Should You Buy Suzlon Energy?

Suzlon Energy has finally received a much-required breather as its lenders have agreed to recast Rs 10,829 crore of debt. The positive movement in the stock on Tuesday has again flared discussions about whether one should buy the stock. We believe that before taking any firm decision one should wait for the company to enter the Corporate Debt Restructuring (CDR) cell which, media repors suggest, will happen next month. The final decision is not yet taken and there may be some clause which will place a lot of restrictions on the management to cut the costs.

Corporate Debt Restructuring is a platform evolved as per the RBI guidelines to preserve viable corporates which are affected by internal and external factors. Recently, pharmaceutical company Wockhardt got a lot of attention after it successfully came back into profits from its financial troubles due to CDR.

As per the initial details of the CDR scheme devised for Suzlon Energy, its promoters will have to contribute Rs 250 crore of which Rs 125 crore will have to be paid upfront. As per the other terms, the company will be provided a 10-year rupee term loan of Rs 3,716 crore. It will be given two years’ moratorium period during which it will not make any principal repayment and interest payment.

Suzlon Energy’s problems have also been due to its high working capital requirement which amounted to Rs 5,278 crore in the first half of the fiscal. The debt restructuring will also give an extra hand by providing working capital facilities worth Rs 5,614 crore at an interest rate of 11 per cent. This will include fund-based facilities worth Rs 2,000 crore and non fund-based facilities worth Rs 3,614 crore. Besides this, the company will also receive two five-year term loans to pay the interest on loans taken, amounting to Rs 1,635 crore.

A total 21 banks have an exposure to the huge debt of Suzlon Energy, which amounted to Rs 14,568 by the September quarter this year. These include State Bank of India, IDBI Bank, Punjab National Bank, Indian Overseas Bank and Bank of Baroda, among others.

Suzlon Energy’s debt woes increased when it defaulted on foreign currency convertible bonds worth over USD 200 million (Rs 1,100 crore) in October 2012. After the default the company has been in talks with the bondholders but no decision has been taken as yet. The company also has another two tranche of FCCBs (USD 275 million) due after 2014, taking the total FCCBs due to over USD 475 million. The CDR mechanism has proposed to extend the due date of all these FCCBs for the next five years by offering an indicative coupon rate of 6 per cent after which these bonds will get converted into equity instruments.

In order to cut costs, the company has initiated a few measures, including restructuring the business, reducing manpower, realigning the supply chain, etc. The company is also expected to sell some of its non-core assets. It has already initiated an asset sale in China but the delay in the process has put pressure on the company. Suzlon Energy’s management is also expecting to recover USD 206 million of receivables linked with its customer Edison based in USA. Besides, as per media reports, the company is also expected to sell its stake in 2015 to raise USD 500 million which will also provide some support to the company.

Suzlon Energy will benefit from the lower interest rate of 11 per cent compared to the earlier interest rate of 14 per cent, which will save 300 basis points of interest on its loans. Besides, the two years of moratorium period will save interest payments of over Rs 3,000 crore, thereby improving its net margins. The management has said that it will recover Rs 1,000 crore from Edison in 2013. We however remain highly skeptical about this as Suzlon Energy’s windmill blades met with some serious defects which breached the conditions set by Edison. The matter has been pending for over four years. Suzlon Energy has initiated legal action against Edison and a court judgment is expected by February 2013. The positive news on that front however should be seen as hope for revival.

While the entire restructuring exercise appears positive, investors would do well to wait for some time. The details provided in this report skim the surface and the management has not yet provided its inputs. Also, the business outlook for wind power remains subdued due a rise in solar power installations and the ongoing slowdown in the US and Europe. For the recent quarter the company has posted loss at the operating level which means that the costs are overrunning the revenues. This certainly is not a sign of healthy business.

After the news of CDR, the stock jumped by 10 per cent, indicating that investors are keenly watching the company’s every move. High risk takers can enter the stock, given the market’s popular philosophy of buying on rumours and selling on news. We expect some surge in the scrip’s price on speculation of revival. Risk-averse investors however should stay away from the counter.