Equity has gone with the wind, but debt is eternal at Suzlon

While founder Tulsi Tanti made a name for himself and his company Suzlon by being one of the first movers in wind energy in India, his bold audacious attempts to catapult the company into a higher orbit ended up dragging it down into an financial crisis, more than once. It’s been more than a decade of struggled existence as Tanti has found it rather hard to shake off the sins of commission committed during the go-go years of 2005-08.

For a strange reason, Europe has turned out to be some kind of acquisition graveyard for many Indian companies. Be it Bharat Forge with CDP, Dr. Reddy’s with Betapharm, Tata Tea with Tetley, Tata Steel with Corus or Havells with Sylvania or the acquisition of Hansen and REpower by Suzlon. While most players managed to scrape through, the wind energy equipment maker didn’t turn out to be so lucky.

As an entrepreneur, Tanti can’t be entirely blamed. An ambitious entrepreneur wants to create, grow and capture as much of the market as possible. And piling up debt is a faster way to scale and boost overall shareholder return. Unfortunately, if the underlying business gets worse instead of better over time, debt ends ups becoming your nemesis.

Most financial blow-ups are thus the outcome of excess on the part of not just the entrepreneur but also indulgent bankers, guided by their own vested interest. Banks have often demonstrated poor judgement not only with respect to assessing earnings durability through cycles, but also pricing in regulatory risks that can practically takedown a business.

In India, public sector bankers are hardly held accountable for their lending decisions. What has made things worse for the banking system is, ministerial interference aside, the primary aim of every bank chairman is to evergreen bad loans to the degree possible during his tenure to avoid a bad report card for himself. Strangely, on the contrary, there is no incentive for good governance and for taking hard decisions to ensure a clean banking system.

Suzlon is a classic case of poor lender diligence. Wind energy has always been on a weak footing in terms of economics, barring government incentives there was never a case for it. Suzlon’s plans came unstuck post the 2008 financial crisis as it never regained the momentum to outrun its debt. For a decade now, debt restructuring has been an ongoing saga.

But the recent debt recast, where the bankers decided to back Tanti on generous terms taking 60% haircut on their loans, is baffling for the business case looks bleaker than ever. Chiefly, the fall in tariff further affects the viability of projects in the renewables space where IRR has anyway been driven by regulatory incentives like accelerated depreciation and generation-based incentives. Unless power tariffs rise, it will be hard for OEMs like Suzlon to relive the gold rush in its initial years.

Yet, against all wisdom, Suzlon’s bankers have refused to throw in the towel or the rulebook at Tanti. The wisdom, not to mention the intent of banks, is open to question because they turned down two potential bidders who were in much better shape financially and in terms of management depth. Brookfield was a global infra asset operator with substantial renewable energy assets under management and Vestas, a well-established wind energy OEM.

Suzlon’s stock price has lost 99% of its value since listing, on the back of continuous dilution. It is not just the lay investor, even pharmaceutical tycoon Dilip Shanghvi hasn’t made any return on the Rs.18 billion he invested in 2015.

But Tanti is firmly seated in the driver’s seat. And debt continues to be his fuel.