Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL BBB-/Stable/CRISIL A3' ratings to the bank facilities of Suzlon Energy Ltd (SEL).

 

The rating factors in the company’s established market position as a leading wind turbine manufacturer, healthy order-book position more than 900 MW (as on 31st Dec 21) and strong base of 13+ gigawatt (GW) of operating capacities providing strong revenue visibility under the operations and maintenance (O&M) business. These strengths are partially offset by low operating efficiency due to high fixed cost nature of the WTG business in the past, modest financial risk profile, inadequate working capital facilities and modest liquidity position.

 

Furthermore, the company is currently refinancing its existing debt and has received approvals from its existing lenders. The refinancing is expected to be completed in April 2022. The proposed bank line instrument rated will be used to fully refinance the existing debt facilities and will not result in any increase in the leverage levels beyond Rs 4,053 crores (of bank facility and term loans). CRISIL Ratings shall continue to monitor the developments and take an appropriate rating action, as and when the debt refinancing is completed.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SEL and its key subsidiaries, namely Suzlon Global Services Ltd (SGSL), Suzlon Gujarat Wind Park Ltd (SGWPL) and Suzlon Power and Infra Ltd (SPIL). This is because all these entities, collectively referred to as the Suzlon The Group (STG), sell wind turbine generators (WTGs) and provide related services and components, with significant operational linkages and common management.

 

The Optionally Convertible Debentures have been considered as debt but are not expected to have material impact on servicing over the medium term as these have minimal coupon payment of 0.01% and negligible repayment till fiscal 2030. The OCDs shall be redeemed over fiscals 2031 to 2040.

 

Similarly, compulsory convertible preference shares have minimal dividend payment of 0.0001% and shall be converted post 20 years.

 

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:

• Extensive experience of promoters

The rating banks on the extensive experience of the promoter, Mr Tulsi Tanti. He has around three decades of extensive experience in wind industry and his experience over the years has helped company develop new products as well as establish healthy relations with their customers and suppliers. The same has helped in maintaining healthy in-hand order book for wind turbine manufacturing (WTG) under “Suzlon” brand as well as growing fleet under operations and maintenance business. The market position would continue supporting business risk profile over the medium term.

 

• Strong market position in the wind turbine manufacturing and operation and maintenance business

The group has a successful track record of more than 25 years in manufacturing and selling WTGs. It historically had a healthy market share of 30-35% in the WTG business. While the WTG market share was impacted and fell to 5-15% during fiscal 20 and fiscal 21 owing to the financial constraint (as the company went under financial stress), it has seen a healthy pick up in order execution with around 471 MW executed in FY22 till December 31, 2021 and pace of execution has increased in Q4FY22 as well. Also company had order book of more than 900 MW as on December 31, 2021 and order book continues to remain at healthy levels which provides revenue visibility.

 

In the India OMS business the strong market position is evident from a growing fleet of turbines to be maintained which has increased from 12.8 GW as on March 31, 2020 to estimated 13.2 GW as on March 31, 2022. This makes Suzlon the largest service provider of wind industry in India.  While the fleet under maintenance reduces with decommissioning of WTGs, post completion of the design life, new wind turbines delivered and commissioned get added to the fleet every fiscal.

 

The company’s strong technical expertise and healthy market position will support it to obtain orders and fleets in the longer run as well, subject to working capital availability and execution of ongoing orders in a timely manner.

 

• Stable cash flow from the operation and maintenance business to support overall debt servicing

The group has a strong O&M business which is estimated to contribute to 24% and 78% of the group’s revenue and earnings before interest, depreciation, tax and amortisation (EBIDTA) respectively in fiscal 2022. The group currently has 13+ GW of assets under maintenance. 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 around Rs 700 crore per fiscal from the O&M services business is expected to support debt obligation.

 

Weaknesses:

•        Low operating efficiency due to high fixed cost nature of the WTG business

In past, high fixed cost organisation structure of WTG business has resulted in losses in the WTG segment due to low offtake which was unable to cover high fixed costs in the segment. Further almost fully utilised bank lines constrained growth and the company was dependent on customer-backed financing to execute orders in the last fiscal. Its near-term plans are to refinance existing debt and avail additional project-specific funding which remains a key monitorable.

 

CRISIL Ratings understands the group has undertaken cost reduction activities in operations, manpower and other expenses, resulting in reduction of fixed costs to Rs 500 crore per fiscal from about Rs 800 crores per fiscal in fiscal 2019. While the measures undertaken may reduce operating leverage, it is expected to remain high and expose operating profitability in WTG segment to variability in revenue.

 

•        Working capital-intensive operations:

The WTG business, accounting for ~70% of the overall revenue, is highly working capital intensive. Bank limits are utilised at 90-92% on average over the past six months through February 2022. In fiscal 2022, the company was able to liquidate inventory of Rs. 361 crore and received goods and services tax (GST) collections and other advances of over Rs 200 crore. Going forward, recovery of working capital of over Rs 200-300 crore each in fiscals 2023 and 2024 is expected from GST receivables, inventory and normalisation of working capital requirement with ramp-up in scale of operations of WTG segment which remains monitorable. CRISIL Ratings believes the above measures will cushion the impact of high debt obligation in the initial years.

 

• Delay in account becoming standard by the banks may constrain working capital availability and thus the growth

Company has limited non-fund-based limits of Rs 1300 crore which remain 90-92% utilized. With existing facilities, company can execute around 350 MW of order and hence is dependent on customers to finance their orders. Company needs to ensure timely debt servicing and pay about 10% of debt (about Rs 900 crore) to lenders to make the account standard. Till December 31, 2021, company has paid Rs 433 crore and is planning to pay the remaining amount through mix of business cashflow, existing cash, reduction of non fund based facilities and asset sale. Company has got approval for asset sale from all the lenders. The consideration received post the approvals and No Objection Certificates from lenders for sale of assets have been distributed amongst the lenders. Going forward, company plans to avail additional project specific funding which also remains one of the key monitorable.

 

•        Modest financial risk profile

Leverage and debt protection metrics are weak since SEL defaulted in the past. The company has negative networth due to past losses. It has hefty principal payment of Rs 450 crore in June 2022, which it plans to service through mix of business cash flow, asset sale, reduction in working capital intensity and existing cash balance. Refinancing is also one of the options being considered by the company. It has received approvals from all lenders and is process of complying with requirements from incoming lenders. Post June 2022, the company has limited debt servicing for fiscal 2023 and healthy DSCR over the loan tenure. Interest coverage ratio is likely to be range-bound at 1.9 to 2.5 times, going forward, and net cash accrual to total debt ratio is expected to be 0.10-0.15 time over the medium term.

 

The company has also planned for asset monetisation in fiscal 2023 to pare down its debt significantly, which is a monitorable.

Liquidity: Adequate

Unencumbered cash and equivalent stood at more than Rs 140 crore as on March 24, 2022. Bank lines remain almost fully utilised. Liquidity is constrained by large working capital requirement. The company has debt obligation of Rs 1,600 crore over the next two fiscals, which it plans to repay from business cash flow, asset monetization, refinancing and release of working capital. The company has planned capex of about Rs 150 crore each fiscal, which it plans to fund through internal accrual.

Outlook Stable

CRISIL Ratings believes that over the medium term, SEL will continue to benefit from its established market position and promoters' extensive industry experience.

Rating Sensitivity factors

Upward factors:

• Faster-than-expected deleveraging of the balance sheet with leverage levels below Rs 2,000 crore, leading to improvement in the financial risk profile
• Better-than-expected cash accrual due to ramp-up in WTG business or improvement in debt service coverage indicators

 

Downward factors:

• Delays in obtaining the approvals for asset sale from the bankers and closing the subsequent transaction to meet the 10% payment target to the lenders and delay in release of working capital beyond mid May 2022 constraining the overall liquidity
• Inability to tie-up additional working capital lines, resulting in constrained growth and accrual

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 19.1 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	NA	3,167	NA	CRISIL BBB-/Stable
NA	Bank guarantee $*	NA	NA	NA	1,300	NA	CRISIL A3
NA	Proposed term loan	NA	NA	NA	3,004	NA	CRISIL BBB-/Stable
NA	Proposed letter of credit #	NA	NA	NA	1,050	NA	CRISIL A3

*SBI led consortium

$Interchangeable with letter of credit

#LOC amount is fungible with RTL and can be increased if NBF O/s is higher on settlement date