On a day the markets rose by 3%, shares of Suzlon Energy Ltd fell by about 5% to Rs55.65. Earlier in the year, the Suzlon stock would have been among the top gainers in such a rally, which saw stocks such as Unitech Ltd and DLF Ltd rise the most. But short-term traders, who drove the stock from its lows of Rs33 in early March to Rs137 in just three months’ time, have lost patience with the company. Suzlon has disappointed the street for two successive quarters and the outlook remains bleak.
While the company’s performance in the September quarter improved compared with the June quarter, it still ran monumental losses of Rs335 crore at the net level, excluding losses on account of forex fluctuations. Losses stood at Rs435 crore in the June quarter. Suzlon’s core wind turbine business has suffered because of the double whammy of a slowdown of demand and a surge in its capacity. So while revenue is much lower, costs have ballooned, leading to an under-absorption of fixed costs.
The company has a gross debt of Rs13,477 crore and much of this involves covenants with lenders, including a target operating profit. The company is likely to have breached some covenants because of its lacklustre performance in the past two quarters. Besides, it is also facing the pressure of redeeming debt that will mature this year and raise additional funds for operational requirements. The company has admitted to operational cash flow shortfalls, which it has so far met through periodic fund-raising. But such an existence has its risks and the company’s large debt position has also hampered its ability to get fresh business from customers.
In order to get out of this vortex of debt, the company has initiated a debt refinancing scheme, which aims to lengthen the maturity of immediately payable debt into longer maturities and create additional lines for operational requirements. For instance, the company is aiming for a two-year holiday on repayments. While it’ll be a big positive if it achieves this, one must also note that its final debt position may end up being much higher after accounting for penalties, etc. As one analyst puts it, “It’ll just amount to a postponement of the problem. The company still needs to sell its stake in Hansen Transmissions International NV to raise cash and retire debt.” After all, at the current high debt levels, new order inflows will be affected. For the past many months, new order inflow has stagnated in the company’s largest market, the US.
So even while sales are expected to pick up in the second half of this year as execution of the existing order book picks up, there are no signs of new order inflow rising. If anything, the Suzlon story is one for the long-term investor. One could argue that there’s value in the stock after its correction of 60% from its highs in June, but where are the takers? According to the analyst, and unfortunately for the stock, most long-term investors have exited months ago. And as far as short-term investors go, they would need hard evidence of an improvement in the company’s fortunes before entering the stock again, and that’s not expected to happen soon.
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