powerfulpicks: Suzlon has been a downhill story for a long long time. From a peak of 400 + in the beginning of 2008, it fell to around 46 today, losing 90% of its peak time market cap. Exactly 1 year ago, it was around 105 odd and it lost nearly 60% of its value in the last 1 year.
Scary? Yes, it is. Equally scary is its recently reported Rs 900 crore loss and their Rs 9500 crore debt. Sales turover has dropped from Rs 7000 crores in 2008 to Rs 3500 crores in 2010, becoming half of what it was. They have reduced expenses, but that did not help them to post losses of Rs 1400 crores in FY10. And then the Rs 900 crore loss in the first quarter of FY11. They were paying an annual interest on loans to the tune of Rs 150 crores in 2008. In 2 years, the interest payment has increased 5 times to Rs 750 crores, indicating serious debt issues.
For the three months to end June, its consolidated net loss doubled to `912 crores over the year ago period, exceeding analyst expectations, due to lower volumes and forex loss of Rs 250 crore. The company is susceptible to forex fluctuations. This is because a large part of its consolidated revenues comes from outside India, especially Europe that is yet to come out of the economic downturn.
Frankly, Suzlon made a mistake in buying German wind energy company REpower Systems at a high premium; Suzlon had acquired a majority stake in REpower after a bidding war with Areva in a deal that valued the German company at around $1.6 billion, while its market cap was lesser, just about $1.1 billion. Now they are trying to amend that mistake and sell 25% stake in REpower Systems, for $500 million. Suzlon recently completed refinancing and consolidation of debt worth `10,690 crore and also raised `1,188 crore through a rights issue. If the company manages to sell around 12% stake of REpower, it could generate cash of around $250 million, or about `1,165 crore. REpower, listed on Frankfurt stock exchange, is itself bearing the brunt of economic uncertainty in Europe, with customers postponing projects. Their revenues are down 29% over the year-ago period, with a net profit of just 1.8 million euros. REpower was the 2nd mistake of Suzlon.
Their first mistake was another international purchase of Belgian gearbox technology firm Hansen Transmissions International. In November 2009, in order to pay back its lenders and reduce debt, Suzlon sold 35% stake in Hansen for $361 million that brought down its stake to 26%. Suzlon had been reportedly looking to sell the remaining holding.
Suzlon is the story of a happy family, earning good money and spending like a king (on credit cards) because the family is confident of earning even more in future, but the primary bread earner of the family suffers an accident and gets seriously crippled for an indefinite time. Companies who save for bad times and plan their capex or acquisition, after accurately evaluating their present strength and future prospects are the ones who can hold on to their attempt to become a larger player and actually become larger.
Suzlon can now only recover if 1. they can successfully reduce their debt (by stake sales) by around 50% and 2. Global economy and especially Europe recovers and 3. shooting up of international oil prices increases the focus on clean and alternate energy.
Suzlon should left to itself for the next 3-4 quarters, so that it can lick its deep wounds and recover to some extent and see a small quarterly profit. The fact that it is below 50 will make many feel greedy to buy, but Suzlon can bounce back, only if it becomes profitable. My personal belief is that it will bounce back in future, but it has to slip a bit further for now. If it cannot hold to the 46 level, it should drift down to 36-37 and probably settle down there for a few weeks at least. I am hopeful of a revival to 57 by end of calendar year 2010.
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