What Suzlon’s flip-flop on growth guidance tells us about wind sector
Apart from the challenges to capacity addition in the near term, there will also be ramifications for Suzlon Energy, Inox Wind and other unlisted wind power firms
Wind power provider Suzlon Energy Ltd’s decision to withdraw the annual growth guidance barely three months into the fiscal year triggered a sell-off in its stock on Monday. In May, Suzlon predicted 45-56% revenue growth for the current fiscal year on the basis of its order book and execution capabilities. However, it recently withdrew the growth guidance citing approval delays, prolonged execution cycles and bid deferrals. The management further said that clarity will emerge only in the third quarter of FY19 as it expects the industry to adjust to the new execution timelines and return to growth in FY20.
However, the announcement should not be a deal breaker for investors, given that the renewable energy sector has been in the midst of a transition for about a year now following the change in rules in feed-in tariffs and auction-based capacity addition.
That said, Suzlon’s decision to withdraw its growth guidance on the back of weak financials in the June quarter and the cancellation of capacity addition tenders for wind power show that the transition to the auction-based regime is going to be far from smooth. Apart from the challenges to capacity addition in the near term, there will also be ramifications for equipment suppliers such as Suzlon, Inox Wind Ltd and other unlisted firms.
U.B. Reddy, managing director and chief executive of wind energy services provider Enerfra Services Pvt. Ltd, said the evacuation constraints are not unknown. Union government auctions are centred on the main grid of the country. But the grid does not have enough substation capacity at high-wind locations, posing an evacuation challenge. This is the primary reason why the recent Solar Energy Corp. of India Ltd’s 2,000 megawatts (MW) tender was undersubscribed, leading to its cancellation.
Experience shows that the grid infrastructure requires investments. This has an opportunity cost as cancellation of tenders will delay ordering for wind turbine equipment. This is happening at a time when the non-auction based capacity additions such as feed-in tariffs, captive-based additions (which were a substantial market two years back) have almost dried up.
Unless the regulations encourage smaller capacity additions (below 25MW) through feed-in tariffs and other means at the state level, it will be tough to reach the anticipated 8,000-10,000MW market per year, adds Enerfra Services’ Reddy.
For perspective, Suzlon estimates the industry to commission 3,000MW in FY19, down from its earlier projection of 4,500MW. As companies chase fewer orders, competition is intensifying among the equipment suppliers in the country.
But Indian companies may face more challenges given their large exposure to the domestic market, which is seeing pricing pressure. These concerns are weighing on the shares of Suzlon and Inox Wind.
- India’s rising steel demand is making companies starry-eyed
- ACC’s operating margins feel the stress as cost pressures grow
- Federal Bank rides out Kerala floods but growth metrics need to sustain
- RIL’s consumer businesses deliver on growth; investments stay high
- Hero MotoCorp Q2: Costs apply brakes on profit growth