Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Suzlon Energy Ltd (SEL) to ‘CRISIL BBB+/Positive/CRISIL A2’ from 'CRISIL BBB-/CRISIL A3/Watch Developing’. CRISIL Ratings has also removed the ratings from ‘Rating Watch with Developing Implications’. The rating on Rs. 4,054 crore bank loan facilities has been upgraded and removed from ‘Rating Watch with Developing Implication’ and also withdrawn on the company’s request and on receipt of a No-Dues certificate form the lender. The withdrawal is in line with CRISIL Ratings’ withdrawal policy.

 

The ratings were earlier on watch as SEL was contemplating options for issuance of non-convertible debt instruments at Suzlon Global Services Limited (SGSL, wholly owned subsidiary of SEL, engaged in O&M services business). This was to pre-pay the entire term debt at SEL and make the cashflows of SGSL ringfenced. Given that the company paid its entire term debt from proceeds of qualified institutional placement (QIP) and does not plan to go ahead with the NCD issuance, the watch is being resolved. In the absence of NCD issuance, the ring fencing of SGSL’s cashflows would not come into effect and in line with management articulation, SEL would operate SGSL as a core consolidated business.

 

The rating upgrade factors in sharp reduction in debt (paying off the entire term debt) done from the proceeds of a recent QIP aggregating Rs. 2,000 crores. The fund-based borrowings are also expected to remain nominal because of healthy cash flow generation from the O&M services business and no material debt funded capex plans. Further, business profile of wind turbine business has improved as seen through lower breakeven volumes and other steps taken for further operating margin protection. SEL has taken cost optimisation and rationalisation efforts over past 2 to 3 years. And as a result, wind turbine business has been able to achieve earnings before interest, depreciation, tax and amortisation (EBIDTA) of Rs 48 crore in fiscal 2023 with execution volume of 664 MW (SEL standalone, Crisil adjusted number). Additionally, company has taken other steps for operating margin protection such as focussing on orders with better margins, receivable profile and pass-through for material cost escalation.

 

Positive outlook reflects expectation that profitability of SEL (consolidated) would further grow and achieve EBITDA above Rs 750 crore in fiscal 2024. This is expected to be driven by increasing fleet base of operations and maintenance (O&M) business and positive tailwinds in Indian wind sector leading to expectation of increase in execution volumes.

 

These strengths are partially offset by the relatively high operating leverage in the WTG business, its working capital-intensive operations and financial history of the company.

Analytical Approach

At present, CRISIL Ratings has combined the business and financial risk profiles of SEL and its subsidiaries, including Suzlon Global Services Ltd (SGSL) and Suzlon Gujarat Wind Park Ltd (SGWPL). These entities, collectively sells wind turbine generators (WTGs) and provides related services and components, with significant operational synergies and some of the common members in the Board.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation..

Key Rating Drivers & Detailed Description

Strengths:

Improved financial risk profile

The term debt stood at Rs. 1,765 crores as on March 31, 2023, on the back of scheduled repayments of term loan and additional reduction of ~Rs 900 crores from rights issue in October 2022. Furthermore, the company’s networth turned positive as on March 31, 2023 on the back of refinancing (gain on derecognition of OCDs & CCPS) and rights issue of Rs 1,200 crores in fiscal 2023.

 

On August 14, 2023, the company approved the allotment of equity shares to Qualified Institution buyers aggregating to ~Rs. 2,000 crores. The company subsequently utilized the required amount to repay its entire debt at SEL, significantly improving the financial risk profile of the company.

 

Stable cash flow from the O&M services business to support overall debt servicing:

The Group has ~13.9 GW of installed fleet under O&M business as on Mar 31, 2023. While the fleet under O&M reduces with decommissioning of WTGs, post completion of the design life, new generators delivered and commissioned get added to the fleet every fiscal. Revenue from O&M services has been steady as this is contractual activity over a fixed timeframe and at contracted price. Also, escalation in revenue is inbuilt into the contracts, ensuring stability of operating margin over a period. The Group has demonstrated stability in revenue and profitability of O&M services business even in stressed times in the past. Stable cash flow with EBIDTA above Rs 700 crore per fiscal from the O&M services business is expected to support debt obligation.

 

Leading market position in the wind turbine segment and a healthy order book

The Group has a successful track record of project execution with technical expertise, evident from the healthy market share of 30-35% in the WTG business over the past many years and also in cumulative installed capacity. The company’s healthy market position should help to obtain orders in the long run. SEL’s order book stood at ~1.43 GW (as on 30th Jun 23), to be executed in fiscal 2024 and fiscal 2025. The company had been dependent on customer-backed financing to execute orders in the last fiscal which had constrained growth. With the repayment of entire term debt, the covenants placed on raising working capital lines no longer exists and the company will be able to pick up orders which it was not able to cater earlier, due to unavailability of capital.

 

Weaknesses:

Operating leverage in the WTG business

Sustenance of revenue in the WTG business is extremely critical on account of operating leverage arising from substantial fixed costs. In the past, on account of these fixed costs, the group has suffered substantial operating losses due to slowdown in revenue from this business. CRISIL Ratings understands the group had undertaken cost reduction activities in operations, manpower and other expenses, resulting in reduction of fixed costs to ~Rs 5.0 billion per fiscal from about Rs 10.0 billion in the past. However, any delay in execution of orders will result in fixed cost under recovery adversely impacting cash flow. While the measures undertaken may reduce operating leverage, it is expected to remain high and expose operating profitability to variability in revenue.

 

High operating leverage exposes the WTG business to losses in the event of curtailed offtake.

Working capital-intensive operations:

The WTG business, accounting for ~65% of the overall revenue in fiscal 2022 and fiscal 2023, is highly working capital intensive.

 

Weak Financial history:

SEL has defaulted in the past and has undergone restructuring. The last restructuring round was in June 2020, post which the company went for refinancing in May 2022. 16 lender consortium was replaced with 2 lenders and unsustainable debt was extinguished through conversion to equity. The company also had negative networth due to past losses till fiscal 2022. This has impacted the financial flexibility of the company with certain lenders.

Liquidity: Adequate

The company’s unencumbered cash reserves stand at more than Rs. 200 crores as on August 31, 2023. The company does not have any debt service obligations given that the term debt has been fully repaid. Furthermore, the company’s O&M division is expected to generate an EBITDA of ~ Rs. 700 crore every year, thereby supporting the overall cash flows. The company has planned capex of about Rs 300-400 crore over fiscal 2024 and 2025, which it plans to fund through internal accrual.

Outlook: Positive

Positive outlook on the back of expectation that a healthy order book and delivery volumes will drive profitability of WTG business.

Rating Sensitivity Factors

Upward Factors:

• Track record of sustained profitability on the back of expectation of a healthy order book and delivery volumes
• Profitability of SEL (consolidated) to grow and achieve EBITDA above Rs 750 crore in fiscal 2024.

 

Downward Factors:

• Order book lower than 600 MW resulting in revenue loss.
• Overall operating margins being lower than 10-12%.

About the Company

Founded in 1995, Suzlon is one of the leading global renewable energy solutions providers. Over the past 26 years, the group has installed over 19.7 GW of wind energy in 17 countries across six continents. The Suzlon Group comprises of Suzlon Energy Limited and its various subsidiaries. The Suzlon Group’s manufacturing footprint is spread across India. It is a vertically integrated WTG manufacturer. It also undertakes installation and O&M of all WTG sales. Operations include design development and manufacturing of all major components, including rotor blades, tubular towers, generators, control equipment, gears and nacelles. Apart from manufacturing, it offers a full gamut of wind project planning and execution services, including wind resource assessment, infrastructure and power evacuation, technical planning and execution of wind power projects. It also offers O&M services in India and overseas countries.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Term loan	NA	NA	Jun-2030	3,004	NA	Withdrawn
NA	Letter of comfort	NA	NA	NA	1,050	NA	Withdrawn
NA	Proposed Letter of Credit*	NA	NA	NA	1000	NA	CRISIL A2
NA	Proposed Bank Guarantee*	NA	NA	NA	500	NA	CRISIL BBB+/Positive
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	50	NA	CRISIL BBB+/Positive

*The LC and BG limits are fungible

Annexure – List of Entities Consolidated

Name of the company	Type of Consolidation	Rationale for Consolidation
Suzlon Global Services Ltd (SGSL)	Full consolidation	Subsidiary of SEL and has strong business and financial linkages with the latter.
Suzlon Gujrat Wind Park Ltd (SGWPL)	Full consolidation