Hansen deal: Suzlon can rake in Rs 900 cr, but what about its debt burden?

Wind power company Suzlon Energy has been in the news quite a bit recently. The latest about the company was that it had concluded its 26.06 percent stake sale in Belgium’s Hansen Transmissions International to ZF Friedrichshafen.

Translation: Suzlon has finally received the Rs 890 crore it had sold the Hansen stake for in July to the German company. That is welcome news for a company struggling with debt of Rs 10,881 crore at the end of the first quarter this year.

There’s more: In the June-ended quarter, the energy generation group posted a profit of Rs 60 crore (consolidated). The Indian company has also nearly completed the acquisition of its subsidiary, RE Power, a company focused on Europe with a good order book and healthy cash flows.

With these positive developments, why is the Street not more excited? Indeed, Suzlon’s shares plunged 30 percent in August alone. Of course, given the global uncertainty, investors are diving into defensive stocks, so that explains some of the price fall. But Bank of America Merrill Lynch also noted that any positions in derivatives were not allowed in Suzlon’s shares which, the brokerage said, added to the stock’s poor performance.

Financially, Suzlon’s debt-to-equity ratio worsened to 1.58 in the June-ended quarter from 1.36 in the last quarter of 2010, which clouded sentiment towards the shares.

That’s where the Hansen stake sale comes in: It’s a step in the right direction in lifting that glum mood. Experts believe part of the money received could be used by Suzlon to buy out the minority 5 percent stake in RE Power held by a German firm for Rs 428 crore.

Suzlon’s revenue visibility is also increasing. It had an order book of Rs 29,291 crore at the end of June 2011. Going by its sales of Rs 17,870 crore last year, the company has enough orders to drive revenues for about 1.6 years.The company has continued bagging orders in September and October from companies like Gail, the Malpani group and Sri Lankan company Senok.

RE Power, which will soon be consolidated into Suzlon, is looking to grow at more than 25 percent on its net profit level on the basis of a shift in product mix to high margin offshore wind. It also wants to get its 2 MW (highest selling) projects to low-income countries. Suzlon has another year as moratorium after which it needs to start repaying its debt. If it does not, it will have to restructure the debt again. Till now, Suzlon was paying only interest on its loan and not the principal amount. Once its turnover improves, it will gnerate mroe operating profits which will help it to service even the principal part of the debt and get its books under control.

The chief threat to the book value or value of assets comes from its huge debt but BoAML has a solution here to offer. It wrote in February, “Suzlon can repay its entire M&A debt of Rs 20.7billion (Rs 2,070 crore) and FCCB of Rs 21billion (Rs 2,100 crore) with its value of Repower shares at Rs 62 billion (Rs 6,200 crore) at current stock price. So if India business remains even stable, then the stock should find support in the worst case.” What BAM is suggesting is to sell RE Power in case it needs to save itself. But the main reason why Suzlon got into this debt situation is the price it paid for RE Power. In that case it is doubtful if Suzlon can get anyone to pay such a high price for RE.

The management seems to be sticking to its promise of bringing down debt and the company looks set to perform well from its good order inflows. The stock is trading at 7 times its estimated earnings for the year ending March 2012.

So has Suzlon left the worst behind it? Maybe.