A Business Research Report On

Suzlon Energy

-------------------------------------------------------Submitted to

Instructor: Prof. M.M.Monippally

Academic Associate: Ms.PakhiAtre Sharma

In partial fulfillment of the requirements of the course

Written Analysis and Communication - II

By Group B10

Shrey Rathi

Pratibha

Pooja Sagar

Kaushik Dutta

Bagwan Zeeshan Ali

Sushil Kumar Meena

Indian Institute of Management, Ahmedabad

3rd March, 2013

To,

Mr. Tulsi R. Tanti

Chairman and Managing Director

Suzlon Energy Limited

From,

WIMWI Consultants

Date: 3rd march 2013

Subject: A detailed report recommending future strategy of Suzlon based on an in-depth analysis of past and current trends in Industry and Suzlon’s decisions.

Dear Sir,

With regard to your request for suggesting a suitable growth focused strategy for Suzlon in next 10 years please find attached the report detailing the same. We have analyzed the wind turbine industry in depth, understanding the trends in demand and competitive environment. Based on economic events and government policies in majority of markets we feel that wind sector will face a sub-dued demand for next 2-3 years after which the industry will revive back to double digit growth phase. We have also analyzed Suzlon’s strategy through the years and impact of the same while growing forward. For future growth we believe Suzlon should focus more on Servicing and operating wind farms, develop supplier relationships for procuring critical components, divest non-strategic assets and outsourced manufacturing requirements. A suggestive plan for short term debt restructuring is also given.

We hope the report will help you in deciding the future course of action.

Regards,

WIMWI Consultants

Encl: Report

Page 2 of 32

EXECUTIVE SUMMARYWind energy sector, biggest in the renewable energy sector, had performed brilliantly till 2008. This period was marked by high oil prices, increased awareness of environmental problems caused by traditional sources of energy and rapid advancements in technology. Several international conferences were organized to discuss the environmental issue and develop a political will to focus on renewable sources of energy. Several countries established targets for use of renewable sources of energy. Taking advantage of these environmental conditions, Suzlon embarked a path of rapid growth to become the seventh player in the industry. It diversified by forward and backward integration. It pursued the vehicle of mergers and acquisition to obtain an inorganic growth.

However, the period of 2008-2012 was challenging for both industry and Suzlon. World economy was hit by first sub-prime crisis in US followed by European crisis. US and Europe were the biggest markets of the sector. This greatly reduced the investment possibilities in new wind energy farms. Another development was the increased production of Shale gas in US. This provided a cheaper alternative for energy production. Further, due to rapid expansion by firms, industry started showing the sign of over-capacity. Political outlook for wind energy in most of the countries also faded. In India, major incentive of accelerated depreciation was repealed.

In the midst of all these negatives, some positive developments also took place. Fukushima disaster shattered the faith of the world in nuclear energy. Several countries, like Germany, decide to either limit or ban the use of nuclear energy. In some countries like Australia, Brazil and New Zealand, government showed positive signs for the industry growth by setting high targets for renewable energy and incentivizing it.

Suzlon also faced several challenges. Aggressive and costly acquisitions introduced cash crunch in the firm. This was furthered by losses that were accumulated during these years. In order to gain some breathing space in cash flows, it started disinvesting. Despite these challenges, it continued its focus on research and development. New products were introduced. Focus on providing end to end service increased. It was also faced with the question of firm culture. With globalization and acquisitions, it needed to develop a ‘Suzlon Culture’.

There is going to be slow growth till 2015. But beyond that this sector again shows promise. Investment in new technologies like direct drive turbines, hybrid plants and offshore wind farms is likely to happen. Recent political developments have also started giving signs that countries will eventually focus in renewable energy.

Suzlon has divided its future strategy into Consolidation Phase (2013-2015) and Growth Phase (2016-2022). It will enter into business of consulting installation, operation and maintenance of wind farms. It will also increase its focus in offshore technology and enter direct drive technology. It will also enter into insurance sector for providing insurance to wind energy farms. It will focus capacity and geographical expansion only in Growth Phase.

[Words : 480]

Page 3 of 32

CONTENTSExecutive Summary............................................................................................................................................................. 3

Abbreviations Used.............................................................................................................................................................. 5

Wind Turbine Industry Sector..........................................................................................................................................7

Pre 2008 Era.......................................................................................................................................................................7

2008 to 2013 era............................................................................................................................................................... 8

Expected Future................................................................................................................................................................ 9

Suzlon as a player in global market................................................................................................................................9

Acquisitions and Backward Integration.................................................................................................................10

Product Mix and R&D.................................................................................................................................................10

Forward Integration...................................................................................................................................................... 10

Offshore Market.............................................................................................................................................................11

HR and Culture...............................................................................................................................................................11

Disinvestments............................................................................................................................................................. 11

Summary...........................................................................................................................................................................11

Aspirations............................................................................................................................................................................ 12

Suzlon Strategy: Moving Forward................................................................................................................................12

Guiding principles.........................................................................................................................................................12

Product, technology and supply................................................................................................................................13

Project and consultancy services..............................................................................................................................13

Operations & maintenance services........................................................................................................................13

Insurance Services.........................................................................................................................................................14

Markets..............................................................................................................................................................................14

Manufacturing Facilities.............................................................................................................................................15

Quality Control...............................................................................................................................................................15

Corporate Debt Restructuring (CDR).....................................................................................................................15

Conclusion............................................................................................................................................................................ 16

Exhibits.................................................................................................................................................................................. 17

References........................................................................................................................................................................... 31

Page 4 of 32

ABBREVIATIONS USED

PTC - Production Tax Credits

IPP – Independent Power Producers

RPS – Renewable Portfolio Standards

MWh – Mega Watt Hour

ITEI – Institutional Tax Equity Investors

WTG – Wind turbine Generators

Page 5 of 32

Page 6 of 32

“The sooner we get started with alternative energy sources and recognize that fossil fuels make us less secure as a nation, and more dangerous as a planet, the better off we'll be.”

-Lindsey Graham

Energy is the prime mover of all the development processes. According to 2008 IEA report, over 81% of total energy consumed in world is derived from fossil fuels while renewable energy contributes to less than 13% (Refer Exhibit 1). Limited fossil fuel reserves, depleting ozone layer, global warming and other environmental problems advocate the cause for increasing energy production from renewable sources like solar, hydro-electric, wind, geothermal and biomass etc.

Of all the renewable energy options, wind energy is by far the most advanced, proven, scalable and quickly installable. It has the potential to contribute more than 30% of the world energy needed within next 20 years.

As the world’s Seventh largest wind turbine manufacturer, Suzlon has it’s footprint over 33 countries across 5 continents with cumulative market share of 7.6%. It is the largest wind solutions provider in India with 43% market share. Suzlon has formulated its international strategy by targeting high potential markets like China, Europe, and North America. Suzlon’s “End to End” business model offers unique solution from equipment supply to full turnkey solution for each market. Suzlon’s approach to supply chain management and logistics relies on vertical integration.

WIND TURBINE INDUSTRY SECTORWind Energy demand is influenced mainly by cost-competitiveness of wind energy, availability of project financing and government policies. The primary customers for Wind Turbines are IPP’s, ITEI’s and Community Wind Farms. Suppliers to the industry include manufacturers of rotors, gearboxes, blades and other components.

PRE 2008 ERAThe world saw a sustained interest in renewable energy including wind energy only after the 1973 Arab oil crisis. Constrained Oil supply led to the development of new technologies during 1970’s and 1980’s. 2000’s saw increasing awareness about global warming with various conferences and business summits being held on green solutions.

Global wind energy installations were increasing at a CAGR of 28% during the period 2000-2008 (Refer Exhibit 2 and 3). New markets like US, China and India led the sector in contrast to traditional European players (refer exhibit 4).

Growing wind energy demand encouraged many new players to enter the market. Wind turbine Industry was characterized by few large players and many small, local and fragmented players (refer exhibit 5). These players were mostly involved in manufacturing and assembling of wind turbines. With demand outstripping the supplies of components, suppliers gained a lot of bargaining power. On the other hand, buyers of wind turbines lacked the know-how of installing, maintaining and servicing the wind turbines/farms. Thus, there was a strong impetus on big players for backward and forward integration. A slate of mergers occurred during the period – Vestas with NEG Micon, Suzlon with REPower, GE with Enron, Gamesa with Made and Siemens with Bonus.

Supportive government policies were the main reasons for the surge in wind turbine demand. Government incentives include – feed-in tariffs, RPS, tax benefits, subsidies and green certificate

Page 7 of 32

systems (refer exhibit 6). Targets of achieving a percentage of energy from renewable source (RPS) were set by the states

Solar and Hydro power are typical alternatives to Wind energy. However, with increasing life of wind turbines (from 12 years in 1990’s to over 20 years in 2008), decreasing per MWh cost of installation and production (from 63$/MWh in 1999 to 40$/MWh in 2007) (refer exhibit 7) wind energy is becoming more cost-competitive as compared to other renewable sources (refer exhibit 8).

Overall, the market outlook prior to 2008 was positive. High oil prices and spreading awareness about global warming kept interest in wind energy alive and many countries embarked to include wind energy in their long term energy mix.

2008 TO 2013 ERA2008 saw major changes in world economy which had repercussions on wind turbine market. These changes and their impacts are summarized as:

1. Economic and Financial Recession of 2008/09: Decreasing capital availability reduced investments by IPP’s, thereby diminishing the demand of wind turbines. The green agenda was overshadowed in many countries. However, the negative effects of recession were partially offset by declining prices and increased supply of wind turbines.

2. Shale gas revolution: Rapid increase in production of shale gas in US has exerted a downward pressure on gas prices across the globe. Production of shale gas in US increased from less than 1% in 2000 to over 20% in 2010. Shale gas provides a cheap way for energy production. Also, carbon emissions are lower than other traditional energy sources. Threat of shale gas becomes graver as two of the largest potential reserves lie in US and China.

3. Excessive Capacity – Logistical difficulties and high cost of transportation of equipments from manufacturing sites to installation sites led to the development local manufacturing facilities. Many firms invested heavily in building capacity. However, sharp decrease in investments in farms resulted in the industry wide over-capacity. At the same time, these firms are riddled with high debts and decreasing cash flows.

4. Policy changes – Kyoto protocol (effective 2005) imposes an upper ceiling on carbon emissions by industrialized countries. This paved the way for introduction of carbon credits. Farm owners can now generate additional income by selling carbon credits. In 2012, during Doha Climate Change talks, member countries agreed to new emission standards applicable from 2013 to 2020.

5. Fukushima Nuclear disaster – Fukushima nuclear disaster in 2011 raised serious concerns over the safety of nuclear energy. Globally, anti-nuclear sentiment grew with countries deciding to either decrease dependence on the nuclear energy. This provides a valuable opportunity for growth of wind energy.

6. Offshore wind farms – OWF’s exploit the fact that high speed offshore winds generate more energy per turbine than onshore winds. They also decrease the hassle of procuring land especially in densely populated regions. UK is the leaders in OWF installations. Post 2012, OWF is expected to grow at 40% CAGR (Annual Report, Suzlon, 2012).

Overall outlook for wind energy was bleak in short term. Average y-o-y growth of new installations decreased to 27.6% in 2012 from 37% in 2007. Growth in China, US and Europe slowed. However, new markets were identified – Brazil, Australia, New Zealand, Japan and Turkey. Favorable government policies in these countries led to over 12.4 GW worth projects being approved. Offshore

Page 8 of 32

market also helped in offsetting the decreased onshore demand of wind energy. Industry had become more competitive and the market shares of top ten players are shown in exhibit 9

EXPECTED FUTUREDespite the current market turbulence, basic fundamentals which have driven growth for wind sector still remain and will only get stronger over time: Energy Security, Electricity price stability, growing energy demands and reducing carbon emissions. After 15 years of 28% CAGR, total installed capacity in about 80 countries at the end of 2012 stood at 240 GW.

However, current economic conditions do not warrant holding similar expectations in near future. Demand growth in most of OECD countries is very slow or non-existent and competition is fierce. China and USA have been the main drivers of the industry since 2009 but decreased demand and uncertain policy frameworks, respectively, diminish possibility of high growth at least until 2015. Brazil, China, India and Canada are dynamic markets but cannot yet make-up for lack of growth in larger markets of Europe, US and China. Opportunities for future growth are many as can be seen below:

Policy changes: Overall government policies became more supportive. US reintroduced its federal PTC scheme. India saw revival of GBI and AD. All these changes point that new markets are emerging for wind power even as growth in mature markets is decreasing.

Offshore wind energy: Offshore which is in early phase of development is expected to grow faster. Offshore requires relatively high construction costs but with increasing research the same will come down making it more cost-competitive (Refer exhibit 10)

Hybrid Wind Plants: Scientists have started research on the combination of gas and wind energy production farms. This will help in ensuring smooth supply of power by the farm. When wind speed is low, power generation can take place from gas.

Direct Drive Turbines: Direct drive turbines employ lesser components, have lower maintenance costs, are easier to install and are relatively cheaper than traditional turbines. This makes both installation and running costs of wind energy cheaper (Refer exhibit 11)

New Alternative uses: The wind energy has been tested for cleaning water used for gas and oil production. The experiments are also conducted for the generation of hydrogen which can be used as next generation vehicle for energy.

Major challenges: Most of the players in wind industry do not have cash flows to meet the financing of projects in the short term. The economic crisis has left the investors with heavy debt. Also, in the long term there will be an increase in competition from substitutes such as shale gas, solar energy etc.

Overall the prospects for wind energy appear strong in longer term, though industry will face a rough phase in short term.

SUZLON AS A PLAYER IN GLOBAL MARKETSuzlon was set-up with an aim of providing green energy to power India’s growth in 21st century. As a first mover in Indian Wind energy sector, Suzlon followed a blue ocean strategy and tried to capture maximum market share. Over years it has grown from a domestic supplier of wind turbines to a global brand in wind sector. In an intensely competitive global industry Suzlon has been able to make a mark through its focus on cost-effective but high quality products. Its key differentiator lies in its ability to

Page 9 of 32

provide end-to-end solutions right from site selection to installations to operations and maintenance. (Refer Exhibit 12)

ACQUISITIONS AND BACKWARD INTEGRATION Suzlon’s vision has been to become an integrated solutions provider. Though it initially started off as a wind turbine manufacturer, through inorganic growth it has integrated backwards into the value chain.

Sudwind acquisition in 1996 gave Suzlon the breakthrough in manufacturing capability and technological expertise. AE Rotor Holding B.V. acquisition gave Suzlon blade manufacturing capability. Pre 2008 era saw high demand and insufficient/unpredictable supplies of components. To this end, Suzlon acquired Hansen Transmission International – a leading producer of gearboxes, in 2006. This not only reduced supply pressures for Suzlon’s projects but also gave it a lot of controlling power over its competitors like Vestas, GE etc. who sourced their requirements from Hansen.

In 2007 Suzlon acquired REPower, a leading player in European markets with strong technological and R&D expertise. Combined with Hansen acquisition, this helped Suzlon shed its family-operated ‘Indian’ business image. The acquisition also gave Suzlon access to developed markets of Europe and the firm embarked on a global expansion strategy.

This backward integration strategy helped Suzlon to have better control on the supplies of critical components and at affordable prices. It also gave Suzlon an opportunity to leapfrog technological advancements. Vertical integration also helped SEL to have EBIT margins of around 25% against 13% of its competitors.

PRODUCT MIX AND R&DWith manufacturing based in India Suzlon enjoyed a lower cost structure (owning to lower labour and raw material costs) compared to its global competitors. However, in did not have the necessary technological expertise as its competitors. To alleviate this problem Suzlon undertook 2 measures – one, it licensed its technology from small wind players like Sudwind, Aerpec, Enron Wind etc. and two, it partnered with various universities to introduce masters and doctoral programs in wind technology.

During initial years, Suzlon’s product mix was limited to sub-1 MW turbines (Megawatt Series). With technical help from REPower, it started producing multi-megawatt turbine series. Renewable Energy Technology Centre (RETC) was formed by Suzlon and RE Power to boost its R&D capabilities and efficiency improvements. With its R&D facilities set up at strategic locations across the globe (refer exhibit 13), Suzlon is able to develop expertise in the different components used for making a wind mill.

In 2009, Suzlon also faced the issue of faulty blades in overseas market and had to spend over $100 million for rectifying the same. Company also came under fire from Indian customers for supplying turbines having control issues, shaking in the wind, and producing less energy than guaranteed by sales contracts, causing utility companies to incur large costs. This was also a big dent on Suzlon’s brand image and resulted in a decreased order book size.

FORWARD INTEGRATION With the aim of becoming an integrated solutions provider, Suzlon expanded its portfolio to include not only products but also services like installation, operations and maintenance of wind farms. It was

Page 10 of 32

also involved in designing, developing and manufacturing WTG, wind resource mapping, site selection, support in land acquisition, connecting wind farms to grid and after sales operations. It also provided consultancy services for wind energy solutions and feasibility analysis of projects. Thus, Suzlon was on its way to become a one stop solution for a client’s wind energy requirement. It created value for customer, who now could contract out the entire development of wind farm to Suzlon.

OFFSHORE MARKET Offshore wind farms are a recent phenomenon and the market is expected to grow at over 40% CAGR. RE Power is one among select firms globally who have the necessary knowhow of the technology. RE Power is also involved in development of high capacity turbines for offshore use such as 5M and 6M.

HR AND CULTURE As Suzlon grew rapidly in different geographies there was a need to develop and define Suzlon culture. Suzlon is striving to create a culture that is agile, consumer-centric, performance-oriented and integrity based. This is being done through leadership programs managed by a global leadership and development team (GLD). To generate synergies among various geographies and functions, Suzlon built a Group Management Centre in Amsterdam.

DISINVESTMENTS

To fund acquisition of RE Power, stake in Hansen was decreased from 61% to 26% and additional FCCB debt was taken during 2007/08. However, decreased demand post 2008 led to default on payments by customers, delayed or cancelled projects etc. all of which has negatively impacted Suzlon’s cash flows. The company has posted net losses for last three years (FY 2009-2011). Suzlon is faced with an unprecedented cash crunch that has crippled its ability to complete projects in time. In October 2012, Suzlon defaulted on payment terms of foreign debt (FCCB’s) and was looking to restructure its debt.

It is noteworthy that though Suzlon is cash strapped, RE Power has a healthy balance sheet. However, transfer of cash from RE Power to Suzlon is facing legal difficulties and is not possible immediately. In the short term, firm has started divesting assets (which are not strategically aligned) for raising cash. In 2012, Suzlon sold off its Chinese facility for around 340 Cr INR. On the positive, the total debt of Suzlon has seen a significant decline of 47.8 per cent since March 2009 (according to Business Today Research Bureau).

SUMMARY Suzlon has a strong market position that strengthens its brand image and increases its bargaining power. A diverse product portfolio (600KW to 6MW Turbines) helps Suzlon better manage demand fluctuations and ability to cater to both community wind farms (smaller turbines) and IPP’s (larger turbines). Strong R&D expertise helps Suzlon in reducing costs, designing more efficient wind turbines, experimenting on new offshore technologies and developing new equipment’s for low wind conditions.

However, Suzlon’s weakness lies in excessive its dependence on external suppliers of key components and materials. Suzlon has faced supply shortages in past due to component manufacturers’ inability to scale up production quickly. Also, its operating margins have decreased from 1.8% in 2010 to 0.7% in 2011. Losses have increased from 9.8% in 2010 to 13.24% in 2011. Declining profit margins reflect the management's inability to deploy its assets in profitable avenues

Page 11 of 32

and also hinders expansion plans. But despite the short term cash crunch, order book of Suzlon is healthy at over $7.2bn or 5755MW (as of Nov 2012).

Summary of strengths, weakness, opportunities and threats to Suzlon are given in exhibit 14. Exhibit 15 also gives a qualitative analysis of Suzlon’s capabilities and whether Suzlon has exploited its various capabilities to full extent.

In short term Suzlon seems to be faced with difficulty in managing its finances. However, with strong order book there exists no fundamental problem with operations. Going forward, Suzlon would have to become more asset-light, flexible and operationally efficient.

ASPIRATIONS To be technological leader in wind sector To be in top three wind companies To be global leader in providing profitable, end-to-end wind power solutions

SUZLON STRATEGY: MOVING FORWARDPast few years have been quite uncertain for Suzlon. It has tried to grow aggressively through acquisitions. But full synergies in these acquisitions are yet to come. Also, the environment is not as promising for growth as it was in 2008. As a result, strategy for next ten years has been divided in two phases. First phase, from FY13-15, will be the consolidation phase. In this phase, focus will be on bringing synergies in the acquisitions that have been made, stabilizing cash flows, restructuring debt, expanding through products and services that can be provided with current capabilities. Second phase, from 2016 to 2022, will be expansion phase. In this phase, focus will be on increasing customer base, production facilities, and technological investments.

A concrete strategy has been made for next ten years. The major steps that will be taken in next ten years have been discussed in detail in following paragraphs. For tentative timeline see exhibit 16.

GUIDING PRINCIPLESSuzlon will base its future strategies on the following three pillars:

1. Efficient technology2. Efficient manufacturing3. Providing end to end solutions

It will be guided by following four principals:

1. Lean: It should be able to innovate and bring cost efficiency.2. Scalability: If demand increases, it should be easily able to increase its production capability3. Flexibility: Geographical presence should be in such a way that it can reallocate regional

resources when needed.4. Agility: It should have the ability to respond quickly to the market conditions.

Page 12 of 32

PRODUCT, TECHNOLOGY AND SUPPLYAs the cost per unit of power produced in wind farms is very high and the positive attitude of government of various countries is fading, it is essential to innovate to bring down the cost per unit of power. This can be done by either reducing the cost of turbines, installation and maintenance or by increasing their efficiency.

Current product portfolio, which includes control systems, generators, hubs, rotor blades and tabular towers, will be retained. Also, current focus on R&D of these products will be continued. This will give an advantage over major competitors who have reduced their focus on R&D (Vestas Annual report, 2011)

Direct drive turbines, as opposed to gear box turbines, are less complex, easy and cheap to install and have low maintenance cost. As a result, Suzlon will invest in establishing manufacturing facilities for these turbines. Though, aggression in this approach will be minimal in initial years as the reliability of this technology has not been proved.

With the acquisition of REPower, Suzlon has built capabilities in the offshore wind farm sector. As the power generation potential in offshore farms is higher than onshore farms, Suzlon will increase its offshore capacity.

Risk in supply chain is increasing due to rise in commodity prices. Shortages of components like gear box, towers, control panels etc. can also affect the timely delivery of turbines. Suzlon has anticipated these changes and is trying to mitigate risk by vertical integration.

PROJECT AND CONSULTANCY SERVICESSuzlon, in addition to supplying parts, has been providing complete installation services to wind energy farms. These services include land sourcing and permitting, wind resource assessment, infrastructure development, installation and commissioning.

Suzlon will introduce modularity in this approach. In addition to providing complete installation package, it will also provide each of the above consultancy services separately if possible. For example, if a client is purchasing parts from other, Suzlon can assist the client in site selection. Suzlon has also developed a strong knowledge base by understanding the patterns of wind in different parts of the world. It can also sell this knowledge by predicting the wind patterns and warning the clients about probable wind speed drop which can cease power generation. Hence, it will include wind forecasting in its consultancy portfolio.

OPERATIONS & MAINTENANCE SERVICESIn its attempt to provide complete wind energy solution, Suzlon has been providing operations and maintenance services to its clients after installation is over. Here also modularity in services will be introduced. These services can be broken into operating farms, repair and replacement of parts, regular maintenance and up gradation

While providing consultancy, operation and maintenance services, challenge will be imparting knowledge about competitors’ products to employees. This will require investment in training. The big question that needs to be answered is whether this investment will generate enough revenues. We believe that since there are not many players who provide quality end to end services, client will prefer Suzlon for full packages or for part services.

INSURANCE SERVICES

Page 13 of 32

Like any other industry, wind industry is also characterized by certain types of risks. Risk can be due to fire, storm, mechanical failure of turbines and lightning. It can be also due to uncertainty in power production due to wind variations. There is a well-established market in Europe for insurance to wind energy sector. Major players in this market are Northern Alliance, Naturesave, Vestas and Bruce Stevensons. Type of claims that are entertained by players include mechanical, lightning, fire, storm and loss of revenue (Danish Insurance Association, 1999).

Since wind sector is highly risky and has not fully matured, there aren’t significant players in India providing insurance to this sector. Added to this is the lack of availability of experts in financial service industry to access the risk involved in this industry.

Since there is very less competition in providing insurance to wind farms across the world, except in Europe and US, Suzlon can enter into this sector (in 2016). Since it has expertise to assess the risks involved, this can be a successful venture. Also, insurance cover will encourage more players to establish wind farms. Its major focus will be in India, Australia and Brazil because these markets have no existing players and have huge potential. It will be provided in four packages – full risk cover, breakdown cover (cover against breakdown of parts), loss of revenue cover and public liability cover (damage or injury to third party).

MARKETSCurrently, Suzlon has presence in India, Australia, Brazil, China, Europe and US. During the consolidation phase, it will focus on developing business in its current areas of operations only. During expansion phase, it will go for geographical expansions.

India: As can be seen in exhibit 17, there is huge untapped potential in India for wind energy. With reintroduction of GBI and AD in Budget 2013, Indian wind energy sector is poised for tremendous growth in short term. This will lead to a spur in demand by 2016. Suzlon’s average growth target is CAGR 20% for FY 2013-16 and 15% in FY 2017-22.

Europe: Due to financial troubles in Europe, there will be very less growth in Europe (except Germany which is discussed separately). Assuming stabilization of economy by 2017, average growth of CAGR 12% is expected in Europe. These operations will be carried on mainly by REPower. Since land availability in Europe is a challenge, major focus will be on offshore technologies.

Germany: After Fukushima nuclear disaster, nuclear power plants have been banned in Germany. There has increased focus on renewable energy and government is incentivizing it. As a result, Suzlon will target this market aggressively, starting from FY2013.

China: China is suffering from capacity overflow. Suzlon has already shut down a facility in China. Chinese market is highly competitive and developed. We will continue focus in china while leveraging developed supplies market for outsourcing.

Middle East: Due to heavy availability of oil, there is very bleak potential for wind energy. Hence, Suzlon will not enter this market. However, there is good potential for trading renewable energy certificates (RECs).

Australia and New Zealand: There is huge potential for wind energy in these countries. Government has set aggressive targets for renewable energy production. Focus will be both on onshore and offshore technology and hybrid plants.

Page 14 of 32

US: Suzlon already has a strong presence in US. However, due to growth of shale gas energy production and decreased interest of government in renewable energy, low growth is expected in this market in short term. Suzlon will target a low CAGR of 10%.

Others: Other potential markets are Brazil and Africa. Suzlon will focus aggressively in Brazil from 2017. It will enter Africa in 2019.

MANUFACTURING FACILITIESSuzlon will not spend anything in capacity expansion during consolidation phase. It will invest in building a plant each in Australia (in 2017) and Brazil (in 2019) for rotor blades. Rotor blades are very large in size and have high transportation costs. Other investments in facilities, starting from 2016, will be done in India and/or China because of cost advantages.

QUALITY CONTROLAfter the incident of supply of defective turbines, Suzlon is determined to work on its Quality Control (QC). Stringent quality control measures will be established at each facility, starting from 2014.

CORPORATE DEBT RESTRUCTURING (CDR)The INR has depreciated 36% in the last 5 years and the 44% of the FCCB’s for SEL are still unhedged for forex risks. Thus we can safely assume that the Mark-To-Market (MTM) loses for Suzlon will be considerable going further. The possible solution would be to restructure/refinance FCCBs through domestic debt (exhibit 18). Refinancing through domestic debt will result in high interest expenses Suzlon decreasing its PAT by a significant amount. Restructuring will lead to a higher dilution of promoter’s stake which currently stands at 44.16%.

Suzlon can make the repayment through following alternatives:

1. Existing cash and cash equivalents or operating cash flows2. Refinancing of debt3. Additional dilution

On the basis of current Debt to Equity position, net cash outflows and committed capital expenditure refinancing option will reduce profitability by ~8.3% . Moreover since the D/E ratio of the firm is more than 1.5X (1.8X as on FY2011), Suzlon would find it difficult to raise further debt. Therefore, with negative cash flows, the only alternative that Suzlon should opt is dilution of promoter’s stake.

Current Debt: 11,000 crore with nine CDR and four non CDR lenders (exhibit 19).

Suggested Action Plan

Expected cash inflows from Edison, U.S customer: Rs 1,100 crore Savings from reduced fixed expenditure: Rs 300 crore Proceeds from sale of non-core asset by FY2015: Rs 2,800 crore Proceeds from sale of assets from Tianjin, China plant by FY2014: Rs 280 crore Proceeds from sale of SE Forge, SE Electricals etc. in FY2013: Rs 160 crore Proceeds from sale of Promoter’s stake: Rs 240 crore (Saikat, 2012)

In order to achieve a sustainable capital structure the company should enhance its working capital capacity by obtaining credit of INR 1500 crore from banks for working capital facilities, a reduction of interest rates, and conversion of interest costs into equity (Moneycontrol Bureau, 2013).

Page 15 of 32

Please refer to exhibits 20, 21, 22, and 23 for detailed calculations.

CONCLUSIONNext ten years will bring both challenges and threats. By the end of year 2016, it would have consolidated its business and uncertainty will be very less. Exhibit 24 shows the forecasted Income Statement of Suzlon for next ten years. Suzlon is determined to achieve its forecasted targets.

[Words : 4586]

Page 16 of 32

EXHIBITSExhibit 1: Global Energy Mix in 2008

Fossil Fuels81%

Nuclear6%

Renewable Sources13%

Energy Use (TWh) in 2008

Exhibit 2 : Global Wind cumulative and annual installed capacity from 1996 to 2016

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013*

2014*2015*

2016*0

100000

200000

300000

400000

500000

600000

Installed Capacity from 1996 - 2016

Existing Capacity (in MW) Annual Additional Capacity (in MW)

Win

d Po

wer

Gen

erati

on in

MW

*Forecasted ValuesSource: http://www.gwec.net/wp-content/uploads/2012/06/glob_ann_inst_wind_cap_1996-2012.jpg

http://www.gwec.net/wp-content/uploads/2012/06/glob_cum_inst_wind_cap_1996-2012.jpg

Page 17 of 32

Exhibit 3 : Growth rate of global wind cumulative and annual installed capacity from 1996 to 2016

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

2013*2014*

2015*2016*

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

20

65

37

9

73

1212

1

41

31 32 35

45

05

10 2 8 12 7

2533 34

28

3730

2621 24 26 27 28

32

24 2119 16 15 14

Growth Rate of New and Cumulative Wind Generation Capac-ity - Global

New Capacity Growth Cumulative Growth

Grow

th P

erce

nt o

ver l

ast y

ear

*Forecasted ValuesSource: http://www.gwec.net/wp-content/uploads/2012/06/glob_ann_inst_wind_cap_1996-2012.jpg

http://www.gwec.net/wp-content/uploads/2012/06/glob_cum_inst_wind_cap_1996-2012.jpg

Exhibit 4: Annual Installed capacity by region from 2004 to 2012

Source: http://www.gwec.net/wp-content/uploads/2012/06/ann_inst_cap_reg_2004-2012.jpg

Exhibit 5: Top Wind turbine manufacturers and their market shares in 2008

Page 18 of 32

Vestas (Denmark); 17.80%

GE (US); 16.70%

Gamesa (Spain); 10.80%

Enercon (Germany); 9.00%

Suzlon (India); 8.10%

Siemens (Germany); 6.20%

Sinovel (China); 4.50%

Acciona (Spain); 4.10%

Goldwind (China); 3.60%

Nordex (Germany); 3.40%

Dongfang (China); 3.40%

REPower (Germany); 3.00%

Mitsubishi (Japan); 2.60%

Other; 6.80%

Top OEM in Wind Turbine Sector in 2008

Top 5 OEM's - Vestas, GE, Gamesa, Ener-con and Suzlon had a combined market share of 62%.

Source: BTM Consult, International Wind Energy Development: World Market Update 2008, 24.

Exhibit 6 : Summary of government incentive policies for wind energy for different countries.

Page 19 of 32

Exhibit 7: Cost of producing one MWh of wind power (in equivalent 2007 Dollars)

Page 20 of 32

1999 2000 2001 2002 2003 2004 2005 2006 20070

10

20

30

40

50

60

70

Wind Power Price (in 2007 Dollars per MWh)W

ind

Pow

er P

rice

in 2

007

US D

olla

rs p

er M

Wh

Source: Wiser and Bolinger, Annual Report, 16–19. Accessed from www.nrel.gov/docs/fy08osti/43025.pdf

Exhibit 8: Cost competitiveness of various energy sources in 2010

Cost (cents/kWh)Coal 5.5Natural gas 5.2Nuclear 0.57Wind* 5Geothermal

3.6

* Wind energy cost includes U.S. PTC

Source: http://meic.org/energy/global_warming_pollution/renewable-energy-alternatives-1/wind_cost, http://www.scientificamerican.com/article.cfm?id=can-geothermal-power-compete-with-coal-on-price, http://www.nei.org/resourcesandstats/nuclear_statistics/costs/

Page 21 of 32

Exhibit 9: Market share of top 10 Wind turbine manufacturers in 2012

Vestas (Denmark)12.7%

Sinovel (China)9.0%

Goldwind (China)8.7%

Gamesa (Spain)8.0%

Enercon (Germany)7.8%GE Energy (US)

7.7%

Suzlon (India)7.6%

Guodian United Power (China)7.4%

Siemens Wind Power (Germany)

6.3%

Ming Yang (China)3.6%

Others21.2%

Percent Market Share in 2012Note that 5 Chinese manufactures now came in top 10 rank-ing compared to 3 in 2008. Share of top 5 manufactures also de-creased to 46.2% only implying more frag-mentation.

Source: http://www.cleantechinvestor.com/portal/wind-energy/10502-wind-turbine-manufacturers-global-market-shares.html

Page 22 of 32

Exhibit 10: Global cumulative offshore installed capacity by region in 2011 and 2012

Source: http://www.gwec.net/wp-content/uploads/2012/06/glob_cum_offsh_inst_cap.jpg

Exhibit 11: Maintenance cost comparison between Direct Drive and Drive train Turbine

*XZERES 442SR is used as a comparative standard only and is representative of direct drive turbines

Page 23 of 32

Source: http://www.xzeres.com/wind-turbine-products/xzeres-442sr-small-wind-turbine/

Exhibit 12: Suzlon’s business model – “End-to-end” integrated solutions provider

Exhibit 13: R&D and Manufacturing facilities of Suzlon

Page 24 of 32

Wind Resource

Assesment and Land

Acquisition

Conceptualization

Access road, Grid

Connection and Power

Lines

InfrastructureWTG design, developm-

ent and manufactu-

ring

Equipment Supply

Project Execution, Installation Commission

ing

Services

Wind Turbine R&D in Germany

Rotor Blade R&D in Netherland

Gear Box R&D in Belgium

Manufacturing Base in India, China

Innovation Centre Europe

Exhibit 14: SWOT Analysis of Suzlon as of 2012

Source: Market line database, Suzlon. Accessed from http://advantage.marketline.com/Product?pid=9D1C9B19-BF3C-4966-A435-60171560A1FA&view= SWOTAnalysis on 03/03/2013

Exhibit 15: VIRO analysis of Suzlon’s Capabilities

SUZLON’SCAPABILITY

VALUABLE RARE REPLICABLEEXPLOITED

COMPLETELY

Complete solution provider

Yes No No Yes

Vertical Integration Yes Yes Yes YesR&D Capabilities Yes Yes Yes Yes

Wide Product Portfolio

Yes No No Yes

Large Client Base Yes No No YesFirst Mover Advantage

Yes Yes Yes Yes

Low Operations Cost Yes Yes Yes Yes

Page 25 of 32

Strengths1) Strong Market Position2) Diversified Product portfolio3) Strong in-house R&D facilities4) Robust order book

Weakness1) Dependence on External Suppliers2) Decreasing margins on operations3) Cash crunch in short term

Opportunities1) Strong Order backlog2) Growing demand for wind energy3) Joint projects with solar, gas and hydro-projects

Threats1) Intense Competition2) Operational risks3) Dependence on government policy4) Shale gas Revolution

Suzlon

Exhibit 16: Timeline of future strategy for Suzlon

Gantt Chart for Suzlon StrategyConsolidation

phase Growth Phase

FY 2013 2014 2015 2016 2017201

8 2019202

0202

1202

2

R&DDirect Drive Cautious investment Aggressive InvestmentOffshore Tech Cautious AggressiveConsultancyWeather Forecasting

Different levels of operating services

InsurancePilot Actual

India focus CAGR 20% CAGR 15%Europe focus CAGR 10% CAGR 12%Germany focusChina focus Continuing current operations onlyMiddle East entry Not enteringAustralia & NZ focus CAGR 20% CAGR 15%US focus CAGR 10%Brazil focusAfrica entryOutside India manufacturing facility

Australia

Brazil

India manufacturing facility

Page 26 of 32

Exhibit 17: Untapped Potential capacity of wind farms in India as of 2012.

Source: WISE report, 2012

Exhibit 18: Debt Repayment schedule

Debt repayment schedule (USD mn)Current outstanding FY13E FY14E FY15E FY16E

FCCBs 654 389 - 90 175

Acquisition loan 465 65 200 200 -

Term loan 860 86 86 129 559

Total 1,979 540 286 419 734

Exhibit 19: FCCB Out standings as on May '2012

FCCB Out standings as on May '2012Company Name

Maturity period

Issues Currency

Issue size

O/S as on (USD mn)

Fixed Exchange Rate

Redeemable amount (₹ bn)

SUZLON Jun-12 USD 300 211.3 44.6 17SUZLON Oct-12 USD 200 121.4 44.6 9.7SUZLON Jun-14 USD 90 90 48.2 6.7SUZLON Oct-14 USD 20.8 20.8 49.8 1.8SUZLON Jun-16 USD 35.6 35.2 49.8 2.9SUZLON Oct-16 USD 175 175 44.6 10.5

Page 27 of 32

Exhibit 20: FCCB Restructuring

FCCB RestructuringBond series I Bond series II

ParticularsOriginal Restructured

Original Restructured

New bond issued (3:5) 59.3 35.6 34.7 20.8Buy back (54.6%) 29.4 44Option not excercised 211.3 211.3 121.4 121.4Total 300 246.9 200 142.2Cash paid on buy back 16 24Consent fee paid 11.8 1.9Gain 25.3 31.9

Exhibit 21: FCCB redemption

FCCB Redemption

Company Name

Maturity period

O/S as on (USD mn)

Redeemable amount (₹ bn)

Cumulative MTM loss (₹

bn)

Effective borrowing cost (%)

Current preveilng yield(%)

SUZLON Oct-14 90 6.7 0.9 9 31SUZLON Oct-14 20.8 1.8 0.2 11.8 53SUZLON Oct-14 35.2 2.9 0.3 10.8 92SUZLON Apr-16 175 10.5 2 11.1 24

Exhibit 22: Likely dilution required

Likely dilution impact on FCCB restructuringEquity dilution on conversion of FCCB @ CMP(%) Promoter holding (%)

Company

Likely redeemable amount Total Additional

As at Q4FY12

Post conversion of FCCB @ CMP

SUZLON 48.6 49.5 31.9 52.8 26.6

Page 28 of 32

Assumptions:

1. MTM calculated at exchange rate of 55.26INR/USD2. FCCB converted till FY 2012

FCCB likely to convert for 20% CAGR is treated as equity and the balance as debt

Exhibit 23: Regional growth rates from 2013 to 2022

Calculating average growth rate for Suzlon

FY2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Share of market in

base Year*

India 20% 20% 20% 20% 15% 15% 15% 15% 15% 15% 48%Europe 5% 5% 5% 5% 12% 12% 12% 12% 12% 12% 12%

Germany 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 3%China 15% 15% 15% 15% 20% 20% 20% 20% 20% 20% 2%

US 10% 10% 10% 10% 20% 20% 20% 20% 20% 20% 29%Australia and New Zealand 10% 10% 10% 15% 15% 15% 15% 15% 15% 15% 2%

Brazil 40% 40% 40% 40% 25% 25% 25% 25% 25% 25% 3%Africa ** 15% 15% 15% 15% 15% 15% 15% 25% 25% 25% 1%

Average growth of Suzlon

15.4%

15.4%

15.4%

15.5%

16.5%

16.5%

16.5%

16.6%

16.6%

16.6%

100%

*Assumption based on data found in Suzlon Annual Report and Internet**Operation for Africa will start in 2019

Page 29 of 32

Exhibit 24: Forecasted Profit and loss statement for 2013-2022

Consolidated Profit & Loss account (In Rs crore)

2012 (actua

l)2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Estimated growth

2.85%

2.85%

2.85%

7.75%

9.07%

9.07%

9.07%

9.19%

9.19%

9.19%

Income

Net Sales 21,08221,68

322,30

122,93

724,71

426,95

629,40

132,06

835,01

538,23

241,74

6Other Income 180 185 190 196 211 230 251 274 299 326 356Total Income 21,262 21,868 22,491 23,132 24,925 27,186 29,652 32,341 35,313 38,558 42,102

Expenditure

Raw Materials

13,75014,14

214,54

514,96

016,11

917,58

119,17

620,91

522,83

724,93

627,22

7Power & Fuel

Cost80 82 84 87 93 102 111 121 132 144 158

Employee Cost

2,009 2,066 2,125 2,185 2,355 2,568 2,801 3,055 3,336 3,643 3,977

Other Manufacturing Expenses

338 348 358 368 396 432 472 514 562 613 670

Selling and Admin

Expenses0 0 0 0 0 0 0 0 0 0 0

Miscellaneous Expenses

2,911 2,994 3,080 3,167 3,413 3,722 4,060 4,428 4,835 5,279 5,765

Total Expenses

19,088 19,632 20,191 20,767 22,376 24,406 26,619 29,034 31,702 34,615 37,796

Operating Profit

2,174 2,236 2,300 2,366 2,549 2,780 3,032 3,307 3,611 3,943 4,306

Interest 1,655 1,655 1,655 1,655 500 500 500 500 500 500 500Depreciation 661 661 661 661 775 845 922 1,006 1,098 1,199 1,309Profit Before

Tax-142 -80 -16 50 1,274 1,435 1,610 1,802 2,013 2,244 2,496

Tax (40%) -57 -32 -6 20 510 574 644 721 805 898 999

Reported Net Profit

-85 -48 -9 30 764 861 966 1,081 1,208 1,347 1,498

Assumptions

*Net sales and Income assumed to grow by growth rate*If not stated, items are assumed to be proportional to net sales with 2012 as base

*Depreciation durin 2013-105 to be same as 2012 as no expansion is done

*Interest is assumed to come to 50% level in 2016, after debt has been repayed

Page 30 of 32

REFERENCESBahety,M.(2012) . Analysis beyond consensus …The new ABC of research.

Retrieved from

http://www.edelresearch.com/rpt/showpdf.aspx?id=20786&reportname=/FCCB_redemption_turns_on_the_heat_-_Jun-12-EDEL.pdf&lgt=656vfdg&type=ynaj9XvqmJoptbYzJzovtA==

Das,S.(2012). This is how Suzlon plans to revive through debt recast.

Retrieved from

http://www.moneycontrol.com/news/business/this-is-how-suzlon-plans-to-revive-through-debt-recast_787856.html

Bureau.(2013). Suzlon's debt restructuring proposal gets formal approval

Retrieved from

http://www.moneycontrol.com/news/business/suzlon39s-debt-restructuring-proposal-gets-formal-aproval_812763.html

Wiki. (2013). World energy consumption

Retrieved from

http://en.wikipedia.org/wiki/World_energy_consumption

Iea. (2009). Renewable and Waste in World in 2009

Retrieved from

http://www.iea.org/stats/renewdata.asp?COUNTRY_CODE=29

Vestas .(2013).Annual Report 2012.

Retrieved from

http://www.vestas.com/en/annual-report-2012.aspx

InWEA.(2007). Policy at the Center.

India: Indian Wind Energy Association Page

Retrieved from

http://www.inwea.org/centralpandr.htm

GWEC.(2012). India Wind Energy Outlook.

Retrieved from

http://www.gwec.net/wp-content/uploads/2012/11/India-Wind-Energy-Outlook-2012.pdf

EAI.(2012).India Wind Energy.

Page 31 of 32

Retrieved from

http://www.eai.in/ref/ae/win/win.html

IER.(2012).Overcapacity hits turbine market

Retrieved from

http://www.instituteforenergyresearch.org/2012/01/23/overcapacity-hits-wind-turbine-market/

EAI.(2012).Central and State Government Policies for supporting Wind Power Projects.

Retrieved from

http://www.eai.in/ref/ae/win/policies.html

GBI RESEARCH.(2012). TOP 10 WIND TURBINE MANUFACTURING COMPANIES - VESTAS CONTINUES TO DOMINATE AS EMERGING CHINESE PLAYERS PROVIDE STIFF COMPETITION TO GLOBAL LEADERS

Retrieved from

http://www.researchandmarkets.com/reports/2305994/top_10_wind_turbine_manufacturing_companies

GWEC.(2012).Market Forecast for 2012-2016.

Retrieved from

http://www.gwec.net/global-figures/market-forecast-2012-2016/

TANTI.T(2013). TULSI TANTI: WIND ENERGY WILL PLAY A MAJOR PART IN SHAPING INDIA'S FUTURE

Retrieved from

http://articles.economictimes.indiatimes.com/2013-01-04/news/36148944_1_wind-energy-indian-wind-largest-wind-turbine-manufacturer

Suzlon.(2012).Annual Report 2011-2012.

Retrieved from

http://www.suzlon.com/images/investor_annual_result/Suzlon%20Annual%20Report%202011-12.pdf

GWEC.(2012). Global Wind Energy Outlook 2012: Global Wind Power Market Could Triple by 2020.

Retrieved from

http://www.gwec.net/publications/global-wind-energy-outlook/global-wind-energy-outlook-2012/

Page 32 of 32