Wind power firm Suzlon Energy Ltd has got a reprieve on the funding front, with the Martifer group agreeing to a staggered payment schedule for its 22.4% stake in REpower Systems AG. The Indian firm now needs to pay Martifer only €65 million (Rs426.4 crore) this month and the balance payment of €205 million has to be made in April and May.
The company had announced in early September that it would make the entire payment of €270 million in December. The assumption then was that the funds would be raised through the debt route. But then the global credit crunch intensified and Suzlon announced its backup plan of a rights issue. The subsequent crash in its stock price meant that this plan too had to be scrapped, leaving the firm with hardly any funding options. Martifer’s agreement to the staggered payment schedule means that Suzlon can breathe easy for a few months at least.
Meanwhile rumours that Suzlon had defaulted on a loan repayment sent its stock to as low as Rs36.20. According to a report by Merrill Lynch and Co. earlier this month, the Suzlon management confirmed that the firm has honoured its debt repayment commitments in time. As a result, the Suzlon stock has jumped by 60% from its lows and now trades at Rs58. The new agreement with Martifer was also cheered by the markets, with the stock rising by 6.5% on Tuesday.
But Suzlon’s funding troubles are not over. Apart from loan repayments related to overseas acquisitions, it has planned capex worth Rs974 crore in the second half of this fiscal and Rs220 crore in the first half of the next. It is also generating additional cash by reducing inventories and thus improving working capital management. Analysts believe the slowdown will enable the firm to bring down inventories considerably. The flip side is that the slowdown will lead to lower operational cash flow.
But if it resorts to further debt, there is a possibility it would breach some debt covenants it has with banks. In fact, such potential breach is one of the reasons Citigroup Investment Research raised its risk rating on the stock from medium to high.
Worse, the quality issues Suzlon has had have not only dented its profitability because of retrofit charges and damages sought by clients, but also affected its order book. Operational issues and funding constraints could well prove to be a double whammy of sorts for Suzlon.
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