Singapore/Mumbai: The world’s fifth biggest wind-turbine maker, Suzlon Energy Ltd, has set aside Rs590 crore ($139 million) to compensate customers for cracked blades.
Suzlon will pay John Deere Wind Energy and Edison Mission Energy for output losses resulting from defective turbine blades, chief financial officer Kirti Vagadia told investors in Singapore on Thursday. About 6% of its 1,251 V-2 series, 2.1MW blades are cracked, he said.
The Ahmedabad-based company’s shares have fallen 46% this year because of concerns that blade defects may prompt customers to cancel orders.
Last month, a unit of Southern California power company Edison International declined to take delivery of 150 turbines after it complained of receiving faulty equipment, Suzlon said.
Core technology: A file photo of Suzlon Energy trucks and wind turbines in Nandurbag, Maharashtra. Suzlon has launched a new V3 series of 2.1MW wind turbines this January and has had ‘no problems’, a company official said. (Photo: Santosh Verma/ Bloomberg)
“Making provisions for retrofitting and for possible claims from clients about loss of production was the right thing to do,” said Krishna-kant Thakur, Mumbai-based analyst with Edelweiss Capital Ltd, who recommends investors buy Suzlon shares. “They’ve stopped making the entire series of blades.”
Suzlon shares fell as much as 8.1% to Rs191.65 in Mumbai, and closed 0.2% lower at Rs208. UBS AG cut the stock’s price estimate on Wednesday to Rs225 from Rs305, citing slower sales and increased cost of provisioning and raw materials. UBS maintained its “neutral” rating.
Deere and Edison are “the most affected” by the V-2 series blades, Vagadia said at the Nomura Asia Equity Forum on Thursday. The two companies use 70-80% of these wind turbines, according to Deven Patel, senior manager for corporate finance.
“We have made a cumulative provision of Rs5.9 billion in the balance sheet as of 31 March,” Patel said.
“We are giving availability compensation to John Deere and Edison under the contractual terms,” he added.
The provisions cover “all types of guarantee and warranty obligations, and not any compensation payment,” Suzlon said in filing to the Bombay Stock Exchange on Thursday. The company has already set aside Rs100 crore to retrofit all its V-2 series blades by November, Patel said. A coating will be applied to the 24m-long blades to prevent further cracks, which appeared closer to the root, Vagadia said.
Suzlon has launched a new V3 series of 2.1MW turbines this January and has had “no problems”, Patel said.
The company’s earnings margin, before interest, depreciation and tax, declined to 14.1% in year ended on 31 March from 16.2% in the previous period. This is higher than the 7% to 8% margins for Suzlon’s peers, Vagadia said.
“Our material cost is 68% of revenues compared to our peers at 72 to 74%,” Vagadia said. “Our manpower costs are 4% of revenues while our peers are 8% and we pay 13 to 14% tax and our peers pay 33%,” he added.
The company has secured a 14% share of the global wind-turbine market after buying a stake in rival Repower Systems AG in May 2007, he said.
Vestas Wind Systems AS is the world’s biggest wind-turbine maker followed by GE Wind Energy Llc., Spain’s Gamesa Corp. Tecnologica SA and Enercon GmbH, according to Suzlon.