged one—it’s reducing debt through promoters, bringing in equity and selling bonds to refinance existing loans to improve cash flows. It’s also building wind turbines to order, unlike the previous practice of making them first and then trying to sell the devices. The company is aiming for a 20% cut each in operating expenditure, staff costs and headcount, besides selling non-critical assets.
Chairman and managing director Tanti, 55, rarely speaks to the media these days as he battles to rescue the company from financial ruin.
“The independent forecasts all suggest that the next 12 months will continue to be challenging for the sector, but thereafter the industry should see some strong and sustainable growth,” he said in an interview.
But given that Suzlon is present in 30 countries and has arguably the widest product portfolio, “there is scope for conservative optimism”, Tanti said.
Suzlon expects to stabilize in the current fiscal and sees the environment returning to normal by next year. Company executives said they are equipping the firm to take advantage of demand when it returns in a year.
“As an entrepreneur, I don’t dwell on the past,” said Tanti, who sounds as ebullient as ever. “Rather, I focus on today and tomorrow. Growth will return to the sector, and my job is to ensure that—strategically—when it does, we are ready for it.”
As a group, Suzlon has a turbine suitable for any wind regime, anywhere in the world, according to Tanti.
That can be something of a double-edged sword because global expansion raises the hackles of local companies, leading to geopolitical pressures that can affect the business, according to some experts. For that and other reasons, one of the smartest moves that Tanti made was to acquire REpower Systems SE of Germany in 2007 to gain the latter’s technological expertise and access to European markets.
That acquisition has given Tanti the strength to attempt a revival, said a consultant, who didn’t want to be named. “Had REpower not been there with Suzlon, Tanti would not have energy left to fight back,” he said.
Kirti Vagadia, Suzlon’s head of finance, firmly dismissed speculation that the REpower unit would be sold to help repay debt. “No plans for any further stake sale. Read my lips: REpower is categorically not for sale,” Vagadia said in an interview.
The company will sell other “non-critical assets” though, said Nicholas Archer, head of global public relations and international government relations at Suzlon. “We have already announced the sale of Chinese assets and some domestic assets,” he said.
In June 2012, Suzlon entered an agreement to sell equity in its wholly-owned China manufacturing subsidiary to China Power (Tianjin) New Energy Development Co. Ltd for $60 million. In April last year, Suzlon sold assets in Tamil Nadu for approximately $40 million.
“We are in negotiations with (prospective buyers over a) few more domestic assets and we would be able to conclude these in 12-18 months,” Archer said. “We are brutally focused on becoming leaner and more flexible.”
According to an investor presentation in February by Suzlon, $400-500 million of non-critical assets have been identified for sale as part of Project Transformation, which is what the firm is calling the revival strategy.
Suzlon’s current afflictions have various origins, according to Archer. The most significant of these was the 2008 global economic slump that led to business plummeting.
With demand outstripping supply, the company had been making wind blades without waiting for orders. When the meltdown came, inventory piled up as orders dwindled.
Meanwhile, The Wall Street Journal reported in August 2008 that Suzlon had recalled 1,251 blades fitted to its top-of-the-line turbines supplied to Edison Mission Energy of the US. Edison told the US Securities and Exchange Commission in February that the 144ft blades from Suzlon had begun to split at its three wind power sites. Suzlon spent $25 million to change the blades that had cracks—not a massive amount of money, but a critical setback given the context.
Having made losses for three years, Suzlon failed to repay $209 million of debt on 11 October 2012, after bondholders rejected its request for a four-month extension, the biggest convertible bond default by an Indian firm. It was following this that Suzlon started discussions on a debt recast.
Vagadia said CDR imposes conditions, but also provides significant headroom through a two-year moratorium in principal and term-debt repayment.
“Additionally, our plan around the sale of non-critical assets, optimization of working capital and Project Transformation will also boost liquidity,” he said.
Vagadia pointed to the raising of $647 million through a bond sale in March to refinance foreign currency debt. “The deal is probably the first of its kind in India, and certainly for one of its size. From the standpoint of the markets, strong investor interest and the final coupon of 4.97% are a major signal of confidence,” he said.
The bonds are dollar denominated and backed by a standby letter of credit from State Bank of India (SBI) with a five-year bullet maturity. They will be listed on the Singapore bourse.
Some experts have their doubts about Suzlon being able to turn itself around given the current external environment, such as the debt and banking crises in Europe.
“Under these conditions, except for a few industries, by and large I see a lot of difficulties for most companies,” said Narayan K. Seshadri, chairman of Tranzmute Capital and Management Pvt. Ltd, a business advisory firm.
Suzlon’s key concern is not order inflow, but capital constraints, said Rosita D’Souza, a Singapore-based credit analyst at Elara Capital Plc. That’s putting the squeeze on execution, she said.
However, with the repayment schedule pushed forward because of the bond issue and the moratorium under CDR, Suzlon can focus on execution, D’Souza added.
“The enhancement in working capital limit should aid in this direction. FCCB (foreign currency convertible bond) restructuring is the last of the outstanding issues, the resolution of which will ensure energies are focused on getting the business back on track,” she said.
Archer said the last fiscal had been a year of liability management. “The current fiscal (2013-14) would be the year of stabilization and next fiscal would be for normalization to gain the licence to lead the sector once again,” he said. “Tanti is working 10 days in the week to bring Suzlon back on track.”
Suzlon suspended its guidance for 2012-13, saying that despite strong fundamentals and a $7.2 billion order book, liquidity constraints, a volatile market, and the debt recast would hurt performance. It hasn’t said when it will declare earnings.
It had earlier forecast revenue of Rs.27,000-28,000 crore for fiscal 2013 and an Ebit (earnings before interest and tax) margin of 6%.
The group’s net loss widened to Rs.1,154.53 crore in the quarter ended 31 December from a net loss of Rs.286.46 crore a year ago. Sales fell 19.58% to Rs.4,047.71 crore from Rs.5,033.45 crore.
After the CDR, IDBI Bank Ltd will hold 7.54% of Suzlon, SBI 4.46% and Life Insurance Corporation of India 3.47%, according to a document filed by the company with the stock exchanges. A total of 21 organizations, including commercial banks, cooperative banks and financial institutions, will share the 32.1% stake.
The conversion price for share issuance to lenders is Rs.18.51 apiece, as determined by the regulator’s preferential pricing guidelines.
Lenders that are not part of the CDR programme include Power Finance Corp. Ltd (PFC) and Yes Bank Ltd. PFC will hold a 4% stake and Yes Bank will take a 0.3% stake in Suzlon Energy.
As per the CDR programme, Suzlon will issue fresh equity to creditors and promoters will bring in Rs.250 crore in two tranches. After this issue, the promoters’ holding in Suzlon Energy will come down to 34.14% from the current 44.46%.
Before establishing Suzlon in 1995, Tanti used to work for the family cold storage business and later set up a polyester yarn unit. The idea for Suzlon came to him when be bought two small wind turbines from Danish firm Vestas Wind Systems A/S to power his factory. Suzlon forged a joint venture with small-time wind turbine maker Sudwind GmbH and acquired bankrupt Dutch firm AE Rotor Techniek BV to design wind blades.
Tanti turned the firm into the world’s fifth largest wind turbine supplier in terms of cumulative installed capacity with a presence in Asia, Australia, Europe, Africa, and North and South America with installations of over 21,000 megawatts capacity. It will be a year at least before it becomes clear whether his revival strategy has a chance to work.
Tanti is at pains to point out that, while he was feted as a billionaire six years ago, he’s not known for conspicuous consumption.
Finance minister P. Chidambaram said last month that bankers need to crack down on rising bad loans and ensure that wealthy promoters bring funds into their companies. “We cannot have an affluent promoter and a sick company,” the minister had said.
“Materialism has never been attractive to me,” Tanti said. “Of course, I would rather we did not face some of the challenges that we do today, but we will emerge from this situation leaner and fitter, and the company will be better able to manage today’s challenges and position itself smartly for tomorrow’s opportunities.”
Ajay Relan, founder and management partner at investment advisory firm CX Advisors Llp, backs Tanti to turn things around. Relan was one of Suzlon’s earliest supporters, dating back to his days at Citigroup. He headed the private equity business at the time and was instrumental in the Suzlon investment. He quit Citigroup in 2008 to form CX Advisors.
“Tanti is one of the visionaries who made history. He made Suzlon a formidable company with the right acquisitions. But he got trapped in a deadly combination of high-cost debt and external environment that turned savagely negative,” Relan said.