It’s well known that Suzlon Energy Ltd had had a rough time in the year till March. Even so, the results for the last fiscal year were worse than expected. Consolidated net profit, adjusted for the impact of forex variations on the company’s overseas convertible bonds liability, fell by 64% to Rs368 crore in the full-year period and as much as 98% to Rs12 crore in the quarter ended March.
Analysts are surprised at the sharp rise in “other operating expenses” last year. Expenses under this head grew by 154% to Rs4,268 crore, even while volumes grew by only about 20%. The company’s presentation to analysts explains that retrofit, replacement and other performance-related compensation made to customers increased by Rs411 crore last year. Besides, there were substantial increases in certain heads such as consultancy charges related to its working capital reduction exercise, bank charges, performance guarantee provisions and damages related to delay in the supply of equipment/components. These expenses rose by Rs654 crore, but some of this is recurring in nature. Even if one were to assume that all of this is non-recurring, operating expenses doubled in the previous year. “Other operating expenses” are normally about 12% of revenues, but in the March quarter they rose to over 21% of sales. The company expects some savings on this count this year, but it will certainly be a while before expenses come back to the range of about 12% of sales.
While the company still managed to report a profit last year, the cash flow position reflects that this was possible partly because of stretching its working capital position. Net working capital rose by Rs4,193 crore, mainly owing to a jump in receivables and inventories, fully negating the cash profit of Rs3,748 crore. Making matters worse was the normal capital expenditure of Rs3,331 crore, which along with the jump in working capital necessitated massive borrowing last year.
Now, while the company has renegotiated its debt covenants and has somewhat more flexibility with its debt liabilities, it hardly has any buffer for any further shocks. Ahmed Raza Khan / Mint
The company ended the year with a net debt of Rs11,800 crore, which is more than four times its consolidated operating profit of about four times.
Now, while the company has renegotiated its debt covenants and has somewhat more flexibility with its debt liabilities, it hardly has any buffer for any further shocks. As the company pointed out in its conference call with analysts, the events of the last 12 months have taught it to be more cautious.
Besides, large customers now increasingly scrutinize the financial position of vendors, and it helps to have comfortable debt position. It’s not surprising then that the company is in the initial stages of disposing a part or its entire stake in Hansen Transmissions International NV. While this move would give it greater financial flexibility, in terms of operations, it could result in hindrances in the supply of a critical component.
Another challenge for Suzlon is that sales in its largest market, the US, have practically dried up since the second half of the previous year owing to difficulties in raising funding for new installations of wind energy products. Still, the major concerns about the firm’s ability to repay its debt obligations have now been pretty much set to rest and this is reflected in its share price movement in the past few months.
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