Mumbai: The new chief operating officer of wind turbine maker Suzlon Energy Ltd, Sumant Sinha, says the company is growing a “little slower than before” and that it had stalled some expansion plans for the time being.
The company posted a net loss in the fiscal third quarter after paying to replace faulty equipment and as orders increased at a slower pace.
Right choice: Suzlon’s chief operating officer Sumant Sinha says wind energy remains a good business to be in, given that governments are mandating minimum usage of alternative energy sources. Ashesh Shah / Mint
In a wide-ranging interview, Sinha also said the company will look at selling “small assets” to fund the acquisition of the residual stake that Martifer SGPS SA of Portugal owns in Germany-based REpower Systems AG, which Suzlon bought in 2007.
He also addressed the issue of Suzlon turbine blades developing cracks. Wind energy remains a good business to be in, given that governments concerned over energy security and climate change are mandating minimum usage of alternative energy sources, according to Sinha. Edited excerpts
Can you maintain the pace at which you were growing from here on?
Hansen Transmission (the Belgium-based gear-box maker Suzlon acquired in 2006) is growing rapidly and so is REpower. Suzlon is growing a little slower than before, but is also growing.
To some extent there is a consolidation issue, as well. I think last year we couldn’t consolidate all of REpower Systems. Now we can. So, the growth we are looking at from last year’s standpoint is 80-90%…
But earlier Suzlon couldn’t consolidate the results with REpower. You still have to buy Martifer’s residual stake and there are other minority shareholders. So, what has changed for you to consolidate?
We now have 51%, so we are allowed to consolidate. We crossed the 51% (level) in late June 2008. When we announced the last quarter results, it was too short a time to consolidate results. Secondly, in REpower, we had to still work on policy alignments and adjustments.
How do you plan to fund the acquisition of Martifer’s stake?
To acquire the Martifer stake, we would require €200 million, about Rs1,300 crore... We still have many sources of financing. The first would be internal cash flow generation. In the normal course, we will have cash flow from operations. We also have (a) fairly high degree of working capital at this point of time that we are managing very actively right now. We expect to generate internal cash from this working capital. That may not cover the acquisition cost...to the extent it will not cover our needs we will access or take access to...some asset disposal of minor nature which will not impact us from a strategic standpoint.
We will be looking at external sources of financing. Fundamentally, we have four to five months to take a call on that. So we are not overly worried about finding the right solution.
What assets have you shortlisted for disposal? You sold a part of your stake (10%) in Hansen? Do you plan to sell more in that company?
We might...with respect to our cash flow situation. We have three sources of cash outflow.
One, is capital expenditure, the other being repayment of our acquisition loans and third, the funds required for buying out Martifer’s stake in REpower.
We wouldn’t require any capital expenditure across the group for next year. It is going to be very minimal. Capacity has already been added. For Suzlon and REpower it is only maintenance capital expenditure which is needed and it is about Rs1,500 crore.
In Hansen, there is some capital expenditure, but some of it can be postponed to later years...with the cash position in our group there is a fair bit of leeway to manage whatever capex we require and still have a fair bit of funds leftover. So, for our acquisition loan repayment, we have already sold 10% in Hansen. That is going to the block account and from there we are going to keep repaying the acquisition loan and that will take care of five to six months of servicing the acquisition loan. The only thing remaining is the payment to Martifer.
So, did the liquidity squeeze defer Hansen and Suzlon’s expansion plans?
After the recent expansion at Hansen, the capacity is about 7,000MW, which is being ramped up to 14,000MW. This will happen by 2012. But it’s just that this expansion is going to be more back-loaded than front-loaded.
And that’s in line with the fact that the industry is going through a slowdown this year. Wind industry, which has been growing at almost 30% for the last several years, will now grow at 10-15% this year.
To that extent capacity addition has already happened. There is no real need for further expansion at this point of time.
In Suzlon Energy, our current capacity is 4,200MW, which is the phase one of our expansion. The second phase to 5,700MW will be only activated when we require it. So, (a) lot of the common facilities have already been made. For extra investment we can take it to 5,700MW but we are not going to make that extra investment at this point of time.
The blade issue must have dented the image of Suzlon. (Turbine blades supplied by Suzlon to some US customers cracked, leading to quality concerns.)
When we grow at a rapid pace to meet customer demand and an organization that is growing at 70-75% a year, sometimes we do things faster than we ought to do. All companies in the wind industry have gone through certain problems.
For example look at Vestas Wind Systems A/S, the leader in this industry and look at their provisions.
The actual utilization against the provisions they are talking about in the first nine months is €191 million of expenditure... What is happening to us is not unique.
Look at the issue. We manufactured one generation of turbines called V2 in 2007 and shipped 400 of such turbines by the end of 2007. By the beginning of 2008, we had already moved to a new turbine.
What happened was unfortunate. The V2 machines we made and sold mostly to US had a problem. We had a solution and that was stiffening the blade in some areas and our customers Deere and Company and Edison Mission Energy decided that they wanted to go through a more vigorous process...
They were our first customers in the US markets. We decided to go out of the way to work with them. So, we went through an extensive testing process which took six months and in that period we took a provision of $30 million in the last financial year...because of this extension of this process we are now having to work through the winter months and so therefore the cost of the programme has gone up and we have taken an additional provision of $35 million.
Will this expense recur?
We feel the provision bounds the problem, boxes it in and allows us to move on with our lives from a financial standpoint.
From a business standpoint, we have already moved beyond since 2007. From a financial standpoint this is the last provision we will make.
In 2008, we started V3 machines; a fair chunk is installed in Australia and they are performing absolutely fine.
Are these exceptional items part of that? Are there more such exceptional items?
One is mark-to-market losses and certain hedges we took when the rupee was Rs42-43, when everybody including all the pundits in the business were telling us that rupee will trade at 35, against the dollar. At that point we took certain hedges to protect our business plan... First the rupee has moved in a completely different direction and these are hedges that have gone against us. So, we have to pay off some of those as it becomes due.
The item number 2 provisions we had to make, which is $35 million plus, as a result of the non-operation of the turbines because of the blade crack issue.
The third is part of the translational losses because of the bond issue which unfortunately runs through our profit and loss.
The assets we acquired out of the convertible bonds was to acquire REpower and Hansen. The assets of REpower and Hansen are getting valued upwards, but it gets reflected in our balance sheet.
How does your order book look, is it as robust?
REpower has 1,500MW of firm orders in hand. They expect to take that substantially into the next financial year. REpower also has frame contracts in place of 5-6,000MW.
Recently REpower signed a frame contract with RWE, which is a German utility, for supply of 5 and 6MW turbine for offshore wind energy. It is close to 1,900MW for the next four to five years.
So from the REpower standpoint their order book looks very robust.
Suzlon has 2,000MW of order book. We plan to take 1,000-1,200MW of this order book to the next financial year. The balance will end up servicing this year, which is in addition to the normal India business we get continuously.
Based on the proven performance of our V3 machines, we are in very active dialogue with number of customers. We are hopeful that in the next few months we will sign several orders. I cannot reveal more.
What is the working capital you need?
Rs6,400 crore in the current year. It’s been stable for last year. It is going substantially lower. It happened because in expectation of higher sales we actually procured higher than we should have.
We stopped procuring and have put a freeze on new orders a few months ago. In some time we will run down the inventory. That will lower working capital requirement.
Will REpower transfer the technology Suzlon needs?
It is a fevered imagination of a few people... What it (the acquisition) actually does is it gives us access to the European market.
The benefit is in combining the two organizations to combine the supply chains of both our organizations so that we can manufacture their products at lower cost. That process is being set up. That is in their interest and in the interest of the minority shareholders.
That process will start off and it is starting now. We will have a seamless manufacturing organization.
We will also have a product portfolio of 600KW which is in the Suzlon basket that extends to 6MW in the REpower.
REpower assembles all their products, it doesn’t manufacture. Suzlon manufactures all the components. Their (REpower) cost is 85% of the sales whereas our cost is 65% of the sales.
(There’s) a lot of opportunity to manage downwards their cost...to help us really optimize the production cost and utilization globally whether it is components or assembly. Our technology needs are overblown..
Can oil prices below $40 a barrel hurt your industry?
Oil prices have very little impact on the business. Can power prices be linked to the oil prices? Do state electricity boards link their rates to oil prices? What happens is that when oil price goes down our logistic cost goes down, our input cost goes down. Interest costs and commodity costs come down. We are much more cost competitive.
In the overseas market, where there might be some linkage, the imperatives of climate change and energy security are so much more significant than the change in prices of an item that accounts for 1.5% of the total power cost. Governments are moving towards mandating the minimum standards in renewable energy.
For example EU (European Union), their mandate is 20% renewable power by the year 2020 from 4-5% today. So, we can imagine that even if the total power demand stays constant we are talking about four times to five times increase in renewable energy.
Have you got or sought any fresh orders from US?
This year the US market will decline sharply. Second-half growth in the US market will get kick-started.
In the US markets, I’ll admit that because of the blade issue we have not actively solicited orders. The blade problem happened with two customers. Our policy is not to go to every small developer, but to go to large customers. This year we are going to Horizon, which is a subsidiary of EDP Renewables, the electricity major in Portugal... We are also going to supply to a large US utility major. We are only dealing with large and sticky customers.. Then (the prospect of) getting repeat orders is better.
Edison and John Deere would like to get the retrofit programme before they decide on fresh orders. Which is fine with us.
Having said that, REpower is getting orders from them so as a group we continue to get orders. It is an amicable sort of a situation.
This year, we are going to be one of the largest players in the US wind energy market. Almost $1 billion into the US market. Probably, the largest Indian company in the US.
Vestas made a provision of 4.5% Suzlon made 2.5%…and that too for this year alone.
Suzlon chairman Tulsi Tanti had remarked that his personal networth is more than the market capitalization of Suzlon Energy. There is also talk that shares of the promoters have been pledged.
That’s something for the promoters to say. I think when Sebi (the Securities and Exchange Board of India) asks for the disclosure, (I) am sure that our promoters will come forth with that information.
Many companies have come forward with this information?
Let me put it this way, we have not come forward with that (pledged shares) information.