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Suzlon Rids Itself of REPower, But Its Still Overburdened

Suzlon has decided to sell that big thing it bought in the past: REPower. Now named Senvion, the German acquisition was the bane of Suzlon’s existence. After it bought REPower in 2008, it couldn’t get access to the underlying technology until it had bought out all minority shareholders, which happened only in 2012. And even then, it couldn’t use the Balance Sheet strength of the much larger German company because of German laws forbidding it.

This chapter may have finally seen an end.

Suzlon finally has sold Senvion to Centerbridge Partners, LP for a sum of 1 billion Euros or about Rs. 7500 cr.. This is way lower than the amount they spent to acquire it, which was 1.5 billion Euros. (Which, at the time, was Rs. 10,000 cr.

Centerbridge is a PE fund that buys distressed assets, it seems. While Senvion was doing well, the problem was that Suzlon wasn’t – it couldn’t service the debt it had taken to acquire Senvion apart from other bad acquisitions. Suzlon defaulted on $200 million of FCCB debt in 2012, and was on the verge of defaulting on another 13,000 cr.to Indian banks. After a tough Corporate Debt Restructuring program, the management and the promoter, Tusli Tanti, were told to please sell the darn thing.

The Modi-Factor? Return of AD

A surprise item in the budget was the reintroduction of accelerated depreciation in wind energy projects. This was strange – it first appeared only in the Hindi budget, not the English one. And then, the notification that brought it back (on Sep 16, 2014) was equally vague.  Basically an avenue to save tax, your investments in a windmill will see a 80% depreciation each year, so you can write off any profits from other sources in the early years; in exchange, your future taxes will be higher, so the net impact is to lose lesser.

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While this has been a call by Suzlon in the last few years, it’s reintroduction in the budget is being spoken about as Tanti’s proximity to the new Modi government.

Does This Deal Help?

Let’s see the Sep 30 Suzlon presentation:

image

They will get ride of Rs. 7200 cr. of the Rupee denominated debt. Which leaves them with :

  • 1700 cr. of rupee debt
  • $1.2 billion of Foreign debt which is around Rs. 7,300 cr. now at today’s rates

This is about Rs. 9,000 cr. of debt left inside Suzlon after this deal. Even at an average rate of 6%, that’s Rs. 540 cr. of interest they have to generate each year.

If you look at their revenues, Senvion was responsible for 848 million euros in H1. That’s about Rs. 6,100 cr.

Suzlon as a consolidated entity had Rs. 10,000 cr. in revenue in H1, so only Rs. 3,900 cr. came from the non-Senvion part of Suzlon (for H1).

Their EBIDTA (Earnings before Interest and other things), including Senvion, for H1 was just Rs. 190 cr. Double that for the full year, and you end up with Rs. 400 cr. – not enough to service even the leftover debt!

So:

  • If you take away Senvion, you have 9000 cr. of debt to service, which is about 540 cr. of interest a year.
  • If margins remain the same, Suzlon is likely to generate less than Rs. 400 cr. of profits before interest.
  • That’s not enough to pay interest costs.

Even if they did, they will need to service at least 10% more shares (recently FCCB dilution after conversion was 10%)

image

Is there hope? Can FCCBs be converted and the Debt reduced?

Let’s just say there are a lot of people in the market who think that Suzlon is darn attractive at the price of Rs. 16 because of this chart (apologies, one day old):

Suzlon

Let’s say they all buy Suzlon. Whose price goes up to, say, Rs. 25 again.

Then there are FCCB holders of $475 million (Rs. 2900 cr.) who are converted into shares at Rs. 15 (the conversion price). This is a dilution of 60%.

That means now debt is lower by about 1/3rd, so interest costs will reduce. But the profit will be spread over 60% more shareholders.

So yes, it could help, marginally. But only if the stock moves considerably upward from here, and then, if profitability also improved dramatically.

Our Note

We aren’t buying. Because there are cheaper, profit-making, non-FCCB-drowing, better prospects in the market.

We think that Suzlon has gone from “severely underwater” to just “underwater”. Their future growth – driven either by higher profit margins or substantially higher volumes – will determine their ability to breathe.

In an environment where oil is at $45 the global demand for wind based energy might be overshadowed by other forms. If anything, the growth has to come from India, and honestly, the volumes have to go to 3x to make this business seriously profitable.

People have done remarkable things in the past,so we aren’t writing Suzlon off. But this deal just lifts the weight off their shoulders. They will still need to recover substantially before they’re worth looking at, from an investment perspective.

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  • Sankar says:

    Good analysis Deepak. This whole purchase seems to be result of poor analysis. One would have expected a corporate entity spending a billion dollars to do proper and thorough due diligence. It is not like these laws were created retrospectively after the purchase.

  • Sanjeev Binaykia says:

    Tulsi Tanti needs to focus on actually selling windmills and wind-energy related services at an honest profit, instead of selling dreams and financial jugglery. I won’t buy Suzlon, simply because we’re still dealing with Mr Tanti, and old habits die hard.

  • Sid says:

    Hi Deepak,
    I always look forward to some well researched articles on your website, as against the crowd sourced gossip on most mainstream media. The following issues have been eating my mind, for a while, and though I have tried to find answers on my own, Im just a hobbyist in this line of work. Would be great if you could shed some light on them:
    1. Senvion
    Is senvion really a profit making entity? Ive looked through their previous earnings releases and they’re clearly showing losses on their balance sheet. Most articles talk of senvion as this super profitable business which is bogged down by Suzlon’s debt. Balance sheets tend to show otherwise, both Suzlon and Senvion have been making losses, however Senvion was contributing to a greater share of the revenue.
    2.FCCB Conversion
    It would interesting if you could do a detailed analysis of the FCCB restructuring, at what price point of the stock, is it financially profitable for a bondholder (who may have been in this for the long haul, since 2007 or earlier?) to press for equity conversion. Suzlon has been trading for well over Rs. 15.46 for a while now. Yet there hasn’t been a torrent of conversion, you could argue that there are other reasons for this, but I believe the current stock price isnt high enough for the bond holders to profit from conversion. Right now, I’m reading through the terms of the FCCB restructuring last May, but the document is quite cryptic for my understanding. Normally I understand that, the potential upside for an FCCB conversion is contractually limited. For example, if the stock price touches Rs.20, all the bonds will be forcefully converted to equity, to limit the upside of the bondholders. Is there such a clause in these bonds ?
    Sorry if my questions are too incisive or naive. But if you find the time to look through this, please do share your views, in public or private. ;). On a fundamental level, Suzlon might not be a solid buy, but armed with the answer to these questions, I believe there is scope for some good trading plays.
    Regards,
    Siddarth

    • Sid says:

      UPDATE:
      It appears that the forced conversion, is set at 150-175% of original conversion price, but only starting Jan 2016.
      But my question still remains, between now and Jan 2016, what stock price is likely to induce large scale conversion of bonds to equity.

  • Sumeet says:

    Hello Deepak,
    Believe you were speaking on CNBC TV18 today and one of the topics was Suzlon. I could not hear the interview but the summary being flashed on the screen was that Capital Mind is viewing the purchase of Suzlon by Dilip Shanghvi as a positive. It is seeing a fantastic run up as well and is up quite a bit between Monday and today. What are your views on this now?
    Also, an online article indicated that the 23% stake picked up by DSA would give a new lease of life to debt ridden Suzlon. My (dumb) query is whether these were new shares issued by the company to DSA and the money is received by the company or did the promoters sell portion of their stake and hence the money goes to them and not the company.
    Regards,
    SK

    • Yes, Shanghvi is a great guy to invest with and he wouldn’t buy into bad corp governance, so that’s the confidence.
      We think the stock still has to make a new 52 week high so while momentum is there, it’s not yet a big way in. Plus, would rather wait for the budget.
      On the rest, a separate post coming…