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Kirti Vagadia, Group Head - Finance, Suzlon Group

01 May 2014

Starting from being a company which was created to primarily supply electricity to Tulsi Tanti’s textile firm, Suzlon Energy has come a long way in the past 20 years or so. In news recently because of a default of $221 million foreign currency convertible bonds (FCCB), the company is now slowly coming back on its feet. Kirti Vagadia, Group Head - Finance, Suzlon Group speaks to Ankita Sharma about his company’s future plans, the status of the court case with US energy company Edison Mission and the synergy with German company Senvion which it had acquired in 2007. Excerpts.

What went wrong with the company?

Suzlon has had a history of 15 years of robust growth and profitability. Between 2005 and 2009, we were growing at an average growth rate of 91 per cent, meaning doubling our revenue every year, according to which our capacities were built. However, post the Lehman crisis, followed by the Euro zone slowdown, industry saw a huge downturn which resulted in low volumes for every player in the industry. Being a capital-intensive sector, low market started resulting in huge losses and ballooning debt. To make matters worse, interest rates in the emerging markets rose sharply in response to sticky inflation. But this hurt our and our customers’ profitability. Post the FCCB default in 2013, the cash flow situation became extremely tough. The company went for corporate debt restructuring (CDR) and got liquidity breather from banks which have been gradually releasing the required additional working capital. We expect this to support further ramp-up of volumes in 2015.

What is the status and the size of FCCB closure?

We continue to be in constructive discussion with our bondholders and have made significant progress in our efforts to reach a solution. We are hopeful of a resolution within the first quarter of next fiscal. The size of FCCB being restructured is `3,200 crore (accredited value).

Why has it taken so long to reach a solution?

We have four different series of FCCBs with whom we are negotiating a settlement. Any solution that we reach with bondholders needs to be approved by our secured lenders, which comprises a consortium of 19 banks. Getting alignment between so many stakeholders is an extremely complex, challenging and time consuming process.

What is the plan for $1.158 billion under CDR? By when is it payable?

It is payable before end 2016. We plan to fund the same through our ongoing asset sale program, which is expected to pick up post election, release from working capital and operational cash flows, which we expect to pick up from 2015. Any short fall can be funded through one or more corporate finance solutions.

When is the moratorium under CDR getting over? How do you plan to fund the principal and interest payments?

The two-year moratorium under CDR gets over on 30 September 2014. The repayment schedule of our debt is back-ended in nature, with extremely small instalments payable in the initial years. We should be able to fund the same from our operations.

Do you have enough working capital to execute your projects?

This business does not require much working capital. In pre-CDR era, global customers were not hesitant in dealing with the company, suppliers used to give open credit on 30-60- 90 days basis. However, post FCCB and CDR process, 90 per cent of our vendors insist on bank guarantee and this puts pressure on us. Hence, once the issues are resolved on the FCCB front, we will be better financially based.

What is Suzlon’s plan to enter new markets in the future?

The plan is to focus on emerging economy markets which have less working capital and higher margins. The US too is now heavily shifting its focus from coal based and conventional energy to gas and renewable energy. Wind has become a competitive market. The cost of funds is just 3 to 4 per cent. There are also huge wind sites of 250 gw projects. They are keen on building a wind and gas-based infrastructure and are going ahead with strong 10-year plan to add renewables. Considering the low cost of funding in the US, it makes good sense to have a manufacturing base there. We also plan to increase our presence in Asian markets like Vietnam, Thailand, Malaysia and the Phillippines. These markets are small but can project good business.

Why was Mr. Tanti reappointed and what is the rationale behind the increase in his salary?

The company’s board, shareholders and lenders have taken this decision and shown immense confidence in the leadership of Mr Tanti. He has not taken any salary in the past three years, reiterating his commitment towards putting the company back on the growth track. “Moreover, he has infused personal capital of `1,800 crore to help the company in crucial transactions and tide over the cash crunch.”

What was the US blade crack issue? Has the company been able to shrug off poor technology image?

The blade crack happened in the US in 2009. It was identified and a complete retrofit was completed at our cost. Post the retrofit; our turbines have been performing well, meeting or even exceeding industry benchmarks. We have good marks from all our clients. Every wind company in existence for such a long time faces these kinds of technology issues. For example, last week there was news about Gamesa’s turbine catching fire at a wind farm owned by Iberdrola.

What are the implications of write off of the money which US company Edison Mission Energy owes to Suzlon?

The prevailing price of power is still very volatile and remains low in the US, leading to value erosion of the wind farm asset against which the receivable is secured. The book value of receivables is adjusted to the value of security, following conservatism principles. However, the money continues to remain due from Edison. As the matter is sub judice, we cannot comment anything in this regard.

What is the current book value of Edison?

It is $90 million, after writing off $70 million in March 2013 and $40 million in December 2013.

What kind of progress has been made on asset sales? Why is it moving slowly?

We successfully divested our 75 per cent stake in China last year. Various other non-critical assets have been identified and are in various stages of sale. The assets are primarily in India and comprise few component facilities and real estate. While huge investor interest is seen for the assets, deal closure in the current real estate environment is difficult. We expect the situation to improve post election. While we intend to divest few of our non-critical assets for deleveraging, we are not distressed sellers. We prefer to wait till we get the right price.

What is the status of Senvion’s sale / IPO / merger?

European capital markets, shut for quite some time, have opened up now and have shown huge appetite for clean renewable stories. Senvion is a marquee asset in wind space, with strong growth and profitability, besides being debt free. We are exploring few corporate finance solutions to tap the opportunity.

Is sale an option? What is the value?

Senvion is an extremely strategic asset and we do not have any plans to sell it. You know the profitability and growth of Senvion and the market multiples of listed peer group. You can work out the number.

What is the status of synergies?

Post acquisition, Suzlon has managed to add significant value to Senvion. Having complimentary product portfolio and target enables to capture the entire spectrum of the market, without having to incur duplicating R&D and new market penetration expenses. Markets where both Suzlon and Senvion were present have been aligned in order to optimize fixed expenses. For example, our presence in Australia has been realigned under Senvion, leading to substantial savings in overlapping fixed expenses. Suzlon has managed to leverage its low-cost Asia based supply chain to lower the costs for Senvion. We are also able to negotiate better price for ourselves as group through joint sourcing, yielding economies of scale. We expect this to translate into higher margins going forward.

Have we lost our leadership position in India to competitors such as Gamesa and Regen?

This is not true. We continue to hold 45 per cent market share in India based on cumulative installations. One can assess the true market share ofSuzlon in India by seeing the drop in volumes in Indian market in 2013- 2014, when Suzlon didn’t contribute in a substantial way. Last year was a complete operational stand still for us due to liquidity constraints. While we have managed to ramp up operations partially this year, full ramp up is expected from next year only.

What are the important aspects of the business model in wind Industry?

There are two aspects in this. One, cost of energy and two, cost of finance. Wind is now `5 per unit which is less than coal. We have reached technology maturity and hence there is greater reliability of the product. The industry has entered industrialization phase, hence there are no technology and performance risks. This is the time to invest in enormous scale projects. At the same time, the cost of finance is also crucial. The rate of interest in India is 13 per cent. In the US it is between 3 and 4 per cent. This affects the cost of energy. Industry supports a large manufacturing base. There is large capital goods investment, hence manufacturing base is growing. China is installing 15,000- 18,000 mw every year. India has done 20 gw in approximately 25 years.

What kind of equity investments can be made in the renewable energy sector?

Approximately $24 billion is sitting idle for equity investment in renewable sector. Pension funds of developed countries like Norway and the Netherlands have earmarked huge investments for renewable. Global funds such as Goldman Sachs, Morgan Stanley, GIC (Singapore) too are investing millions in India.

What can the government do to boost the wind energy sector?

The government should formulate policy towards energy security and energy independence, which itself will have space for wind. Wind in India today is the most competitive form of clean energy and is competitive to coal. The preferential tariff for wind is lower than even coal in few states. Given the increasing scarcity of fossil fuel and reliance on costlier imports, wind presents a reliable and a scalable alternative.

What is the future of global wind industry?

Wind industry is influencing global energy policies. The world requires low-cost energy, low carbon emissions, energy security and longterm sustainable jobs in the sector. The cost of energy from wind is driven by technology and not fuel. Wind offers sustainability for over a century which cannot be said of other conventional sources. Also, the offshore market has a positive growth outlook. Maturity of offshore technology is improving. Strategically, investing in offshore wind energy is good investment for countries. It can harness say 1000 mw to 2000 mw by just installing turbines 50 km into the sea. Plant load factor(PLF) is 50 per cent in offshore. There are no land limitations too.

The Indian wind industry has been through a vulnerable phase in 2013. Are we in a worse situation than before?

We are definitely in a worse situation. We are not improving and correcting things fast. We are not adding sufficient capacity, the cost of energy is high, our fuel situation is precarious and financial institutions are nervous to invest in this sector.

Can we expect a turnaround in 2014?

Yes. 2014, 2015 and 2016 are going to have a positive outlook. The 40 gw market is expected to touch 50 gw. Global economy is estimated to have 3.7 per cent GDP growth. Major driver will be the US market. There is a positive outlook in markets like Australia and Canada. Emerging economies such as India, Brazil, China and South Africa will also head towards big growth. New countries like Thailand and Saudi Arabia will be investing in wind energy. In the current year big companies such as GE, Vestas and Siemens have a strong order book which is a positive signal for industry. New generation machines have a better margin and are more efficient.

What is the future of the Indian market?

A lot of positive developments have taken place in the past quarter. GBI was reinstated with five-year validity, tariffs have been hiked by at least 40 per cent in all the states over five-year period, competitive bidding has been withdrawn from Rajasthan, there is clarity on Telegana and Seemandhra and cheap funds are now available from national clean energy fund. We believe the Indian market will rise at least 40 per cent in 2015 on the back of these developments.