30 DEC, 2010

Suzlon revival in sight but needs lot more cash just to survive

When it was his time, Tulsi Tanti had the audacity to make offers the others couldn’t
refuse. Offer 1: 2005, Hansen Transmissions, the Belgian maker of gearboxes for
wind-energy equipment. Barely six months after he acquired Hansen, Thomas
Putter, CEO of Allianz Capital , had an unexpected visitor.

It was Tanti, founder-chairman of Suzlon Energy , and he wanted to buy Hansen.

Putter refused, saying he wanted to add value to Hansen for at least three years.
“Quote me the price you want after three years,” Tanti said. Eighteen months later,
in mid-2006, Tanti bought Hansen for 435 million euros.

Offer 2: May 2007, REpower Systems, the German maker of wind turbines. After a
five-month bidding war with French company Areva, Suzlon bought REpower for
1.32 billion euros. It meant borrowing a lot more, but Tanti didn’t mind. He believed
loans and intelligence (Suz in Gujarati) would grow Suzlon. Bolstered by cash and a
business that was going places, it was his time.

Not anymore. Instead of making offers others can’t refuse, Tanti, 53, needs others
to make him offers he can’t refuse. He’s too proud and too full of bravado to
concede he is not dictating terms the way he once did.

“We are well positioned,” says Tanti, sitting in his spacious room in Suzlon’s Pune
headquarters, which sprawls across 10 acres and is powered entirely by wind
energy. But that posturing doesn’t conceal the pithy truth: Tanti needs cash, stacks
of it. For years to come. For survival.

Although the acquisitions made Suzlon Asia’s largest and the world’s third largest
wind-energy equipment company, it also loaded it with a debt of about Rs 14,870
crore. Tanti had planned to repay it by selling equity and by using cash from the
business. Except, as the credit crisis unravelled in late-2008, the stock market nose-
dived and business slumped. It pushed Suzlon to the brink of defaulting on its loan
repayments.

This forced Suzlon’s lenders to come together and rework its debt. They made it
cheaper and gave Suzlon a moratorium on principal repayments till March 2012.
That fixed the bleeding.

Now, the healing needs to start — Suzlon needs to go back to earning more cash
than it is paying out. Starting March 2012, 15 months on, it will need to repay Rs
250 crore in year one, Rs 400 crore in year two, Rs 800 crore in year three, and so
on.
It’s nowhere close to that. At its prime, in 2007-08, Suzlon earned a net profit of Rs
1,256 crore. Since then, though, it has slipped into losses: Rs 1,078 crore in 2009-10
and Rs 1,247 crore in the first half of 2010-11. “It does not look as if Suzlon will
generate the required cash flow,” says SP Tulsian, a stock analyst in Mumbai.
“It may end up as another Ispat,” he adds, drawing parallels with Ispat Industries ,
whose promoters, Pramod Mittal and Vinod Mittal, were on the verge of defaulting
to lenders and ended up selling the company to JSW Steel .

Unlike the Mittal brothers, though, Suzlon and Tanti have three more options to
raise cash. Tanti controls 58% of Suzlon, which is worth Rs 5,250 crore today.

Tanti can dilute that stake, but he would not like to reduce his hold on the company.
He is more amenable to selling Suzlon’s 26% in Hansen, but the current $150
million valuation is half of what it was six months ago and Tanti will wait for a better
price.

What Tanti would like to do, but cannot at this point in time, is leverage the 91% Suzlon holds in
REpower to benefit the Indian company. “REpower is the jewel in my crown,” says Tanti.

It’s a jewel he can admire, not adorn. Much as he would like to use REpower’s cash flows — it
posted a Rs 195 crore cash profit in the first half of 2010-11 — to retire Suzlon’s debts, he
cannot.

Ironically, it is the lack of cash that prevents Tanti from using REpower’s cash flows. Under
German laws, for that to happen, Suzlon needs to own 100% of REpower. The remaining 9% is
expected to cost Suzlon $150 million, which it can’t spare at the moment. However, says Tanti:
“It (buying the 9%) is top priority. We will do it in the next 12-18 months.”

There was a time when raising $150 million was a day’s work for Suzlon. It was quite a come
down for Tanti, who had the foresight to enter the wind-energy equipment business in 1995.

He was aggressive and street-smart, and was not averse to making acquisitions. By 2004-05,
Tanti realised India wasn’t large enough to satiate his growth aspirations. He went out, and
bought Hansen and REpower. He was on a roll.

Suzlon could do little wrong till the 2008 credit crisis, dubbed as the worst ever in the history of
global finance. Orders of wind-energy equipment from US and Europe, its main markets,
evaporated. Power companies, the main buyers of wind-energy equipment, could not tap bank
loans to fund wind turbines.

In the second half of fiscal 2009 (September 2008 to March 2009), 7,250 MW of wind-energy
capacity came up in the world — 70% below the first-half figure. “Suzlon saw a similar dip,”
says Robin Banerjee, chief financial officer, Suzlon. “In October 2008, we thought normalcy
would return in three to four months,” he says. By March, when orders had all but dried up, “we
realised it might continue for a longish period.”

Even before the credit crisis set in, 2008 was a tumultuous year for Suzlon. In January, its
customers in the US reported that Suzlon’s turbine blades could not support the extra weight of
ice on them and cracked; they also failed to deliver the power output stated in the sales contract.
Orders were cancelled or held back.

It was a fallout of Tanti’s obsession with growth, says an industry official who is clued into
Suzlon’s inner workings. “He (Tanti) overlooked product quality because his sole focus was
expansion,” he says. Suzlon spent $100 million fixing the problem.

“We have retrofitted all 1,150 blades that reported complaints,” says Girish Tanti, executive
director of Suzlon, who is also Tulsi’s brother and right-hand man. Banerjee says it’s not an issue
anymore. “Toyota recalled 8 million cars because of a braking system fault,” says Banerjee.
“That does not mean people won’t buy Toyota cars.”

The same year, group CEO Andre Horbach and group CFO Patrick Krahenbuhl left within
weeks of each other, raising questions on Tanti’s willingness to delegate and ability to build a
global business. “Horbach left because he did not have autonomy,” says the official. “Suzlon is a
glaring example of a native, aggressive entrepreneur getting trapped in his vaulting ambition.”

Tanti defends such criticism. “I run a business in 25 countries,” he says. “How can we operate
without a proper system?” Since those exits, Tanti has decentralised management. Each country
has a management team, which operates like a special business unit. REpower and Hansen have
their own management.

Besides the demand slump and internal issues, what made it worse for Suzlon during the credit
crisis was the $1 billion short-term loan it had taken, mainly to fund its REpower buy. Tanti’s
plan was to do what he did with Hansen in 2006, when he raised 450 million euros through an
overseas equity issue to retire the short-term loan used to fund that purchase.

In a good market, he would have. But the market tanked. Suzlon’s share price fell from a high of
Rs 464 in January 2008 (adjusted for a stock split) to Rs 33 in March 2009 — a drop of 93%.
And liquidity in the market vanished, taking along institutional buyers who could have bought
Suzlon stock.

In a little over 15 months, when the blade issue arose, it had all come undone for Suzlon: there
was little demand for its products, its pricey acquisitions simply sat there, and it was hurtling
towards a debt trap. Suzlon’s debt had ballooned from Rs 5,160 crore in 2006-07 to Rs 14,870
crore in 2008-09.

When the crisis was its worst, the business wasn’t generating enough cash to service that debt.
Tanti even had to sell some personal shares to extend a Rs 1,200 crore loan to the company he
owned and ran.

With neither the stock market nor the business outlook showing a dramatic improvement, the
fire-fighting began. Among the corrective measures, the most important was refinancing
Suzlon’s debt, keeping in mind its new business dynamics. The debt-restructuring exercise took
six months, involved 24 banks and was coordinated by four financial advisors, led by SBI Caps.

One of the four advisors was Money Matters, the financial intermediary that is implicated for
bribing bank officials to facilitate loans for its clients. Rajesh Sharma, its chairman, reportedly
told investigating authorities it had paid Rs 30 lakh to a Central Bank of India director to get
approval on Suzlon’s refinancing.

“Our relationship with Money Matters was above board,” says CFO Banerjee. “We had a
contract with them, based on which we paid them. We have nothing to do with what the
company did with that money.”

Under the new agreement, finalised in May 2010, the lenders replaced Suzlon’s previous debt of
Rs 9,500 crore with a new loan of Rs 11,000 crore. They gave a two-year breather on principal
repayment. They freed Suzlon of the Rs 3,000 crore foreign-currency loan, by replacing it with a
rupee loan from SBI; Suzlon had repaid part of it by selling 36% in Hansen.

This was crucial because it freed Suzlon from the strict conditions imposed by foreign lenders.
For example, its debt was capped at four times its EBIDTA (earnings before interest,
depreciation, taxes and amortisation). Based on its 2007-08 numbers — its last good year — that
would have been Rs 8,200 crore.

Now, its debt has been delinked from earnings, and capped at Rs 20,000 crore. It now has a
minimum net worth requirement, of Rs 6,000 crore; its current net worth is Rs 11,000 crore. “We
will trigger none of these,” says Banerjee.

Suzlon is back from the brink, but it is yet to turn around, says a banker involved in
the refinancing. “We need volumes to fly,” says Tanti. “It’s got a breather,” says
Sumant Sinha, who was the COO of Suzlon when it refinanced its loan and is now
the chairman of Savant Advisors, a financial advisory firm.

In the first half of 2010-11 (March-September), Suzlon posted a net loss of Rs 1,282
crore. Its cash loss - depreciation added to net profit, which yields the figure
available with a company to repay debt — for the same period stood at Rs 1,018
crore.

Typically, March-September is a lean period for wind-energy equipment companies.

Business picks up in the second half. A senior company official says Suzlon might
break even by March 2011. It is banking on a turbine, due to be launched in a few
months, that generates power even from low-wind speeds. About 65% of the earth
is a low-wind area.

The wind-energy industry has been seeing a geographical shift, from developed to
emerging countries, where Suzlon is strong in, especially China . Also underway is a
structural shift, from onshore to a combination of onshore and offshore; REpower
gives Suzlon more strength in the offshore segment.

Global demand, however, is expected to come back to 35,000 MW — the 2007-08

number — only in 2012-13. In the first half of 2010, it was 10,800 MW and is
expected to be 17,000 MW in the second half.

As Suzlon waits on demand, it is attacking costs. The Boston Consulting Group

( BCG )) is helping it improve its business processes, and has reduced its working
capital by Rs 1,000 crore to Rs 4,000 crore. Tanti, along with brother Girish, are
foregoing their salary this year — last year, the two earned Rs 2 crore.

It improved its debt-equity ratio from 2 in March 2010 to 1.4 in September 2010 by
converting the Rs 1,200 crore personal loan from Tanti into equity. Ultimately, it
comes down to Suzlon selling more wind turbines profitably, generating cash to
repay lenders, and put wind in its sails.

This might be Tanti’s last shot. “If it defaults, lenders may look to induct a strategic
partner,” says Tulsian. That might mean Tanti giving up management control at the
company he built into one of India’s largest and most valued. Tanti debuted as an
entrepreneur at the age of 18, when he sold water from his family’s tubewell to
cash in on a water crisis in Rajkot. If every drop counted then, every penny will
count now.