Can Suzlon do a Wockhardt?

Suzlon Energy Limited's recent Rs 9,500 crore debt restructuring (CDR) exercise has bought the company some breathing room to turn its business around. The world's fifth-largest turbine maker (by installed capacity) has had no trouble bagging orders. However, it has been roiled by a grave shortage of working capital to implement those orders.

The Pune-headquartered company, promoted by Tulsi Tanti, restructured its debt with a consortium of 19 banks. The deal from the banks includes a two-year moratorium on principal and term-debt interest payments, a three per cent reduction in interest rates, a six-month moratorium on working capital, and conversion of Rs 1,500 crore of bank loans into equity.

As June 30, 2012, the company had orders worth $7.2 billion (Rs 37,400 crore). Its German subsidiary REpower accounted for $5.1 billion (Rs 26,500 crore) of those orders. The German subsidiary is debt-free and has cash reserves, but an inability to repatriate cash to the parent company aggravated problems.

Now, with an increase of Rs 1,800 crore in working capital facilities as part of the bank package, Suzlon will be better placed to execute orders quickly. "I am confident that with this CDR package, we will quickly return to a position of stability and confidence for our customers, vendors and employees," says Kirti Vagadia, the company's Chief Financial Officer.

The wind energy giant had posted losses in each of the last three financial years, and had a net debt of Rs 13,000 crore at the end of June 2012. As a result of its weak financial position, it has defaulted on payment terms of foreign debt (foreign currency convertible bonds). The company's FCCBs - issued twice and totalling $220.8 million (Rs 1,150 crore) - were due for redemption in October 2012. FCCBs (Rs 1,348 crore) currently dominate more than half of Suzlon's unsecured loans.

"We continue to be in constructive dialogue with the majority of our bond holders across all the four series, and this development will help provide further visibility towards finding a consensual solution at the earliest," says Vagadia.

In 2011/12, the company posted revenues of Rs 21,082 crore, and reported improved pre-tax (EBIT) margins of 5.5 per cent (versus 2.2 per cent in the previous year). In June this year, Suzlon sold its manufacturing subsidiary in China for Rs 340 crore, but the cash is yet to come in. Its efforts at recovering $208 million (Rs 1,081 crore) from a customer, the US-based Edison Mission, have come to naught with the latter refusing payment, saying the turbines supplied were faulty.

On a brighter note, Suzlon's total debt has declined 47.8 per cent since March 2009. According to Vineeth Vijayaraghavan, a renewable energy expert and Editor of Panchabuta, an online industry newsletter, the steps Suzlon initiated in the past nine months to reduce costs and improve efficiency will help it achieve a quick turnaround. "The sector will pick up in the coming year with fresh incentives from the government, and Suzlon will be in a better shape to take advantage of it."

The successful turnaround of drugmaker Wockhardt Limited by its Chairman, Habil Khorakiwala, should provide Suzlon some inspiration. Though it operates in a different sector, Wockhardt, too, faced its biggest crisis due to an inability to service its FCCBs. But it weathered the crisis and is now doing well.