Home >Market >Mark-to-market >For Suzlon, Senvion a good riddance

Suzlon Energy Ltd’s shares have risen by 14.5% since Bloomberg reported on 7 January that the wind turbine maker is in talks to sell its wholly owned subsidiary, Senvion SE. It’s understandable why investors are breathing a tad easier after the company announced the sale at a valuation of €1 billion.

While it’s true that Senvion, earlier known as REpower Systems AG, was Suzlon’s best performing asset, it was also the chief reason behind its unmanageable debt. So, while some may see the exit as a distress sale, perhaps forced by the company’s creditors, it is, in fact, good riddance.

If anything, the company should have sold its stake earlier. Share prices of competitors Gamesa Corporacion Tecnologica SA and Vestas Wind Systems have declined by about 20% compared with mid-last year, and worse still, the rupee has depreciated by about 12% during the same period. In effect, Suzlon has faced a double whammy as far as rupee valuations for the Senvion asset go. This is important because the main intent of the sale is to bring back part of the proceeds to repay rupee-denominated debt. Part of the proceeds has to necessarily be used to pare overseas debt.

Besides, while the company tarried on this asset sale, competitors have taken advantage of the company’s poor financial condition to gain market share in India. In the past two years, Gamesa has been the number one firm in the country. This represents a huge fall for Suzlon, which for years had a big lead in the wind energy market.

Suzlon’s founder Tulsi Tanti had been so enamoured with Senvion that the company wasted precious time exploring other fund-raising options. News reports from last year suggested a bond issuance by Senvion and even a public issue, the proceeds of which would help the company pare debt. But with such measures, Suzlon would have, at best, managed only a dent on its total debt of around 17,000 crore.

Now, according to the company, rupee debt ( 8,900 crore on 30 September) will be reduced by 6,000 crore, leading to a halving of overall interest costs. The reduced debt will free credit lines with banks, which will help the company grow its business in India and emerging markets. This makes far more sense for the company, especially with its better grip on the domestic market.

The new central government had last year reinstated the benefit of accelerated depreciation and generation-based incentives, which has helped generate some additional demand. The industry has been asking for more measures such as tax-free bonds, saying the main challenge before it is financing.

With the new government favourably disposed towards renewable energy producers, it won’t be entirely surprising if something on these lines gets passed during the annual budget presentation. With its pared debt, Suzlon will be much better placed to tap the increased demand that could come as a result.

Even so, it must be noted that the company will still be left with a substantial amount of debt, even if a large number of foreign currency convertible bond holders decide to convert their holdings into equity shares. And excluding Senvion, the company has been bleeding at the operating profit level as well as in cash generation. Therefore, unless there is a substantial pick-up in volumes, the company could struggle to service its remaining debt.

It’s little wonder that the company’s equity investors are only a little relieved—the company’s shares are still languishing at 16.05, nearly 99% lower than its value at the time of the REpower acquisition.

In rupee terms, Suzlon has managed to pretty much recover its investment in REpower. The total cost of its investment was between €1.4 billion and €1.5 billion, and while the sale price has been far lower in euro terms, it must be noted that the rupee has depreciated by 32% since the time of the acquisition. As a result, the company ended up losing less than 10% in rupee terms.

But as is evident in the company’s share price, REpower and the company’s other acquisition activity has caused far more collateral damage—in the form of increased debt, to the point where the company even defaulted on obligations.

The author has no positions in the stocks of companies mentioned above.

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