Mumbai: Suzlon Energy Ltd plans to spend the next 18 months consolidating its European operations and increasing its presence across Europe, which is the world’s largest wind power market.
European wind power revenues grew at 23% in 2006, and there is an installed capacity of 7,588MW.
While Hansen Transmissions International NV—the Belgian gearbox maker—will retain an arms length relationship with Suzlon, Repower Systems AG—the German wind power company—will be fully integrated with Suzlon in the next 18 months, Tulsi Tanti, chairman and managing director of Suzlon Energy Ltd, had said late last week. Suzlon is coming off a weak quarter that saw its profit fall 79.16% in the period ended 30 June.
Suzlon acquired the two European firms over the last 18 months at a combined enterprise value of €1.49 billion (Rs8,284.4 crore). While Suzlon bought the Belgian firm Hansen in an all-cash deal valued at €465 million, it struck a staggered payment deal for Repower, with the French nuclear power company Areva SA and Portugese’s engineering firm, Martifer Group, for €1.34 billion. Suzlon currently holds 86.5% voting rights in REpower through its pooling of voting rights agreements with both these companies.
“Repower is in the same line of business as Suzlon and will be fully integrated.... Primarily, it will be a technological integration, with manufacturing and supply-chain support. We will grow (in) the European markets together,” said Tanti.
Harnessing advantage: Suzlon Energy chairman and managing director Tulsi Tanti says integrating Repower’s business with Suzlon’s willaccelerate the company’s growth in the overall European market.
“Suzlon does not make all the components themselves. Repower is not a financially sound company, but Suzlon’s integration move should be beneficial to both Suzlon and Repower. With crude prices rising, there is going to be good demand for wind energy. The integration will have a positive impact on Suzlon but the company’s performance will continue to be impacted for the next two to three quarters,” saysRabindranath Nayak, an analyst tracking Suzlon for IDBI Capital Markets Services Ltd.
One of Suzlon’s major challenges is increasing Repower’s share in its home market in Germany. Though Repower has a 10% market share and is the third largest turbine maker in Germany, competitors Enercon and Vestas together have a 68% share of the market.
“Integrating Repower’s business with ours will accelerate growth in not only in Germany, but also in the overall European market. We expect to boost Repower’s volumes by at least 20-25%. Together, we expect to our business in Europe to grow at more than 50% year-on-year,” Tanti said.
Suzlon is also looking at reducing Repower’s raw material cost. Much of the reduction will come from integrating the companies’ operations.
“Hansen, which is doing some design engineering for Suzlon, will also work with Repower’s designs, and sourcing raw materials along with Suzlon will help reduce Repower’s costs. This will bring down the costs by 10% over the next two years. After that, we can look at how to reduce it further,” said Tanti. The agreement enables Suzlon to buy the remaining stake in Repower over the next two years.
“In a year’s time, we will buy out Areva’s stake at market price. We expect that it works out to around €150 per share,” said Tanti. Suzlon’s agreement with Martifer too allows it to buyout the Portuguese group after two years.
Suzlon has already committed itself to a Rs3,300-crore capacity expansion programme in India, expanding its existing capacity of 2,700MW to 4,200MW.
Meanwhile, Hansen will continue its at-arm’s-length relationship with Suzlon. “Hansen’s business is different from ours. It will be our extended arm,” said Tanti. “Hansen will develop components for us and they also have independent customers. Currently, they have 100% external suppliers, which will go down to 60-70%. We are not interested in consolidating, otherwise we will lose business,” says Tanti. “To maintain share-holder and customer confidence, we have retained Hansen’s management. There is no change in reporting line or controlling line. It will continue to be (in) a buyer-seller relationship with Hansen.”