CASE 7

Tulsi Tanti: Reviving Suzlon Energy Ltd.

This case study is based on the video interview with Sri Tulsi Tanti, chairman and managing director, suzlon energy limited

SYNOPSIS

It was Tulsi Tanti’s, Chairman and Managing Director of Suzlon Group, dynamic vision which established Suzlon Group as a global supplier of wind energy. Through his acquisition of Hansen Transmissions in 2006 and the acquisition of REpower, Germany in 2007, secured the company’s future supply chain in a supply-restricted environment, and unlocked immense potential for future growth.

Suzlon Energy fell on hard times during the global economic crisis of 2008 and has been struggling ever since. Through the herculean efforts of Tulsi Tanti, the debt laden and loss making firm is showing signs of revival. In the three months, ending 31^st March 2014 Suzlon turned both EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) and EBIT (Earnings before Interest and Tax) positive after seven quarters. At least there was light at the end of the tunnel!

VISION

• To be a technology leader in the wind sector.
• To be in the top three wind companies in the key markets of the world.
• To be a global leader in providing profitable, wind power solutions.
• To be the ‘company of choice’ for stakeholders.

Suzlon’s has always aimed to pursue sustainable social, economic and ecological development for the planet.

GLOBAL WIND MARKETS AND OUTLOOK

The global wind markets are expected to grow at a rate of over seven percent CAGR (compound annual growth rate) in the four-year period, between 2012 and 2015. The share of wind power in global electricity generation is projected to increase to nearly eight per cent by 2020, up from the current 2.3 percent (see Figure 7.1).

Top 10 Suppliers at the end of 2013. Suzlon Group retained No. 5 globally

 

SUZLON GROUP PROFILE

The Suzlon Group was ranked as the world’s fifth largest wind turbine supplier, in terms of cumulative installed capacity, at the end of 2012. The company’s global spread extends across Asia, Australia, Europe, Africa and North and South America with approximately 22,000 MW of wind energy capacity installed and operations across 32 countries. The Suzlon Group—headquartered at Suzlon One Earth in Pune, India—comprises of Suzlon Energy Limited and its subsidiaries, including the Germany-based REpower Systems SE, a leader in offshore wind technology. Suzlon offers one of the most comprehensive product portfolios, ranging from sub-megawatt on-shore turbines at 600 KW (kilowatts), to the world’s largest commercial offshore turbine at 6.15 MW (megawatts).

FINANCIAL HIGHLIGHTS

Key highlights FY14

Strategic FCCB negotiations concluded

1. Last remaining piece in comprehensive liability management program Asset sale gaining traction₹ ~700 crs+
2. Big Sky Sale completed $~90M
3. China Subsidiary stake sale completed- $~28M Project Transformation complete
4. >3,200 headcount reduction since FY12
5. ~31% fixed opex reduction since FY12 (Suzlon Wind)
6. Restructuring goals at Senvion achieved; savings exceeded target
7. Working capital rationalized to ~3.6%

Operational Ramping up volumes

1. ~723MW in FY14 against ~251MW last year; 188% YoY growth (Suzlon Wind)
2. Consol. Revenue ₹ 20,212 Crs in FY14; ₹ 6,581 Crs in Q4 FY14 (54% YoY growth) Continued robust performance by Senvion
3. FY14 EBITDA at ~EUR 146mn is 22% higher, despite 19% drop in revenue at ~ EUR 1,806mn Positive EBITDA after 7 quarters, highest revenue in last 8 quarters
4. Ramping up volumes
5. Increased profitability
6. Favorable geographic and product mix
7. Cost efficiencies from group wide restructuring efforts

Suzlon is a leading wind power products and services company with a global footprint. Its global team, spread across six continents, focuses on adoption of the world’s best practices to fuel continuous growth and propel expansion in high potential markets. This company combines global experience with local expertise to maximize technology for the economic value and client benefit. It heads its international sales, marketing and service out of each market with an emphasis on local expertise to drive growth in each market.

Tulsi Tanti—Sowing the Seeds of Success

It was Tulsi Tanti’s daring venture into the textile industry that resulted in the birth of Suzlon. Faced with soaring power costs and its unreliable availability, he looked to wind energy as an alternative. Beginning with a wind farm project in the Indian state of Gujarat in 1995, with a capacity of just 3 MW, he set forth to acquire the basic technology and varied expertise to set up Suzlon Energy—India’s first home-grown wind technology company.

ALTERNATIVE SOLUTIONS: WIND ENERGY

This integrated wind energy solutions provider offers end-to-end solutions, starting from wind resource mapping, land acquisition, technology development, turbine manufacturing, EPC projects, and completing the chain with operations and maintenance services.

Suzlon focuses on providing a complete range of efficient, cost effective wind energy solutions. Using the support and talent of its multi-cultural, multi-ethnic global workforce, it has successfully constructed and managed customized wind farms in varied geographic areas and climatic conditions. By the end of 2012, Suzlon:

• Approached 22,000 MW of installations across the world
• Ranked the fifth leading wind power equipment manufacturer
• Earned a global market share of 7.4 percent.
• Suzlon in India had a cumulative installed base of over 7700 MW across eight states, acquired over 42 percent (as of 31^st December, 2012) cumulative market share and is the market leader for the last 15 consecutive years.ⁱ

Clientele and Market Share: Suzlon market share (including REpower) rose to 7.4 percent, thereby making the company one of the leading wind turbine manufacturing groups in the world. Its wind turbine generators (WTGs) are customized to local geographies, wind regimes and needs, for installation in a variety of climates ranging from hot, dry deserts, to humid coasts and near-freezing plains.

Product Development and Supply: Its approach to technology is one of constant research, development and innovation. In order to create products that deliver high performance and reliability in varied operating environments, the company employs the best in every field of development in the wind energy industry. With world-class design, and state-of-the-art facilities in Germany, India and the Netherlands, its R&D team is a combination of the finest of global experience and in-depth expertise. Suzlon, in joint venture partnership with REpower, has established the Renewable Energy Technology Center (RETC) in Hamburg. RETC provides cross-industrial and interdisciplinary expertise in the areas of research, technology development, testing, validation and consulting in cooperation with an international network.

Operations and Maintenance Services: Its operations and maintenance teams are committed to extracting longer life spans and higher returns from every wind turbine it manufactures, which is why it offers a comprehensive range of value-added services and solutions. Its operations and maintenance efforts ensure energy yield optimization in accordance with on-site climate and grid conditions. It also provides detailed monitoring services for every wind turbine erected. This combined synergy of its business units and customer support networks succeeds in providing its customers with benefits that help satisfy their expectations of a global wind energy solutions provider.

SUZLON’S TURNKEY SOLUTIONS

Suzlon’s turnkey services range from complex front-end engineering design, construction, installation and commissioning to long-term operations and maintenance as well as the length, breadth and depth of customer requirements across the wind energy value chain. Its key differentiator is having both strong front-end engineering and the benefit of local experience, interface management and construction knowhow.

It offers clients a wide range of benefits from development, construction to operations. Manufacturedriven supply chain strengths and global expertise help offer customers the best in quality services. Suzlon is well-placed to assist clients in overall wind power project delivery. The major sections of the delivery process where Suzlon can add value are micrositing, grid connection, HV/ substation creation, electrical (reticulation), laying roads and foundations and project scheduling. Suzlon also offers end-to-end solutions in select geographies whenever required. In India, these solutions include wind mapping and land sourcing, which extends across the entire value chain.

Its global experience coupled with local expertise ensures an immensely talent capital. This has resulted in a multifaceted talent pool (containing 32 nationalities). This gives it the advantage of leveraging local talent and creating a truly global expert workforce. Its continuing growth in its operations in all key international wind energy markets and presence in all the emerging markets is further strengthening its global integration. Currently, the company has been doing aerodynamics research in The Netherlands, developing wind turbines and components in Germany and process engineering and integration in India. This is a testimonial to its focus on global integration and its passion to make Suzlon a company as global as the wind.

THE HANSEN STORY: SOFT TOUCH INTEGRATION

In 2006, Suzlon Enegy’s Chairman and Managing Director, Tulsi Tanti, won a €371 million bid to take over the Belgian gearbox maker, Hansen Transmissions (see Table 7.1). Since then he revitalized Hansen, prodded it to expand capacities, pushed it to go global, invest more in research and improve profitability. Then in a masterstroke, he listed Hansen on the London Stock Exchange in December 2007 (a rare instance of an Indian company listing a global acquisition). Tanti multiplied the value of his €371 million investment by five-fold in two years, making it one of the company’s most profitable acquisitions. Suzlon Energy put wind into Hansen Transmission’s sails in the twenty months it had been at the helm.

 

Tulsi Tanti had demonstrated two valuable qualities: the ability to take daring risks and the dexterity to integrate in order to gain the maximum value out of his acquisition. This is where Suzlon and other Indian companies, such as Bharat Forge Limited and Mahindra and Mahindra Limited were doing something unique. In most acquisitions, rather than bulldoze their way to seize control of their trophies, they have taken a ‘soft touch’ approach to integration. Most Indian acqusitions have not fired CEO’s, shut down plants, laid-off workers and even shipped jobs back to India. Tanti had demonstrated remarkable restraint and deftness in managing the potentially explosive acquisition of Hansen Transmissions (see Table 7.1).

THE REPOWER ACQUISTION

REpower was a publicly listed company that was partly owned by Areva, a French public multinational industrial conglomerate. They owned 30 percent stock in REpower. The other partner was Martifer, a Portuguese company which owned 23 percent of the stock. The remaining 47 percent stock was publicly owned. Tulsi Tanti targeted it as it was the best available asset that complemented Suzlon’s market position, product portfolio and customer profile.

In case of Repower, it was purely an equity purchase and not a buy-out. So Suzlon had to purchase the equity stocks of REpower for acquiring it. Suzlon had to acquire 23 percent stake of the Martifer Group before putting its bid in the stock market. However, there was one catch that payment would be made only after two years. It submitted the bid and acquired an additional 30 percent stock from the open market. Suzlon also convinced Areva to sell their stock after a year. Thus one-third payments were done by Suzlon to the shareholders and this was arranged through debt. After a year, Suzlon had to pay Areva. It had already raised the money in the capital market through the Foreign Currency Convertible Bonds (FCCB) route. They also paid their original shareholders, Martifer, through the debt route. REpower was acquired at a value publicly estimated at $1.8 Billion. It was a very friendly deal closure executed without hurting any of the existing shareholders. In a nutshell, Suzlon had acquired REpower in installments.

THE FINAL EVENTS: HOW IT WENT DOWN

The gobal economic crash of 2008 made Tulsi Tanti and his management team to question each strategy undertaken and restructure the business model from scratch. In September 2008 when Lehman Brothers collapsed and financial disaster struck, Suzlon got off on the wrong foot. By March 2009, the Suzlon team realised that the recession was going to be a long-term phenomenon. This crisis provided the opportunity to introspect and consolidate the business and to implement the changes needed in the positioning of the product, organizational structure, management bandwidth and in-resource planning.

Suzlon completed the final stage of its strategic roadmap with Hansen Transmissions by 2011. It had acquired this company in order to secure its supply chain, unlock the gearbox supplies in a highly constrained market and accelerate value creation. Suzlon successfully achieved these strategic goals by expanding Hansen Transmissions in countries that required low cost for its set-up, successfully listing it on the London Stock Exchange and exiting from Hansen at the profitable valuation of ₹ 4,000 crore.

In 2011, the Suzlon group’s acquisition of REpower systems SE also crossed a critical milestone which included subsequent delisting of the company from the Frankfurt Stock Exchange, making it a wholly-owned subsidiary. The acquisition of REpower would now set the stage for the next phase of growth for what had been a highly successful acquisition. Since its initial investment in REpower in 2007, it had been a catalyst for the company’s growth. It had worked closely with the REpower management team to increase its revenues by five times and profitability by a factor of nine in just five years.

‘Our core business fundamentals remain sound – high gross margins, strong and firm order book and high turbine availability, and we are embarking on a robust program, Project Transformation, to reduce annual operating expenditure and manpower costs by 20 percent by year-end,’ Tanti was quoted saying in a company release. The company release further said that the order stood at 5.6 GW (gigawatt) which was worth around ₹ 39,700 crore (as on August 2012). Further, Suzlon had bagged new orders for 456 MW and framework agreements for 200 MW in the first quarter of 2012–2013.

SUZLON’S COMPETITION: TROUBLED TIMES

Suzlon’s global peers, such as Vestas and Gamesa, had undertaken large scale lay-offs in the middle of the economic slowdown in Europe. There was also uncertainty over the extension of the production tax credits in the US which was the key driver for the rapid growth of jobs and manufacturing capability in the country.

In India, in the first half of 2012, the government withdrew incentives given to the wind power industry which severely affected the sector’s growth. Even Siemens, the German multinational engineering conglomerate had put on hold its plans to open a manufacturing facility for wind solutions due to the uncertainty in the Indian market. Analysts foresaw global wind installations contracting almost 10 percent in 2012 due to lower demand from the US.

 

It was on the 11^th of October, 2012 that Suzlon requested to extend the date of payment of $209 million (FCCBs) by four months to February 11, 2013. However, it was rejected by the bond holders. This would be the biggest default by an Indian company after Workhardt (a pharmaceutical company) failed to pay bondholders in 2009. In July 2012, Indian lenders to Suzlon helped the company redeem the first tranche of convertible bonds worth $360 million.

LONG TERM SOLUTION: RESTRUCTURING OF LOANS

The company was facing a number of problems at the same time:

• The size of Suzlon’s total debt was ₹ 14,000 crore (which was twice its equity base.)
• ₹ 8000 crore was the amount paid by Suzlon for REpower.
• There was a 60 percent fall in the price of Suzlon shares (compared to the 10 percent fall in Sensex.)

Yet not all was lost. ‘We continued to enjoy the support and confidence of our secured lenders for our business objectives. We believed our ongoing engagement with them and our bondholders continued to be both constructive and progressive and was geared towards addressing our liabilities and our overall capital structure in a holistic manner,’ said Kirti Vagadia, the CFO of Suzlon Group. In a move that would give Suzlon long-term succor, domestic lenders led by State Bank of India had agreed to consider restructuring Suzlon’s debt to bring down its costs.

WIND IN SUZLON SAILS: THE CORPORATE DEBT RESTRUCTURING SOLUTION

As a solution to the crisis, Suzlon announced that it had submitted a proposal to restructure approximately ₹ 11,000 crore of domestic debt. The CDR proposal included a maturity period of ten years, a two-year moratorium on principal and interest payments on term debt and additional working capital facilities. This meant that Suzlon would not be able to raise funds from international markets till it was under CDR.

‘The company, in consultation with its senior secured lenders, has taken the decision to undertake a debt restructuring exercise under the CDR mechanism. Our senior secured lenders are supportive of our long-term business plans and our efforts to consolidate our overall debt to achieve a sustainable capital structure,’ said Kirti Vagadia, CFO of Suzlon Group, adding that it is an important step towards stabilizing business by enhancing liquidity and injecting additional working capital. ‘We believe this will help us safeguard the interests of our key stakeholders, including customers and vendors,’ he added.

State Bank Of India agreed to restructure Suzlon’s debt worth ₹ 10,829 crore (80 percent of ₹ 14,000 crore debt). All the large banks and financial institutions (ICICI Bank, Axis Bank, IDBI Bank, Yes Bank, Indian Overseas Bank, Power Finance Corporation and others led by SBI) had agreed to induct the company for a debt recast.

CASE UPDATE

Suzlon on the Revival Path

Suzlon turned both EBIDTA (earnings before interest, tax, depreciation and amortization) and EBIT (earnings before interest and tax) positive after seven quarters in the three months ended 31st March 2014. It launched a turnaround programme, code-named ‘Project Transformation’. On 24^th January 2013, its nineteen lenders agreed to recast ₹ 9500 crore of debt and convert the interest payable for two years into 32.1% equity. They also agreed to enhance working capital loans by ₹ 1800 crore and a 10-year deferred repayment plan. The promoters brought in equity and Suzlon sold bonds to refinance its existing loan with the help of lenders to improve cash flows. Now it started making turbines only on receiving firm orders.

Fixing the Bonds

After 18 months of talking to bondholders around the world, Suzlon on 3^rd May 2014 announced a cashless restructuring of $485 million worth of foreign currency convertible bonds for five years. These bonds will mature in 2019-20. This was the last piece in a comprehensive liability management program at Suzlon. It sold assets worth ₹ 700 crore, cut staff by 3200 and reduced fixed operation expenditure by 31%. It also raised volumes to 723 megawatts (MW) in 2013-14 from 251 MW in the previous fiscal year, a 188% growth year-on-year.

Back from the Brink

For the fiscal year ended 31^st March 2014, net loss narrowed to ₹ 3519.97 crore from ₹ 4723.96 crore in the previous year. Net loss for the quarter ended 31^st March narrowed to ₹ 603.45 crore from ₹ 1912.72 in the year ago period. It also swung to an operating profit of ₹ 328 crore from an operating loss of ₹ 594 crore in the same period.

QUESTIONS FOR DISCUSSION

1. What triggered Suzlon’s Tulsi Tanti to enter the Global wind energy business?
2. Comment on Tulsi Tanti’s ‘Soft touch approach’ in taking over Hansen Transmissions in 2006 and RePower in 2007.
3. How did Tulsi Tanti takeover the German wind power company RePower in installments?
4. How did the world-wide recession of 2008-2009 affect the operations of Suzlon? What immediate steps did Tulsi Tanti and his team take to combat the situation?
5. What was the combination of factors which caused the downfall of Suzlon?
6. What long term steps did Tulsi Tanti and his team take to revive Suzlon from its mountain of debts?
7. What were the main features of the corporate debt restructuring solution?
8. What were the main features of project transformation?

END NOTES

1. (BTM Consult)

   All images, photographs and company data has been taken from (Suzlon Group: Annual Report, 2012–2013)