<div>For a few years now, wind energy company Suzlon, and its chairman, Tulsi Tanti, have been struggling. A series of problems — a deflated global economy, cracked turbine blades, top-level exits and working capital issues — eroded most of the company’s value. Now, Tanti is trying to get the company back up and running. <br /><br />Suzlon Energy started as a captive power plant for a textile unit in 1995. By 1999-2000, Tanti moved entirely to wind energy. Within a few years, he had orders from the US; and was foraying into newer markets. Suzlon became one of the largest wind energy players, with 90 per cent sales in the lucrative and under-served Indian market. In 2005, Suzlon went public — not to raise funds but to create an enterprise value to participate in global tenders, and acquire companies abroad. The IPO was on the aggressive side — at 12 times book value and 29 times its 2005 earnings per share (EPS). The company mopped up Rs 1,400 crore. <br /><br />The immediate concern was how to use the funds, say sources close to Tanti. The company set up office in Amsterdam; hired expat executives for top posts; and acquired Hansen Transmissions in Belgium, and REpower Systems in Germany. It also built a green corporate centre at Hadapsar in Pune, which cost the company Rs 450 crore, say sources.<br /><br />But Tanti, the ‘wonder boy of the wind world’, soon faced serious problems. The 2008 global financial downturn sucked away a lot of his fortunes. Suzlon had to spend $100 million on repairing turbine blades in the US. Then, though the company had a strong order book, high steel and raw material prices curbed its flight. Cash flow stagnated because of delays in executing orders. And, as interest rates rose, the company could not service its debt. As pressure built, many expat executives quit, and the management headquarters was shifted to Pune. <br /> </div><table width="200" cellspacing="10" cellpadding="10" border="0" align="right"><tbody><tr><td><img width="200" vspace="8" hspace="8" height="200" align="right" alt="" src="/image/image_gallery?uuid=4a987951-3db4-490f-affb-372ee5c11245&groupId=520986&t=1363712253841" /></td></tr><tr><td>The Tulsi Tanti-led Suzlon’s Rs 9,500-crore debt recast plan comes with stiff riders</td></tr></tbody></table><div>Now, Suzlon is known more for being the third-biggest wealth destroyer in India. Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services, says Suzlon has wiped out Rs 27,600 crore since 2007, given the difference in share price in the past five years. In 2012, Suzlon defaulted on its foreign currency convertible bonds (FCCB). The total debt went up to over Rs 10,000 crore, despite a few paybacks. <br /><br />Suzlon got a fresh lease of life when, in January, its bankers cleared a corporate debt restructuring (CDR) for a Rs 9,500-crore domestic loan. In addition, it has an order book of $7.7 billion (two-thirds of which comes from REpower). <br /><br /><strong>Little Room Left</strong><br />Suzlon plumbed the depths when it defaulted on the $221-million FCCBs on 11 October 2012. At a meeting in London a day earlier, bondholders were asked for a four-month extension on two series of FCCBs, but they refused. “It is somewhat disappointing that the bondholders’ meetings did not achieve consensus” was what Kirti Vagadia, the company’s CFO, said after the meeting.<br /><br />Suzlon, which had posted losses for three consecutive years in the run-up to the FCCB default, slowed order execution because of a shortage of working capital. The company, which had declared profits of Rs 1,017 crore in March 2008, has already posted a net loss of over Rs 2,800 crore in the first nine months of this financial year. Under the CDR, it has had to close down manufacturing units at Puducherry.<br /><br />After announcing the third-quarter results, Vagadia said Suzlon was facing a textbook case of conflict in allocation of resources. “While we have made tremendous progress on the liability management front, our business performance has been hit due to our abnormal operating environment, leading to a significant loss...”<br /><br />Critics say the fault lies with Suzlon’s management. “Tanti was over-ambitious and bit more than he could chew,” says Arun Kejriwal, director, KRIS Capital, an investment advisory firm. “Suzlon has been financially over-leveraged and expanded beyond capacity. The management failed to anticipate the global economic crisis and failed to tackle the situation.”<br /> <br /> The criticism stems from the way the management spent on expansions. In 2008, Suzlon was talking about 3,000-MW capacity expansion at Rs 3,000 crore, plus forging facilities of 70,000-metric tonne (MT) capacity and foundry facilities of 120,000 MT. It expanded in Asia, Australia, Europe, Africa, North and South America; installed over 21,500 MW in 30 countries; and created a workforce of over 13,000. <br /> </div><table width="580" cellspacing="10" cellpadding="10" border="1" align="center"><tbody><tr><td><img width="500" height="295" align="middle" alt="" src="/image/image_gallery?uuid=ab49bb32-0d61-4bcf-9309-71c8bc9d4aa4&groupId=520986&t=1363712337678" /></td></tr><tr><td>BIG HEADACHE: Suzlon’s bad run abroad led to the firm moving most of its staff to its Pune head office (Bloomberg)</td></tr></tbody></table><div><br /><br />“Suzlon is the victim of market conditions. To grow fast, it went for greenfield expansions and acquisitions, and became cash-negative. It thought order execution would increase the cash flow that would service the debts,” says Deven Choksey, CEO of KR Choksey Securities. But it is also true that Suzlon didn’t take adequate measures to insulate itself from currency movements and a negative market environment.<br /><br />To execute orders worth close to Rs 42,000 crore and pay off interest, Suzlon’s profit was far from sufficient, prompting it to push for a CDR. The State Bank of India-led 19-bank consortium approved its proposal to rejig the Rs 9,500-crore debt on 22 January. SBI Capital Markets drafted the CDR plan. SBI, alone, has a Rs 3,500-crore exposure to the company. <br /><br />The CDR proposal involves a 10-year, door-to-door, back-ended repayment plan with a reduced interest rate. With a 3 per cent cut on interest, the effective interest will be around 11 per cent. There is also a two-year moratorium on principal and term-debt interest payments, apart from a fresh working capital loan of Rs 1,800 crore with a six-month interest moratorium. During the two-year moratorium, interest to the tune of Rs 1,500 crore will be converted into equity. Also, the lenders will get fresh equity shares worth Rs 1,451 crore in lieu of interest. <br /><br />“The approval of our CDR proposal is a key step towards normalising business. That, along with the enhanced working capital facilities, and Project Transformation (under which we are reducing operating expense and manpower costs), will enable us to focus on execution,” says a Suzlon spokesperson.</div><div> </div><div>break-page-break</div><div><br />Suzlon has to raise Rs 2,200 crore from the sale of its components manufacturing subsidiaries in the next 12-24 months. On the block could be non-critical assets such as SE Forge, SE Electricals and its China manufacturing units, but critics feel these won’t fetch the required amount. A company spokesperson counters, “We are confident of raising the desired funds.”<br /><br />A silver lining could be the $1 billion (about Rs 5,400 crore) released by the CDR package, which will allow the company to get on with executing orders. But the CDR proposal is expected to be implemented only by the end of March. As part of the plan, Suzlon promoters also sold a 6.19 per cent stake for Rs 240.40 crore on 28 February. This reduces promoter holding to 44.46 per cent; of this, around 98 per cent is pledged.<br /> </div><div><strong>Troubled Marriage</strong><br />The way Suzlon managed its foreign investments has a big role to play in its current state of affairs. <br />The company got a chance to acquire Belgian gearbox manufacturer Hansen Transmissions. Raising funds from London, Singapore and Boston, Suzlon acquired it for €465 million in cash in 2007-08. This ensured gearbox supply, which was running short at that point. But Tanti never wanted to stay with Hansen for long, and started selling it in pieces, raising nearly $1 billion to repay debts. <br /><br />If the Hansen deal was smooth, the REpower takeover was anything but. Formed in 2001 by bringing together four wind turbine companies in Germany, REpower’s takeover was meant to give Suzlon an opportunity to access its product range (turbines with rated outputs of 1.5-6.15 MW) and a footprint in Europe. But the taleover was torturously long and expensive.<br /><br /><img width="295" vspace="9" hspace="9" height="302" align="right" alt="" src="/image/image_gallery?uuid=2749d626-1a35-4745-ae71-6ca7a4996749&groupId=520986&t=1363712502308" />Fritz Vahrenholt, a leading German politician and a former federal minister, was REpower’s CEO at that time. He had the vision and contacts to bring adequate capital to REpower. That’s how French nuclear major Areva and Portugal’s Martifer also bought stakes in the company. Tanti teamed up with Martifer to bid for REpower’s management control. But Areva decided to counter the offer. After five months of intense negotiations, Suzlon finally paid €1.35 billion (about Rs 7,314 crore) to get nearly 75 per cent management control.<br /><br />Along the way, there were apprehensions that the Indian company would milk REpower dry and take away its technologies. “Vahrenholt began to show his true colours and did everything possible to make sure that the takeover was as difficult as it could be,” says a company insider. In addition, German laws are stacked against competitors taking full control of a local company. <br /><br />Besides, as per German law, the chairman of the supervisory board (Tanti in this case) — who is usually from the majority shareholder — cannot sack the CEO or the CFO of a German company. So, even though Tanti, his brother Girish, and Vagadia were on the supervisory board, they could not do much for over a year. Suzlon, however, did manage to increase its shareholding to over 75 per cent by buying out Areva and Martifer’s stakes. <br /><br />Suzlon’s troubles did not end there. The laws stipulate that a domination agreement be signed between the owner and the management board, for which the statutory authorities are the CEO and CFO. Also, that such an agreement would spell out which of the Board’s instructions the management would or would not follow. <br /><br />Eventually, Suzlon managed to replace Vahrenholt in 2008 with Per Hornung Pedersen, a Dane by origin. But it still had to contend with the CFO. “He would virtually veto everything the Board suggested,” say insiders.<br /><br />Suzlon tried to get around the German laws by setting up Renewable Energy Technology Centre, a 50:50 joint venture between REpower and Suzlon. By 2011, Suzlon fully acquired REpower by squeezing out the minority shareholders. Tanti allowed REpower to function independently, and ring-fenced its finances so that it was not burdened by the parent’s troubles. <br /><br />However, a merger process that was to start by September 2012 did not take off as planned. The REpower brand is owned by Swiss energy company Ratia Energie, whose licence was to expire by December 2012. But it has since been extended to the end of 2013.<br /><br />One positive result of the joint venture was that it helped Suzlon improve blade design and tweak the S-88 (its flagship turbine) to come out with improved windmills that had longer blades and better output.<br /><br /><strong>Exodus of Talent</strong><br />Suzlon has also had trouble with the constant churn in its top posts. Initially, Tanti and his three brothers — Girish, Jitendra and Vinod — were running the show. Girish played a key role in acquiring technology from Südwind and in building a vendor base for imported components. He was responsible for operations and was an executive director besides being the vice-chairman of REpower. He is now a non-executive director.<br /><br />Jitendra is now the MD of Synefra Engineering and Construction (formerly Suzlon Infrastructure, a family holding company), which built Suzlon’s Pune headquarters. He is not on the board of Suzlon. Vinod, another non-executive director, is now REpower’s COO.</div><div> </div><div>break-page-break</div><div><br />Following the acquisitions in Europe in 2007-08, Suzlon had got former GE executive Andre Horbach as CEO and Patrick Krahenbuhl from ABB as the group CFO. Krahenbuhl left by March 2008, and Horbach two months later. The next CEO, Toine Van Megen, left within a few months. After that most of the Indian executives returned to India. <br /><br />Vivek Kher, principal consultant at management advisory firm Ü. Brepman Partners, and a former executive in Suzlon’s Amsterdam team, says the exodus was not on account of the promoters. “Unfortunately, the team was unable to steer the group during its most critical period, 2008-09. The CFO and CEO left in quick succession. The next CEO, too, left within a few months.”<br /><br />Sources say the key heads are now REpower’s CEO Andreas Nauen (former CEO, Siemens Wind Power) and Vagadia, the CFO. In September last year, Suzlon brought back Rohit Modi from Gammon India to be CEO of India and Emerging Markets. <br /><br />In August 2008, Suzlon brought in Sumant Sinha, former CEO of Aditya Birla Retail, as COO, and Robin Banerjee as group CFO. They helped in converting foreign currency loans to rupee loans, in reducing the loan burden, and in pulling off the blade retrofitting programme in the US. For some time, Tanti and Sinha shared the CEO’s role. Sinha stepped down in June 2010; Banerjee left two years later, to be replaced by Vagadia.<br /> </div><table width="590" cellspacing="1" cellpadding="1" border="1" align="center"><tbody><tr><td style="text-align: center;"><strong>BLADE BLEMISH</strong></td></tr><tr><td><img width="200" vspace="8" hspace="8" height="133" align="left" alt="" src="/image/image_gallery?uuid=402d701f-eb0f-4205-b4fb-e3c19afa1cb3&groupId=520986&t=1363712693173" />In 2004-05, Tanti sensed a trillion-dollar opportunity in the US for onshore wind power. Of the top 10 global manufacturers, six (Vestas, GE Energy, Gamesa, Siemens, Acciona and Nordex) were setting up manufacturing facilities in the US. Suzlon decided to enter that market in a big way with its flagship product — the S88 (2.1 MW) turbines. The product was a couple of years old and had been tested at Suzlon’s wind farms in Kanyakumari for a year or so.<br /><br />Soon, Suzlon set up a manufacturing facility at Pipestone, Minnesota, with the support of the local government. Partnering with John Deere Wind Energy (JDWE), it had invested in several Minnesota wind power projects since 2003; it now expanded to Texas and Missouri. Another major client in the US was Edison Mission Group (EMG), which is yet to pay Rs 1,100 crore for the wind farm. Suzlon is taking legal action against the firm. <br /><br />But by the end of 2007, its turbine blades developed cracks. To be fair to Suzlon, many other leading manufacturers also faced problems. For example, in 2007, Vestas withdrew an entire series of its V90-3MW turbines for problems with the gearbox.<br /><br />Navigant Consulting concluded that the S88-V2 blade’s design had a weakness in the transition area — about 6 metres from the root of the blade (the blades are 43 metres long and weigh 7 tonnes). Also, blade-testing standards designed by the certification agency, Germany-based Germanischer Lloyd, were found inadequate. On March 2008, Suzlon announced a blade-retrofitting programme for 1,251 (417 sets) blades. The massive programme (which involved bandaging the vulnerable spot on the blade with a strip of reinforced fibreglass) went on for six months, and cost $100 million.</td></tr></tbody></table><div><br />Suzlon also undertook operational improvement initiatives with the help of the Boston Consulting Group. “This is a very complex business, operating out of different parts of the world. Over and above the financial issues,most of the managers were not able to cope with these kinds of pressures,” says a source. <br /><br /><strong>Where Is It Headed?</strong><br />The wind market has weakened and project economics have become complex. “Project developers are facing capital-raising issues to fund their equity part, but the return is only 14-15 per cent,” says Sanjay Sethi, senior executive director and head of infrastructure at Kotak Investment Banking. “This has affected equipment manufacturers and they are not getting the same amount of orders that they were getting two years ago,” he adds.<br /><br />Suzlon’s traditionally strong markets are no longer in its favour. The US has become unpredictable. The government has extended the production tax credit for one year. But orders were already put on hold. The Chinese market exploded but its laws favour local players. <br /><br />“Given Suzlon’s investment and plans in China, it was an expendable asset. They were not able to make much headway. Getting a few 100 MW in a market of gigawatts is nothing,” says a source. Now Suzlon’s main markets are India, South Africa and Brazil, while REpower continues to have a grip in Europe, the US and Canada. <br /><br />Tanti hopes REpower will help it through these tough times. Without it, Suzlon will not have much value, says one analyst. The German company had revenues of €626.1 million and an operating profit of €27.8 million in the first half of 2011-12. In the first nine months of this financial year, its revenues grew by 58 per cent. <br /><br />Getting its finances in order requires cutting input costs. “At one point, Suzlon’s non-operating working capital was 30-40 per cent, compared to 5-10 per cent among industry leaders. It continues to hover around 25 per cent even now,” notes a source.<br /><br />Suzlon must also inspire confidence in customers that orders will be executed on time. The Rs 1,800-crore working capital allocated will help, but it is unclear whether it will be sufficient to execute orders worth nearly $2 billion that Suzlon India has on its books. Moreover, talent needs to be retained and technology upgraded. On the debt front, Suzlon has to pay some cash upfront to the holders of its FCCBs when it restructures them. Otherwise, the bonds will be junior to similar instruments that are maturing in 2014 and 2016.<br /><br />The company also needs to put up a fight to get back the Rs 1,100 crore it is owed by Edison Mission Group in the US. A spokesperson says, “We have filed a legal motion towards the recovery of these dues… It is important to note that this is fully secured against a wind farm.” <br /><br />Kejriwal of KRIS Securities says the company will take at least 5-6 years to come back to its 2007-08-levels, and that too if everything goes well. The wind market is weak due to recession in the US and the euro zone, and stable fossil fuel prices. Solar energy has managed to attain critical mass. Tanti said in one of his columns recently, “Let’s be honest: the wind sector today seems to have an uncertain future. The times are turbulent...” <br /><br />Wind turbine component prices are stable (thanks to steel prices), but Chinese competition has put margins under pressure. “Wind is never going to be as ‘sexy’ as it was,” says Kher of Ü. Brepman.<br /><br />The next 24 months are crucial. Suzlon needs to be financially disciplined and operationally correct. It also needs the world economy in its favour. If anything goes wrong, Suzlon will have to either sell REpower or Tanti will have to exit as promoter. <br /><br />nevin(dot)john(at)abp(dot)in<br />nevinjl(at)gmail(dot)com <br />(at)nevinjl<br /><br />(This story was published in BW | Businessworld Issue Dated 08-04-2013)</div>
