Mumbai: Suzlon Energy Ltd’s default on bond payments worth $172 million this week did not come as a major surprise. The company has been struggling to meet its debt covenants for some time, which was also reflected in its credit ratings.
In early April, Care Ratings downgraded Suzlon’s financial instruments and banking facilities to ‘default’ rating, citing delays in repayments. The company began missing payment obligations after a steep fall in volumes began eroding its revenues and earnings.
From an operating profit of ₹2,499 crore in FY17, the company slipped into operating losses last fiscal, as volumes fell sharply to 496 megawatt (MW). In FY17, it had garnered volumes of 1,573 MW, three times the level in FY19.
The shift to auction-based capacity additions and the resultant disruption to the market caught all stakeholders, including Suzlon, off-guard. As a result of the change, wind capacity additions in India dropped to multi-year low of 1,523 MW last fiscal. In FY17, wind capacity additions had stood at as high as 5,500 MW.
The steep fall in tariffs in auctions led state governments to abandon power purchases through feed-in tariffs mechanism, a large source of business for Suzlon and other stakeholders. Under the earlier system of feed-in tariffs, states purchase power at pre-determined prices and these are remunerative for developers. The low tariffs in competitive bidding, on the other hand, crimped returns of all stakeholders. This stalled investments, impacting capacity additions.
Of course, the industry’s troubles aren’t alone responsible for Suzlon’s current situation. Its debt binge thanks to past missteps proved to too big a burden, and the company did not move in time on stake sales and asset monetization to reduce its debt burden.
Suzlon did sell its German subsidiary Senvion S.A. in 2015 and refocused its energies on the Indian market. But perhaps the sale was a tad late, as it had already lost leadership in the Indian market by then.
Helped by project awards by government entities over the past year, industry participants expect capacity addition to improve in the current fiscal. Ratings agency ICRA estimates the wind sector to add 3,500-4,000 MW in capacity in the current fiscal. But as seen in the last two years, execution is a key challenge. Land acquisition, grid connectivity and financial closure remains key hurdles.
Besides, the quantum of capacity additions and the pace of recovery is too slow for Suzlon’s comfort. The incremental volumes can bring Suzlon out of the operating losses. But it still has to find a way to bring down the debt. Creditors cannot perpetually wait for their payments. As of last fiscal, Suzlon has debt of ₹11,141 crore (net term debt and working capital debt).
Further, given the continued challenges of auction based system, it is imperative that the government revitalizes small scale capacity additions (less than 50 MW) with policy assurances on tariffs and power purchase agreements. The contracts can be revised periodically adjusting to the market rates. This will trigger the capacity addition cycle, providing much required push to equipment manufacturers and stakeholders at large.