4 years since Senvion sale, turnaround continues to elude Suzlon

Shares of Suzlon Energy Ltd gained 3.8% last week after the Economic Times reported that the company is in talks to sell stake in its services unit to pare debt. The company also said it has won a 50.4 megawatt (MW) order. It is part of the pipeline of orders Suzlon indicated earlier. With this, Suzlon’s order backlog rises by 4.8% to 1,107MW. Even so, it has to be seen how much of a relief it can bring.

Recent gains notwithstanding, the stock is still at its historic lows. It slumped after the company’s losses widened sharply in September quarter. A prolonged slowdown in the domestic wind industry that hit sales volume was the factor behind the wider loss. Business is expected to rebound this year. But auction delays and continuing infrastructure constraints show industry volumes aren’t seeing any major recovery.

This became apparent after Suzlon withdrew its 44% revenue growth guidance for FY19 after just one quarter. Industry commissioning volume estimates have also been cut drastically from 4,500MW at the start of the financial year to 3,000MW at the end of Q1, to a 2,000MW estimate last month.

The latest estimate do not indicate a major rebound from FY18, when industry volumes were hit by the transition to auction-based capacity additions. Commissioning volumes in FY18 stood at 1,766MW, down from 5,502MW in FY17. The sharp fall hit the whole industry. But the impact is more pronounced on Suzlon as the company’s earnings fell below the threshold levels for the first time after the sale of its overseas turbine manufacturing unit Senvion SA. Operating earnings (Ebitda) fell short of finance costs in FY18 pulling the company into losses for the first time after Senvion sale. The situation worsened in the first half of the current fiscal. As volumes dropped sharply, earnings fell far short of the company’s finance costs.

The deterioration in financial situation is disconcerting. The company attempted a new beginning in 2015 when it sold Senvion for ₹ 7,000 crore and raised a fresh equity of ₹ 1,800 crore. The funds lowered debt and eased liquidity situation. This helped it gain market share in India.

As India’s thrust on renewable energy drove volumes, the company turned profitable in FY16 and FY17. The situation is back to square one now. With core earnings falling sharply, debt is increasingly looking unmanageable. As of September, Suzlon has gross debt of ₹ 11,900 crore. Worse, rising working capital requirement and adverse foreign currency fluctuations means the gross debt numbers are climbing.

The company expects volumes to rebound next financial year (FY20). But many expect only a gradual recovery. Demand from private sector remains sluggish and states, the large buyers of electricity, are yet to come back to the market in a major way.

Proceeds from the likely sale of stake in its services unit can help reduce debt. But such a sale will also take away a more steady commensurate revenue stream from Suzlon, intertwining the company’s fortunes even more closely to the capacity additions trajectory in India.