FOR SEVERAL MILES beyond the military airbase of Bhuj in Gujarat, the arid landscape is dotted with shrubs and bushes. This region scarcely gets any rain, and except for a few hardy crops, the land is not really cultivable. Years ago, a few cement companies set up shop to take advantage of the region’s limestone deposits and the fast-growing construction markets elsewhere in the state. But the region never prospered; neither has it fully recovered from the aftermath of the 2001 earthquake that left more than 12,000 dead.
Nani Ber, a village north-west of Bhuj, near the Gulf of Kutch, is different. Early last month, Tulsi Tanti, chairman and managing director of wind energy firm Suzlon, unveiled his newest product here. A typical wind turbine sits on a steel lattice tower or is mounted on a tall steel column, which is not higher than 80m. A taller tower/column means its base diameter will surpass 7m and it’s difficult to transport such large parts. So towers in India usually don’t exceed 90m. Suzlon’s hybrid tower—a steel column mounted on a lattice tower—reaches 120m. “Taller windmills cost 10% more but are 14% more efficient,” says Tanti. Wind speeds rise with increase in hub heights, and a taller tower is a boon in low wind-speed nations like India. The company has also built a larger rotor diameter for its turbines and both products have been tested at the research centre of Suzlon’s wholly owned German subsidiary, Senvion.
The Rs 20,516 crore company has installed more than 1,200 wind turbines around Nani Ber and will add another 1,000 over the next four years—many of which will be the taller ones. When the Kutch project is complete, Suzlon’s windmills will cover about 120 km, have an installed capacity of 2,000 MW, and will be the biggest such farm in the world. For the 61-year-old Tanti, it could signal an unequivocal turnaround for Suzlon, after the debacle some years ago.
An optimistic Tanti says he has “commitments from customers to buy the new hybrid machines”. Others are not too enthused. “Just remember that Suzlon’s windmill blade broke a few years ago,” a senior executive who works for a competing firm points out. “We still don’t know how reliable the new technology is.”
While at Nani Ber, Tanti recalled that during the Vibrant Gujarat summit in 2007, he had proposed to install a 50 MW wind power project in Bhuj. Narendra Modi, then chief minister of Gujarat, asked him the potential capacity of the state. Tanti estimated it would be about 5,000 MW across Gujarat and 2,000 MW in Bhuj. At Modi’s behest, he agreed to take up the Bhuj project and also promised to install India’s first offshore windmills in Gujarat, which would initially generate around 350 MW. “In a way, it’s [Bhuj] a turning point for Tanti, who was earlier thinking of large-scale projects,” says a former board member of Suzlon, who did not want to be named. “But the markets tanked at the time.”
Tanti could be back with a new story as the wind market has changed considerably. When the government introduced accelerated depreciation (AD) in 2003 (allowing higher deductions in the early life of an asset), high net worth individuals and small companies with high tax liabilities went for wind-based power as they could write off up to 80% of what they paid in the first year itself. Wind power now became a financial tool. Till four years ago, 90% of the sales took place on account of AD, points out Madhusudan Khemka, managing director of ReGen Powertech, another wind turbine manufacturer. To ensure better production, the government came up with a generation-based incentive (GBI) in 2011. An incentive of 50 paise was given for each unit of electricity fed into the grid (for a period of at least four years and a maximum of 10 years) with a cap of Rs 62 lakh per MW. The GBI is provided over and above the tariff fixed by the grid. The government dropped both the sops in 2012; GBI was reinstated in 2013 with a revised payment ceiling of Rs 1 crore, and AD was brought back in May 2014.
The depreciation news impacted Suzlon’s stock and the scrip jumped to Rs 34.65, hitting the upper circuit on the bourses. But the spike was short-lived as Suzlon issued fresh shares to its foreign currency bond holders at Rs 15.46, who have resorted to selling them whenever the price goes up.
With the reintroduction of GBI, a new breed of customers, known as independent power producers (IPPs), has come to Suzlon. Unlike those who invested in windmills for the sake of tax benefits, IPPs are companies/consortiums that focus on production, set up large wind projects, and get funded by banks and/or top-tier private equity (PE) firms. As independent power generators, they have low incomes and lower taxes to pay. Hence, AD fails to attract these developers while GBI can clearly provide 10% to 20% incentive or even higher, experts say. Globally, big PE firms, including J.P. Morgan Asset Management and Goldman Sachs, invested in IPPs. Valuations of wind firms have gone up in Europe and several IPPs got listed. Mytrah, an IPP started by serial entrepreneur Ravi Kailas, is currently listed on London’s Alternative Investment Market.
Going by the trend, India’s wind energy market could be getting more organised and taking the IPP route. When AD was withdrawn in 2012, total installation orders for that year stood at 1,600 MW and nearly all of them came from IPPs. A year later, Suzlon received no orders owing to its fragile finances, but other firms bagged installations worth 2,000 MW as the government reinstated GBI. Suzlon soon caught up with its peers and orders are expected to close at 1,800 MW in the current fiscal, of which 750 MW has come in the first six months. And the orders are flowing in from IPPs this time. Tanti is banking on his Bhuj experience of scaling up to facilitate the growing IPP segment.
Suzlon is theworld’s fifth-largest wind-turbine maker (earlier, it held the third spot), a space dominated by European and U.S. companies. When global oil prices threatened to smash the $100-a-barrel barrier in 2006, the future of fossil fuels looked bleak. The idea of renewable energy hit a high pitch and Tanti became the darling of the stock market. He was catering to the fastest-growing global markets (Europe and the U.S.) and doing it faster than his global peers. His company topped Rs 57,000 crore in valuation and he became one of the richest men in India.
Tanti’s story is similar to many operating during the heady pre-Lehman Brothers days. He borrowed heavily from banks to acquire two prize assets in 2007—Belgium’s Hansen (world’s second-largest maker of wind-turbine gearboxes at the time) and German wind power firm REpower Systems SE (third-largest wind-turbine maker in the country, now renamed Senvion). Suzlon’s borrowing shot up to Rs 14,800 crore in FY09 and it posted cumulative losses of Rs 11,000 crore in the next five years. Turbine troubles, weak global orders, and rising interest costs forced it to default on a $200 million (Rs 1,244.6 crore) foreign currency convertible bond. The company initiated corporate debt restructuring (CDR) in 2012-13 and Tanti had to dilute his family’s stake (to 35% from 65% in December 2007) in order to bring in new capital as part of the CDR process. Suzlon got working capital of Rs 1,800 crore, less than half of what it had at its peak, and the banks involved got a 30% stake in the firm in lieu of the forgone interest.
With oil prices falling to a four-year low of $81 and the discovery of shale gas in the U.S., renewable energy projects dwindled. In August 2013, Suzlon’s value fell as low as Rs 2,200 crore and the banks began forcing Tanti to sell off his assets to pay them back. It sounded like the death knell for Suzlon—well, almost.
Tanti says Suzlon should be back to profit by FY16. Given the history, that sounds overoptimistic. Business is looking up no doubt, and operational income has increased in the last two quarters. The Indian market for wind turbines showed a significant recovery last year, and Suzlon’s domestic sales more than doubled to Rs 5,600 crore. It has an order book of Rs 6,300 crore (of which domestic orders amount to Rs 1,100 crore) and regained its No. 1 position in the domestic market from Wind World India (formerly Enercon India), another key player in the wind energy segment.
Suzlon is not out of the woods yet as its total debt stands at Rs 15,000 crore in FY14, converting into a leverage of 3.3, and the business doesn’t generate enough revenue to cover its annual interest cost of about Rs 2,200 crore. So it is planning to list its German arm on the London Stock Exchange early next year and raise about Rs 4,000 crore to reduce its rupee debt. According to a Financial Times report, Suzlon may raise another $600 million (Rs 3,707 crore) in fresh dollar-denominated debt.
As IPPs expand their footprints and look for providers, Suzlon’s end-to-end solution for wind projects can give it an edge over competition. It takes about two acres to set up an onshore windmill and its allied infrastructure. From the beginning of its operations, Suzlon has bought the land, set up windmills, sought permission to connect to the grid, and liaised with government agencies on behalf of its clients. Earlier, such arrangements saved more than Rs 50 crore in power costs for Pune-based automobile companies, including Bajaj Auto and Tata Motors. More recently, State Bank of India commissioned a 30 MW wind farm (developed by Suzlon) in rural Maharashtra, which will be connected to the state grid. The bank, in turn, is entitled to 30 MW of power usage elsewhere in the state, say in Mumbai, where commercial cost can be north of Rs 8 a unit. Suzlon has similar arrangements with several public sector units that have been mandated by the government to source 2% of their energy requirements from the renewable energy sector.
Tanti has in place a dedicated sales team for IPP customers, which will work out the modalities of large projects. For instance, as Suzlon sources large tracts of land necessary for wind farms, it can easily set up more capacity for customers like Mytrah. He also feels this turnkey strategy will keep the company ahead of big competitors, mostly European firms like Spain’s Gamesa and German firms Enercon and Vestas, which won’t have easy access to such land parcels.
Suzlon’s long-term customers, who bought windmills as tax-saving tools, are realising the business potential of IPPs. Delhi-based Sterling Agro, which started small in the late 1990s, has 60 MW of wind power installed. It is operating as an IPP now and buying new installations to leverage GBI. In Coimbatore, J.P. Morgan-funded Leap Green Energy has bought second-hand Suzlon windmills to build a 140 MW installation. The company is planning to increase its capacity to 1,500 MW. Mytrah, one of Suzlon’s biggest IPP customers, already has 330 MW installed and an agreement with Suzlon to raise its capacity to 2,000 MW. From 10% of the installed capacity in 2007, GBI-backed IPPs now account for a third of the total installed wind capacity. Last year, out of the 21,100 MW of wind power, 6,700 MW fell under the GBI scheme.
According to Tanti, if new investors (read IPPs) leverage the sops and pricing norms in the power-hungry country, wind assets can be depreciated and paid off by the time the power deficit narrows. “Then India will have green, profitable power.” As the current government is targeting 10,000 MW of wind power capacity every year, Tanti feels upbeat.
Rajeev Karthikeyan, co-founder and managing director of Leap Green Energy, agrees. “Wind energy in India will be viable as demand always exceeds supply and you’ll always find buyers who are willing to pay market price,” he says. Wind power is cost-competitive, compared with the clean coal technology of the recently set up ultra mega power projects. The current cost of wind energy varies between Rs 3.15 and Rs 6 a unit; thermal energy, which accounts for nearly 70% of India’s power generation, costs between Rs 1.5 and Rs 8 a unit while the nuclear energy generated at the Kudankulam Nuclear Power Plant is said to cost between Rs 3.5 and Rs 5 a unit. The proposed plants by the Department of Atomic Energy could be churning out power at more than Rs 9 a unit. “In states like Tamil Nadu, wind energy is cheaper than traditional power,” observes Karthikeyan.
The viability factor and grid parity are prompting even small investors to think big. Rajesh Malpani installed his first wind turbine in 2000 to take advantage of the depreciation that investing in turbines offered. Today, the Malpani Group has an installed capacity of 235 MW in Maharashtra and Rajasthan, and he expects to add another 125 MW this year. Malpani has changed his strategy to avail of production incentives and acts like an independent power producer. “Over a long period, mainstream power costs will only increase in India while wind energy prices will remain stable, making it like an annuity business,” he says adding 16% to 20% return is “easily possible”.
All these indicate increased activity and a more viable environment, believes Tanti.
Meanwhile, there’s fear that the government may prefer solar power over wind. Suzlon’s peers in Europe have seen their share prices rise between 275% and 300% since early 2013 while its own shares have declined 30% during the same period, as per a recent report by HSBC Global. One reason for this could be the broad policy changes that made the wind sector look unviable in 2012 although the government left the incentives for solar projects intact. According to the Ministry of Renewable Energy, India has an installed wind power capacity of 20,149 MW (and an estimated potential of 100,000 MW), compared with 2,180 MW of solar energy. But wind energy in the country is largely dependent on monsoon winds, and remain highly location-based. Wind speeds here are at least 50% lower than those in Europe, bringing down power generation. In contrast, the country sees 300 days of sunlight every year and solar projects are constantly promoted.
The former UPA government established the Jawaharlal Nehru National Solar Mission and set a target of 20,000 MW of grid-connected solar power by 2020. The current BJP government also backs solar power units and wants more IPPs in this space. “There’s a lot of interest among investors for IPPs—both wind and solar,” says Rushabh Patel, head of private equity at the consulting firm PricewaterhouseCoopers.
It means Suzlon must lock horns not only with wind players but also with new entrants in the solar sector. For instance, Delhi-based Hindustan Power Projects is planning to list its wholly owned subsidiary Hindustan Power, which specialises in setting up solar-based IPPs. It is run by Ratul Puri, who earlier ran Delhi-based Moser Baer’s solar business and lost heavily to Chinese competition. He is now planning to raise $1 billion from the equity market to set up 1,000 MW of solar photovoltaic capacities in India and abroad. According to an equity analyst from a foreign brokerage, “An IPP will now have a choice between wind and solar energy, which was not there earlier.”
Tanti admits this reality. In India, solar potential is high, but solar companies are small and fragmented unlike those in wind, he notes. Moreover, solar technology is still evolving and there’s no proof yet that solar panels can work for decades without requiring replacement. (Wind turbines have an estimated lifespan of 25 years.) “We are doing newer things to make wind energy an attractive investment,” says Tanti. “We can even start offering solar solutions to our customers and they will have the advantage of using the same distribution infrastructure at the windmill sites,” he adds.