Will Suzlon Energy Sell REPower?

Suzlon Energy is yet again in the news, this time not for winning orders but about selling its German subsidiary REPower. According to media reports, French engineering major Alstom SA is evaluating an option to buy REPower. Suzlon have denied the same but it needs to be seen whether Suzlon will sell its Germen arm or not.

REPower contributes about 44 per cent to the topline of Suzlon Energy with significant inputs to its order book too. For the half year ended September 2011, REPower had an order book of 2,692 MW (USD 4.1 billion) which is 57 per cent of the total order book of Suzlon Energy i.e. 4,734 MW (USD 6.5 billion).

While the order book looks healthy, Suzlon’s current worries are mostly related to its mountain of debt which stands at Rs 13,357 crore. Another factor to be seen is its near-term FCCB redemption. Suzlon has outstanding FCCBs worth USD 654 million of which USD 246 million of FCCBs are due in June 2012 and USD 142 million are due in October 2012.

REPower has recently signed a consortium of agreement for a loan of Euro 600 million (about Rs 3,950 crore) with banks in Germany. Suzlon’s shares had jumped by 11 per cent on the day when news of REPower’s debt funding hit the markets. The debt raised by Suzlon was largely seen by the markets to repay its FCCB obligation due in June. However, one should note that the total liabilities of REPower as per the FY11 report amount to Rs 7,659.36 crore. The funds raised by REPower are not sufficient to cover its own debt.

Besides, according to an article published by Bloomberg, the funds raised by REPower under this agreement cannot be transferred to the parent company, Suzlon. Considering that the company will use the entire Euro 600 million for debt repayment in REPower its debt will still will be over Rs 9,000 crore, which is still negative. With this new development we believe that the overall debt profile will not improve significantly.

The key question is whether it will really sell it? Even though the company has denied this, it should be noted that REPower’s acquisition has not been positive for the company. Also, the company has recently sold some of its assets to raise the funds. In a conference call dated October 24, 2011 its management had said that they would further sell some of their non-critical assets to raise the required funds.

REPower, we believe, is a critical asset as the company now holds over 90 per cent stakes in it and it also contributes significantly to its business. It however has not yielded positive results for the company due to which there is a probability that the company could consider selling REPower. We believe it’s a Catch-22 situation for Suzlon Energy in a way that if the company continues holding REPower on its balance-sheet, its overall debt remains high and if it sells REPower then its major order book is lost. We see a lot of uncertainty in the stock at the moment and maintain our stand to avoid the scrip.