Event update: Suzlon Energy (Downgrade to Underperformer) - Downgraded on delay in resolution and likely cancellation of 700MW orders

Event update

Suzlon Energy (Suzlon) has defaulted on its foreign currency convertible bond (FCCB) of USD172m, due on 19 July 2019, while its 700MW order book faces potential cancellation.

Details

• Absence of finalisation of resolution plan has led to Suzlon defaulting on its FCCB. Moreover, the Andhra Pradesh state government has decided to cancel its power purchase agreement (PPA) with Axis Energy Ventures (Suzlon was the original equipment manufacturer (OEM), causing its 1.9GW order book to decline to 1.2GW.
• India’s wind industry has faced multiple headwinds in last two years a) an abrupt end to the auction regime b) teething issues with the auction regime c) delays in transmission evacuation d) delays in land allocation in Gujarat. These factors have caused the industry to shrink from 5.5GW in FY17 to 1.5GW in FY19 (FY18 as 1.8GW).
• Despite being a market leader in India’s wind market in last two years, low execution in the overall industry has adversely impacted Suzlon. As a result, the company incurred losses in FY18 and FY19, post healthy profit of Rs6bn in FY17.
• Liquidity issues further worsened the situation at Suzlon (led by leverage), impacting the execution of its strong order book.
• Media reports cited that Suzlon has been in negotiations with a third party investor, with lenders having entered into inter-creditor agreement on 7 June 2019, as per an RBI circular. Given the likely delay in resolution plan and its contours, assessing the residual value for minority shareholders would be difficult.

Impact on financials: We are downgrading Suzlon’s earnings estimates to Rs11bn/Rs1.5bn in FY20E/FY21E due to delays in asset monetisation, which has been impacting execution (potential resolution is critical).

View and valuation

Suzlon’s efforts to resolve its liquidity situation through asset monetisation/equity infusion have been delayed. We believe the delay will continue to impact Suzlon’s financials, despite the company’s large order book and our favourable outlook for the industry over the next two years. As a result, we expect execution to suffer in FY21. We downgrade Suzlon to Underperformer (from Outperformer), given the delay in resolution plan, difficulty in assessing residual value for shareholder and uncertainty in resolution timeline.