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Suzlon Energy: Re-energising Itself

| 11/29/2012 9:00 PM Thursday

Suzlon Energy has finally received a much required breather as its lenders have agreed to recast its Rs 10829 crore of debt. The stock has responded well to this development once again putting the counter in the limelight. Is it time to buy the stock of Suzlon, or should you wait until it actually goes into the CDR cell?

Reports are suggesting that this could happen anytime next month. The final decision is not yet taken and there may be some clauses which will put a lot of restrictions on the management to cut costs and get lean and thin.

As you may like to know, Corporate Debt Restructuring is a platform evolved as per RBI guidelines to preserve viable corporate, the fundamentals of which have been affected either by internal or by external factors. Recently, pharma major Wockhardt was in the news after it successfully returned to making profits following its successful debt restructuring.

As per the initial details of the CDR scheme devised for Suzlon, its promoters will have to bring in their contribution of Rs 250 crore of which Rs 125 crore will have to be paid upfront. According to the other terms, the company will be provided a 10-Year Rupee Term Loan of Rs 3716 crore. The company will be given two years as the moratorium period, during which it will not make any principal repayment and interest payment.

Suzlon’s problems have been due to its high working capital requirements which amounted Rs 5278 crore in the first half of the current fiscal. The debt restructuring will also give it an extra hand by providing working capital facilities worth Rs 5614 crore at an interest rate of 11 per cent. This includes fund based facilities worth Rs 2000 crore and non fund based facilities worth Rs 3614 crore. Besides this, the company will also receive two five-year term loans to pay the interest on the loans taken amounting to Rs 1635 crore.

A total 21 banks have an exposure to the huge debt of Suzlon which amounted Rs 14568 as at the end of the September quarter of 2012. These banks include the State Bank of India, IDBI Bank, Punjab National Bank, Indian Overseas Bank, Bank of Baroda among other.

FCCB Conversion In 2015

Suzlon’s debt woes particularly increased when it defaulted on the repayment of foreign currency convertible bonds worth over USD 200 millions (Rs 1100 crore) in October 2012. After the default the company has been in talks with its bondholders but any agreement on what would be the future course of action is yet to be arrived at. It also has another two tranches of FCCBs (USD 275 million) due after 2014 taking its 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 six per cent, after which these bonds will get converted in equity instruments.

Internal Measures

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

The Impact

The company is negotiating for a lower interest rate of 11 per cent as compared to the earlier rate of interest of 14 per cent that it was paying. Besides this, the two years of moratorium period will save interest payments over of over Rs 3000 crore which will improve its net margins. The management has said that it will recover Rs 1000 crore from Edison in the receivables in 2013. Suzlon has taken a legal recourse against Edison and the court judgment is expected by February 2013. We, however, remain highly sceptical about this.

Should You Buy The Stock?

For the rosy picture to come true, one has to wait for some time. The business outlook for wind power remains subdued due the higher competition emerging from solar power installations and ongoing slowdown in the US and Europe. For the recently-ended quarter the company has reported a loss at the operating level which means its costs are overrunning the revenues, and this is not a sign of a healthy business.

After the news of the CDR coming in, the stock jumped 10 per cent, indicating that investors are keenly watching the movement in this counter. High risk takers can enter the stock as they say buy on rumors and sell on news. We expect some surge in the price on the speculation of revival. Risk-averse investors, however, should stay away from the counter.

 

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