Sucheta Dalal :Will Suzlon be able to tread the growth path again?
Sucheta Dalal

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Will Suzlon be able to tread the growth path again?  

November 13, 2009


Suzlon, the largest manufacturer of wind turbines in India, is looking at becoming the biggest provider of wind energy in the world. But the company is facing a mounting debt burden and increasing complaints about the quality of its wind turbines.
The company’s woes began when there were a few complaints from its American clients because Suzlon’s turbine blades started cracking while facing volatile winds. In fact, Suzlon was forced to retrofit 1,251 blades. Subsequently, a number of prospective wind turbine buyers cancelled their contracts with the energy major and a few orders that were in the pipeline were also cancelled.
Moreover, the company’s debt burden has been steadily rising. With an eye on global expansion, the company snapped up three large organisations—REpower, Hansen and SE Forge. With these acquisitions, Suzlon’s combined capacity increased to 5,450MW, which is one-sixth of the annual global installation of wind power projects.
Suzlon’s standalone Q2FY10 sales volume plunged to 283MW from 727MW in the same quarter of the previous year. In monetary terms, standalone sales declined 56% to Rs1,868 crore and the company reported an EBITDA (earnings before interest, tax and depreciation) loss of Rs149 crore. Consolidated sales in the same quarter declined 31% to Rs4,793 crore. Interest expense increased 79% to Rs 258 crore and depreciation cost rose 48% to Rs188 crore, resulting in a consolidated net loss of Rs356 crore.
The half-yearly results throw up similar figures. Consolidated net loss for the April-September 2009 period was a huge Rs808 crore even as sales dropped 11% to Rs8,946 crore. Suzlon’s dismal performance has resulted in a company with Rs26,000 crore global sales (in 2008-09) enjoying a market capitalisation of only Rs10,500 crore.
The irony is that Suzlon’s performance is plunging while globally, wind turbine installed capacity has been steadily increasing. Global installed wind energy capacity increased 8.6% to 30,625MW in 2009 and is projected to increase by 19.6% to 36,640MW in 2010 and by 19.6% to 43,820MW in 2011.
Against this global scenario, Suzlon’s standalone sales volume declined 62% to 283MW in Q2FY10 (the annualised figure is 1,132MW). Moreover, the company’s order book stands at just four-five months of sales. As of November 2009, Suzlon has pending domestic sales orders for 123MW and international orders for 1,365MW.
With customers continuing to postpone orders, the company is unlikely to achieve its break-even sales volume of 2,000MW (37% of total capacity) in the current fiscal which will result in a huge spill-over of potential supplies to 2010-11. Going forward, the low quality of blades in its turbines—leading to possible cracking in high-wind areas—will force the company to develop high-performance carbon-composite blades and spares, which will lead to a further increase in costs.
Suzlon’s wind turbine electricity generation cost has nearly doubled over the past four years— from Rs3.80 crore per MW in 2004-05 (on total sales of Rs1,942 crore for 506MW) to Rs6.50 crore-Rs7 crore per MW in 2008-09 (on total sales of Rs26,000 crore for 2,790 MW). The total landed cost per MW is much higher after factoring in sales tax, freight, land price, grid connecting charges, etc. In contrast, the cost of thermal power has declined from Rs4.5 crore per MW to Rs4 crore per MW over the past four years. Ultra-mega power projects run on super-critical turbines of 4,000MW are projected to have a total cost tag of Rs17,000 crore by 2012.
It is not just the higher capital costs that are plaguing the industry; the performance cost per MW is also very poor in case of wind turbines. Per MW of installed capacity, wind turbines can generate only around 1.5 million kWh a year whereas thermal power projects can generate 7 million kWh. This means an investment of Rs 10 crore per MW of wind energy capacity will generate 1.5 million kWh, whereas an investment of Rs4 crore per MW of thermal power capacity will generate 7 million kWh.
So, despite the 80% depreciation benefit (in the first year of operation) and the 10-year tax holiday granted to wind power projects in India, the price of power produced from wind turbines is almost twice that of thermal power.
Suzlon will have to overcome its technological and financial constraints to return to profitability.
Dhruv Rathi [email protected]

-- Sucheta Dalal