Falling Bond Yields May Hammer Suzlon Further

According to a report by Bloomberg dated Feb 23, 2012, the prices of the Convertible bonds of Suzlon Energy have fallen by 16% since 2009. The yields on these bonds have increased sharply by 82 bps. In Feb 2012, the yield has increased sharply by 119%. An increasing yield usually indicates that the financial health of the company is not very strong, which is the case with Suzlon Energy.

Apart from its dismal performance on the domestic stock exchanges where its price has fallen by 47% in the last one year, its GDRs listed on the London and Luxembourg Stock Exchange have also declined in value by similar or higher percentages. This indicates that investors are not seeing near-term capital appreciation.

A near-term concern for the company is the repayment of its USD 654 million (about Rs 3249 crore) Foreign Currency Convertible Bonds (FCCBs). Of this amount, about USD 246 million are due in June 2012, while USD 142 million are due in Oct 2012. The remaining FCCBs of USD 265 million are due after 2014. The bonds that are due in Jun 2012 have a very steep conversion price. The redemption premium is also over 140%. Interestingly, the company has already paid a fee of USD 13.7 million to restructure this debt. Looking at the current scenario, the company may be required to wipe out its cash (Rs 2,257 crore) as well some of its reserves (Rs 6,160 crore) when the bonds would go for redemption.

According to the Fitch Ratings, 20% of the USD 7 billion FCCBs issued by Indian corporates may get defaulted. FCCBs are the financial instruments issued in foreign currencies which carry an interest rate. These can be converted into equity shares or be repaid based on the terms agreed upon and the market conditions.

Suzlon’s financial performance has not been very robust for nearly 3 years now. In this fiscal so far, the company has posted a loss of Rs 173 crore despite posting a very healthy 36% growth in its topline.

The company has a total debt of Rs 13357 crore, which has constantly been on the rise. Its nine-monthly interest payment rose by 23% to Rs 1012 crore. Its current cash position and interest cover ratio of 0.8x also look very vulnerable. Recently, the company has been seen selling some of its assets, about which we are not positive. After selling these assets, the company may be able to meet these obligations. However, its operating performance may slide, further hammering its stock price.

We have been reiterating that investors must avoid the stock, and we continue to maintain that position.