PremiumIntegration of Suzlon and Repower is required for our growth strategy
Chairman and managing director of the world’s fifth largest windmill maker Suzlon Energy LtdTulsi R. Tanti, 50, is confident he’s finally got a tailwind behind him.
Last week, on 1 September, Tanti struck a deal to buy Portuguese construction company Martifer Group’s 22% stake in Repower Systems AG, the last step to complete his acquisition of that company, giving Suzlon a 90% holding and access to the German wind turbine maker’s technology which it needs, some analysts say, to increase the quality of its own turbines that have suffered quality problems in both India and the US.
You have a whole year left to acquire Martifer’s stake in Repower. Why did you buy them out now, when you had a choice to close the deal next year?
At the time of the Repower acquisition last year, we had a two-year time slot. There was some uncertainty regarding Areva (the French nuclear energy company that was in the race for Repower too). Areva had an option to sell their stake to us after one year. They also had the option to continue as a Repower stakeholder. We were clueless about when they would decide. Fortunately for us, Areva’s management was not interested in continuing as a stakeholder in Repower. They offered to sell when the specified one-year time frame ended.
As the Areva uncertainty got over, we decided to complete the buyout of Martifer’s stake. The opportunity and benefit for us is that now we have an early integration at the company level as well as at the group level. As per German laws, we had gone for a domination agreement. For a domination agreement, a minimum stake of 75% stake is mandatory...
That’s very different from what you have done with Hansen Transmissions (the Belgian gearbox maker that Suzlon acquired before Repower)?
Hansen Transmissions (International NV) is in a different business. They make gearboxes for wind turbines. Hansen is an independent company listed on the London Stock Exchange and integration with it is not required. We are running it at arms-length basis. They are key suppliers to Suzlon and Repower.
Hansen being an independent company gives huge comfort to other customers, including leading wind turbine makers like Vestas (Wind Systems AS) and Gamesa (Corporacion Technologica SA)
In the case of Repower, we are both in the wind turbine business. So integration is required for our growth strategy.
How do you plan to go about the integration?
Repower is just a turbine manufacturer. Suzlon has competencies in component technologies and manufacturing of towers, rotor blades, control panels... So we can integrate seamlessly. The key is to integrate these strengths as it gives the market a reliable and cost-competitive product in the market.
The normal business model in this industry is turbine technology and assembly. They (companies) then outsource the components required for the wind turbines. They don’t have access to the component technology. The real technology part is in the components. So if you own the two technologies, and integrate the two, then you have the most competitive product, which is reliable and next generation. If we have component knowledge and component technology then we have a fully vertically integrated company in the wind turbine value chain. We want to integrate the whole value chain that will benefit Repower. They are getting access to Suzlon’s components and they are getting an opportunity to grow because their base is lower. To grow the supply chain is the key bottleneck in the industry. The supply of the component is available with Suzlon. And that can give huge growth opportunity for Repower and they can improve their margins. Because Repower has low margins.
How much?
They have about 4-6%.
And Suzlon’s?
Our margins are nearly 10-12%. .
How exactly do you see their margins improving from 4-6%?
In the next three years, I think their margins can grow from 4% to 12%. Last year, Repower had 4%, this year they will achieve 6% and going forward it will improve further. Margins have a true leverage. That is, if you are increasing the volumes then you are recovering and leveraging the fixed cost. Secondly, (they depend on) the availability of low cost components.
Repower’s costs to materials alone is 82%, whereas Suzlon’s material costs are pegged at about 65%, which is a sizeable difference. This is because Suzlon is fully integrated unlike Repower which only makes turbines.
Another is our combined product range. The lowest we have is 600 kilowatt machines and highest that we (Repower) have is 6 megawatt and thus we have the full range of turbines, after integration. So we have a product for any part of the world. Repower’s 5 MW and 6 MW wind turbines are offshore turbines. Thus the group has a complete range of wind turbines for different geographies.
Suzlon has 2.1 MW and Repower has 2 MW (turbines); 2 MW turbines are possible for mature grids such as Germany , England. For erratic grids in India and China, the 2.1 MW works fine. Thus different turbines work on a different philosophy. Repower is very strong in markets like England, France and Germany.
Your competition — companies such as Vestas, Gamesa and GE — is also expanding.
It is very difficult for them to have the complete range. Either they don’t have the smaller turbines or they dont have the 5MW-6MW range. Nobody has it in the world. The 6MW Repower turbines are the biggest to be made in the wind energy space. And offshore is the fastest growing market in Europe. The constraint for Repower in the offshore turbine business is that they require gearbox and components.
Hansen will supply the gearboxes and we will supply the rotor blades to Repower. We know how to expand the component production base because we have the skills to do so. Global supply chain for components for the next three years has been completely sold out. The bottleneck in the industry is in the supply chain for components. That’s the constraint. If any company gets more components then they can supply more turbines.
So how will Repower benefit if Hansen is fully booked?
Hansen is fully booked for three to four years. But they have the capacity for Repower. Repower and Suzlon have booked the capacity. Repower is going to manufacture the world’s largest wind turbine, the 6MW one with Hansen gearboxes.
There have been reports that you’ve approached Repower previously for a licensing arrangement for technology...
That was all market speculation. We never talked like that. The speculation was that Suzlon doesn’t have access to technology. We don’t need anything. Suzlon has specific products designed for a specific market. Suzlon is selling in India, China and the U.S. Repower operates in a mature market ( Europe) and in the offshore market (turbines installed in the Ocean).(But) if you are buying a company, then that comes with the technology. It cannot be separate. What I realized is that the company’s size is small. They were running with high material cost and it has a small value. I am investing money in them. If I am able to expand the business which they were not able to expand independently...
Walk us through Repower’s capacity expansion
Last year they did 600 MW. This year they did 1100 MW, almost 80% growth after our acquisition. If it was without our acquisition, the growth would have been normal.
When they buy the components, the costs are high.
Why is that?
Because they are late in the procurement. And now they are getting from Suzlon’s supply chain. Suzlon will get the benefit of scale in the component area. They will now get components at low cost. The immediate benefit for the group is revenue growth and improving margins.
Have the markets recognized this?
Repower’s price is about €200 (a share). When we acquired it at €150, it was high then because of the bidding process. So it is a huge benefit for Repower and their shareholders. But now we are the majority shareholders.
The change in Repower is because we have been the catalyst for their growth. That’s the benefit and we are not looking at only their technology.
If anybody wants technology they can go to any turbine manufacturing company in Germany and discuss with them and buy the technology. The buyers have to pay only €1-2 million. They get the technology.
But not the technology that Repower has
No no. Repower has licensed technology to so many Chinese companies.
Have they done that for their offshore turbine technology?
No, only for onshore turbines. Because offshore is a small market currently and it has great potential in the future.
You say Repower has provided technology for Chinese companies? What about Essar? They had a technology tie-up with Repower before you acquired a stake in the German company.
They (Essar) had a license agreement. Certain stipulations and a timeframe were mentioned in the agreement. It was not completed within that timeframe. They (Essar) have not executed certain things as per timeframe. There’s no progress.
Are you saying that the Repower-Essar agreement has lapsed?
They have missed the time table so now nothing is possible.
Are you ready to tackle the people issues involved in integrating a business like Repower?
This is a cultural issue. It is a different way of thinking. There business strategy is also different. People from Asia are more aggressive and set high growth targets for their companies because they have grown up in that environment. Whereas Europe is low growth and focus more on sustainable development because they are running with thin margins and low volumes. And Asia is running with high volumes and good margins. So they are not worried about the risk part.
To manage people is a key competency. It is very difficult to manage people from two different geographies, so initially there is a problem. The problem is to understand them if you are communicating and ensure that we understand each other. We have not faced any problem with Hansen and Repower. We had expected some concerns on that count but we are fortunate that such issues never crept up.
But a lot of employees from your international operations have resigned?
That is not because we acquired their companies. We have not lost any people on that count. The CEO of Suzlon decided to go to some other industry. But we have hired Toine van Megen. He is from (the) Netherlands, but living in India for more than 25 years.
The bigger issue seems to be quality — cracks in blades of turbines you sold in the US. Has this been addressed?
Already in Q4 of the last financial year, we had acqnowledged this. We have identified the problem . The stiffness of the rotor blades was not enough. And now at that time we decided to go in for a retrofit programme. We have provided $30 million in this financial year and decided to laminate the blades.
There are also concerns about the performance of your equipment in India.
In India our customers are not utility companies. They are essentially small and mid cap companies (companies with low or medium market capitalization). Individuals also invest. Abroad, the wind energy projects are large in size and are mostly run by utilities. Here it is a captive investment. Here there are lot of factors including the turbine, the grid and the wind velocity that involves the performance of the turbine. If the turbine is running, but the government grid is shut, then the turbine cannot generate electricity. There are days when the grid and the turbines function but the wind velocity is not there. Then also turbines cannot run. Do you know that last year wind (speed) was 20% lower in India?
Why is that?
Because of the wind patterns. It is not that every year the wind patterns will be constant. Why is rain one year lower and one year good? It is nature.
This investment (wind turbines) is for 20 years . It is not for 1 year. So if you take 10-year wind average, then it is good.
Coming back to Repower, how soon will you get the domination agreement done?
It doesn’t have a timeframe. The German court will decide. Normally it takes 4 months to 12 months.
Will you buy out the minority shareholders?
No. We have not offered to buyout. They will continue. Domination agreement will protect the shareholders. The court will decide. The minorirty shareholders have two choices. If they want to sell, then we will buy at the price fixed by the german market regulators. That’s our commitment. The seecond choice that normally is given in such cases is that the minority shareholders have a choice of a fixed dividend decided by the court, irrespective of company’s financial performance.
Are you going to raise debt or sell equity? Either in Suzlon or in Repower to fund your acquisition?
It was arranged in the very beginning . If anyone wants to go for an acquisition in the German market, first he has to deposit the money or their bank gives a guarantee to Baffin, the German market regulator. The commitment was given earlier. Otherwise we would not be allowed to make the acquisition. At that time, we arranged the full debt. We have done subsequently an FCCB (foreign currency convertible bond) issue of $500 million and later a QIP (qualified institutional placement where money is raised from banks and other financial institutions) of $500 million. So we have in place funds raised through three routes: debt , FCCB and QIP.
You have been quoted as saying Suzlon is not an engineering company but a financial engineering company.
We are a financial value creating company. We did two transactions. One being Hansen Transmissions for €371 million. Within 18 months we listed it on London Stock Exchange with robust growth plans for the gearbox maker. We raised €440 million from the market by offering a 27% stake. Today the market capitalization of the company is €3 billion. So we created this value for Suzlon shareolders. At the same time, gearbox is the main bottleneck in the industry (in terms of supply), so we have expanded capacity. We have made it available for the Repower and Suzlon, so that is another set of value creation.
In Repower, we acquired 34% stake. After one year, we acquired Areva stake and now 18 months later, we are buying Martifer stake in three instalments.
And the growth in Repower has started. The profit is much more. Earnings before interest and taxes was €27 million. This year it is €60 million. And our investment was only 34%. When we acquired Repower shares were at €150, today it is €210 in the market. The financial world has acknowledged our two well-structured deals.
You have about 64% in Suzlon and 90% in Repower. Do you have any plans to dilute equity and bring down debt costs?
Our financial team will look at it and decide at the appropriate time. Currently, markets are not in a favourable condition. So debt is a better option.
What is the total debt in your group?
It is about 1:1 (in terms of) debt-to-equity ratio.
Vestas, Winwind and recently even the R-ADA group have evinced interest in entering the Indian wind energy market.
India has a great opportunity. India is running short of 16,000 MW. We don’t have energy security. So India needs 4-5 Suzlons.
Do you have any plans to enter other renewable energy sectors?
The group is highly focused on renewables. We want to produce more and more wind power and expand geographically. The next three years we will continue our focus on wind and also begin focusing on solar energy as we can leverage on the infrastructure. Currently we are focussing on technology solutions for combining solar and wind energy offerings. It will be a good combination because the same area will be utilized, and will require a common infrastructure and maintenance support. Offering solar solutions independently is a very expensive proposition for the customer.
