Fresh Trouble Brews For Suzlon – Exit The Counter

After Suzlon's lenders asked the troubled wind turbine maker to infuse Rs 5000 crore equity or sell its German arm, RE Power, we have turned absolutely bearish on the company and advise our readers to book profit and exit the counter.

In an earlier article, we had said that only buyers with a high risk appetite should look at investing in this the stock. Our call came mainly after the company’s Corporate Debt Restructuring (CDR) was approved by the lenders’ consortium. The company was asked to raise Rs 250 crore, for which the promoters sold 2.11% stake in Suzlon Energy. It is also in the process of selling three of its Chinese subsidiaries.

The lenders’ stipulation comes after the Indian bankers agreed to tighten the norms on companies seeking debt restructuring. As per the new guidelines, promoters are required to pledge 100% shares with the lenders and also increase their equity contribution. The lenders also want promoters to furnish unconditional personal guarantees.

REPower is the major revenue driver for Suzlon Energy. As per its H1FY13 financial results, REPower contributed 77% to Suzlon's consolidated revenues. Of the company's total order book of USD 6.8 billion (Rs 37400 crore), only 20% comes from India, while as much as 48% (Rs 17952 crore) comes from Europe and the remaining 32% from other countries. REPower oversees its European operations, and if this entity is sold, the company will lose half of its order book and would see a huge decline in revenues.

Also, in view of the investor sentiment on wind turbine makers, REPower may not get robust valuations even if Suzlon decides to sell it off. This will result in further erosion of shareholders’ wealth.

It is noteworthy here that the company has been trying to hold on to REPower despite all the issues that it has been facing. If Suzlon had intentions to sell REPower, it wouldn’t have entered the CDR in the first place.

Suzlon's lenders have also asked it to bring the cash lying with REPower. This is also another far off possibility as the German lenders have disallowed Suzlon from accessing the cash resting with REPower. Under these circumstances, the execution of the CDR may take more time than expected, and hence, the company’s stock price may see further lows.

The only option that Suzlon may have left is to list REPower in Germany at lower valuations. This may increase some liquidity in the company, which can be used to either lower the debt or increase equity infusion in the company.

As a result of all these factors cumulatively, we expect the shares of Suzlon to remain weak. Our advice to investors is to exit the counter.