The stock price of wind power equipment maker Suzlon Energy fell almost 40 per cent over a week to hit a new low this Monday. There has been a buzz in the market that the company’s promoters have been selling stake to address margin calls to bankers. The company’s chairman and managing director, Tulsi Tanti, discusses these issues with Katya B Naidu, Vishal Chhabria & Arijit Barman. Edited excerpts:
Suzlon promoters have sold as much as two per cent of their promoter stake in the open market recently. What was the reason behind this move?
We have an end-to-end business model, we have to invest on land bank, power evacuation and infrastructure like sub-stations and lines. The promoters are using the stake sale money to set-up this infrastructure, exclusively for Suzlon. We are getting many orders, if we do not build this, we will be unable to grow.We have targeted 30-40 per cent growth in the next financial year.
But the market perception is the sale was the due to the pledges shares coming under stress due to the fall in share price… There seems to be a crisis of confidence?
The market is going on perception rather than on facts. We have not borrowed money against our pledged shares. If we had done that, we would have to pay margin money on mark to mark losses. We have pledged 80 per cent of our stock as a secondary security, which is not linked to the stock price. That's because, last financial year when we re-financed our debt, we were not making profits. Unfortunately, the market reaction was negative because of overall sentiment of the economy and the state of the power sector.
There is a buzz that lenders have stopped giving additional money to the company, So is there a cash flow problem?
That is again a misconception. Last month, we had a meeting with our bankers, and they approved an increase in working capital loans. They have done this on the back of the fact that we have been posting profits in the last three quarters, and our $7 billion (Rs 32,454 crore) orderbook. Banks understand that this volume can generate more cash. When we have a $7 billion orderbook and $5 billion topline, $2 billion in debt is not a big deal.
Your debt of around over Rs 9,000 crore is still huge concern How you plan to turnaround the company, and repay this debt?
Around Rs 6000 crore of it is working capital debt, and Rs 4000 crore is long-term debt, which is to be re-paid over 5-7 years. That means the total is $2 billion. In the next 12 months, our repayment obligation is $750 million. Out of that we have to repay $550 million in Foreign Currency Convertible Bonds and the balance is debt.
Now where will that come from? We have raised around $200 million from Hansen sale. Next six months we will generate $200 million in cash. We are also recovering $200 million in receivables from a single customer, in the next six months. So that will reduce some working capital requirements. Added to that, we will generate $200 million in cash in the next six months. On the top of that, we are selling a non-core asset, a wind farm, which is will bring in around $50 million. That will take care of the debt. Today, the net debt to equity ratio is 1.6 times, which will go down to 1.4 by the end of the year. By March 2013, it will be be at 1:1, and that too without raising any equity.
But with large part of your debt is rupee debt. Isn’t the interest burden now getting excessive? Last few quarters, the interest costs have gone up.
As I told you, large part of the rupee debt is long term. I do not have immediate repayment obligation on them. Last quarter we have seen interest cost corrections. It was debited in the last quarter. Because of that, temporarily interest cost goes up. In the current quarter, it will go down.
Are you seeing any improvement in prices of wind power equipment?
Are you seeing any improvement in prices of wind power equipment?
In the last six months in the Indian market, there is has been a 4-5 per cent improvement in price realisation. One of the reasons is reduction in commodity prices, mainly steel. We also got our energy efficient 9X product into the market. The customer will get that benefit but we should get at least five per cent benefit. Our supply chain is in India, so we are not impacted by imports. But we are exporting to the US and Brazil, where I am getting a 10-15 per cent better price realisations better because of currency depreciation in India.
That will impact your margins too?
In the last six months, we have seen major corrections in the gross profit margin. We have brought down material costs through value engineering, technology and aggressive sourcing. We have introduced new product which gives better realisations so we have enhanced the delta. With lower volume now we can breakeven. Our breakeven level is 3,000 mw. Till then, we do not generate cash. After 3,000 Mw a year with every Mw, we generate gets Rs 2 crore cash profit. If the price goes up, that increases as well. We have reduced fixed cost as well. We brought down the breakeven levels. That is giving very good efficiency level. By just 1,000 Mw addition, we can generate 2,000 core. This trend can sustain for two years.
How do you think the orderbook will grow in India? Is there good intake of orders?
A lot of global financial investors are interested in investing in Indian wind assets. Goldman Sachs already stated its plans. There are four other large international funds, which are in discussions with us to invest in the sector, and hence are likely to become our customers. Instead of putting money in equity, these funds are going for hardcore assets, which will give them annuity income for the next 20 years. They are looking at Rupee assets and they have a currency advantage, and power price will only go up. Its a good idea to put money in the renewable power sector, than in the stock markets.
The conventional power sector in India is facing issues with regards to supply of fuels like coal and gas. Will that help the renewable energy sector?
The economics of fuel-based power has become extremely vulnerable and expensive. Currency has also gone up, making energy more expensive. Wind power has opportunities in this environment. India added 2,200 megawatts of wind energy last year. This year, that grew to 3,000 Mw, and next year it will be at minimum of 4,000 Mw. We will maintain our 50 per cent market share in that.
Carbon credit prices are going down. Will that be a dampner for investors into the space?
Carbon credit market will not affect our business because whenever regulator fixes tariffs, it is based on interest costs, available revenues and capital expenditure. In India, investors in the wind power should get at least 40 per cent equity return. If carbon credit earnings are out, price will be corrected. Recently, CERC raised the tariffs for wind power.
How will the international wind market grow in the US and Europe?
Wind power market in the US is very large and will continue to be for the next two decades. In 2012, the US is expected to set-up wind power of around 10,000 to 12,000 megawatts. As the wind power policy is expiring by then, there are a lot of projects in the pipeline which want to encash the benefits. Even if there is no incentive after the policy expires (in 2012), the market in the US will continue at 6,000 megawatts. Wind assets are becoming competitive, especially in larger sizes.
There is debt crisis in the Eurozone. Do you expect orders from that market?
The debt crisis it not affecting my customers who are large utility companies. They have a daily cash revenue on their books and wind assets are a part of their strategic long-term plan. Wind power has become cheaper as there is no fuel escalation like in other fuels. Wind power is no more tax, depreciation or subsidy driven. It has become cost competitive, and we are very bullish.
Suzlon has talked about acquiring small technology companies. Have you found any such targets?
We are looking at boutique engineering groups, which will help us with next generation technology. We are working on it but there has been no progress on that.
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