Suzlon Energy Ltd nearly doubled its operating profit in the December quarter, but the markets were far from pleased and the firm’s shares fell by 7.7% in a flat market. The company reported a consolidated loss after tax of Rs188 crore, but that was after accounting for a large deferred tax liability. Its consolidated earnings before interest, tax, depreciation and amortization (Ebitda) rose from Rs275 crore in the December quarter to Rs535 crore in the March quarter.
But even this is not sufficient for a company that needs to service a monumental debt. For the year as a whole, Suzlon reported an Ebitda (including other income) of Rs1,013 crore. Its interest costs in the same period were Rs1,195 crore. In other words, it doesn’t have enough interest cover. It has managed to get a moratorium for two years on its principal repayments from its banks, but just servicing its interest payments seems like a tall order.
It’s little wonder then that soon after its massive debt restructuring, the company is out to raise funds through a rights issue. According to an analyst with a foreign brokerage, the company would need to sell more of its stake in Hansen Transmissions International NV to improve its balance sheet. Its order intake has been poor in the past year and one major reason, according to this analyst, is the company’s huge debt position. International customers typically do a due diligence of vendors’ credit worthiness. In cases where there are concerns about too much debt, they choose not to give orders. After all, dealing with a wind turbine manufacturer such as Suzlon not only involves installation of the product but also regular maintenance.
Graphic: Yogesh Kumar/Mint
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To make matters worse, the entire market for renewable energy has become weak owing to lower gas prices and the European crisis. Price realizations have been falling, but the bigger problem is that orders aren’t being booked. Its order book position (excluding that of REpower Systems AG) has fallen from 1,484MW at the end of January to 1,126MW currently. This is before deducting sales between 1 April and 26 May, which means that the actual order book position is even lower.
In sum, Suzlon faces the mammoth task of generating sufficient cash under difficult circumstances to service its large debt. Its attempt to raise equity funds will, without doubt, lead to a large dilution, especially since its shares trade close to a 52-week low. But then, it has little choice but to pare down its debt position and bring down its interest burden.
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