Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Suzlon Energy Ltd (SEL) to ‘CRISIL A/Positive/CRISIL A1’ from ‘CRISIL A-/Positive/CRISIL A2+’.

 

The rating upgrade follows an improvement in EBITDA margin of the wind turbine generators (WTG) business while maintaining a healthy cash flow from the operations and maintenance (O&M) services business and an uptick in the order book providing revenue visibility for future revenues. WTG business has been able to achieve earnings before interest, taxes, depreciation and amortization (EBITDA) of Rs 237 crore in H1FY25 (7.8% EBITDA margin) in H1FY25 with execution volume of 530 megawatt (MW) against margin of 4.6% and 2.2% in fiscals 2024 and 2023, respectively. Order book of the WTG business increased to ~5.1 gigawatt (GW) as on September 30, 2024, compared to 3.8 GW as on May 29, 2024.

 

The positive outlook reflects possibility of better than expected EBITDA of WTG business on higher execution volumes and maintenance of working capital cycle.

 

SEL continues to hold a cumulative market share of ~32% in Indian wind turbine segment. Rating reflects stable cash flow from the O&M services business and healthy financial risk profile. These strengths are partially offset by the relatively high operating leverage in the WTG business, large working capital requirement and financial history of the company.

Analytical Approach

CRISIL Ratings has changed analytical approach and consolidated SE Forge into SEL in line with the management articulation of now treating the business as core growth area on account of its backward integration and linkage to overall operations of SEL. Additionally, SEL is expected to provide managerial and financial support, if required, to SE Forge going forward.

 

CRISIL Ratings has combined the business and financial risk profiles of SEL and its subsidiaries, including Suzlon Global Services Ltd, Suzlon Gujarat Wind Park Ltd and SE Forge Ltd. These entities, collectively referred to as the Suzlon group, sell WTGs and provide related services and components, with significant operational synergies and some 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:

• Stable cash flow from the O&M services business to support overall debt servicing: The Suzlon group had about 15 GW of installed fleet under the O&M business as on September 30, 2024. While the fleet under O&M reduces with decommissioning of WTGs, post completion of the design life, new WTGs delivered and commissioned get added to the fleet every fiscal. Revenue from the O&M services has been steady as this is contractual activity over a fixed timeframe and at a 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 the O&M services business even in stressful times in the past. Stable cash flow with EBITDA above Rs 700 crore per fiscal from the O&M services business is expected going forward.

 

• Leading market position in the wind turbine segment and healthy order book: The group has a successful track record of project execution with technical expertise, evident from the healthy market share of over 30% in the WTG business in India over the past many years and in cumulative installed capacity. The company’s healthy market position should help us to obtain orders in the long run. SEL’s order book stood at ~5.1 GW (as on September 30, 2024), to be executed till fiscal 2027. The company has been able to overcome the dependence on customer-backed financing to execute orders, which had constrained growth in the last fiscal.

 

• Healthy financial risk profile: Term debt stood at Rs 1,773 crores as on March 31, 2023, on the back of scheduled repayments of the term loan and additional reduction of ~Rs 900 crore 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 optionally convertible debentures and compulsorily convertible preference shares) and rights issue of Rs 1,200 crore in fiscal 2023.

 

In FY2024, the company approved the allotment of equity shares to qualified institution buyers aggregating to about Rs 2,000 crore. The company subsequently utilized the required amount to repay its entire debt at SEL, significantly improving its financial risk profile. Further, SEL does not have any material debt-funded capital expenditure (capex) over the medium term. SEL has also raised Rs. 2,500 crores of lines from REC Limited to meet its working capital requirements (the facility is in form of Letter of Comfort, based on which LC/BG is issued by fronting banks.)

 

Weaknesses:

• Operating leverage in the WTG business: High operating leverage exposes the WTG business to losses in the event of curtailed offtake. 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 a 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 nearly Rs 5 billion per fiscal from about Rs 10 billion in the past. However, any delay in execution of orders will result in fixed costs 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.

 

• Competitive intensity in wind industry: The business environment for the wind energy sector continues to be challenging. While SEL is one of the prominent domestic players with over 30% cumulative market share as on September 30, 2024, it faces intense competition from certain domestic players and foreign players.

 

• Weak financial history: SEL defaulted in the past and underwent restructuring. The last restructuring was in June 2020, post which the company went for refinancing in May 2022. The 16-lender consortium was replaced with two lenders and unsustainable debt was extinguished through conversion to equity. The company also had a negative networth due to past losses till fiscal 2022. This has impacted the financial flexibility of the company with certain lenders. Nevertheless, with prepayment of the entire debt, many lenders have reached out to fund the working capital requirement of SEL.

Liquidity: Adequate

The company’s unencumbered cash reserves stood at about Rs 683 crores as of September 30, 2024, up from Rs 242 crores as of March 31, 2024. The company does not have any debt service obligation, given that the term debt has been fully repaid. Furthermore, its O&M division is expected to generate an EBITDA of over Rs 700 crore every year, thereby supporting the overall cash flow.

Outlook: Positive

CRISIL Ratings maintains Positive outlook on the ratings of SEL on the back of possibility that a healthy order book and delivery volumes will drive profitability of the WTG business leading to improvement in the overall credit profile of the company. Tailwinds in the wind energy sector in the form of higher expected wind energy tendering by government also support the positive outlook.

Rating sensitivity factors

Upward factors

• Sustained and better than expected EBITDA in the WTG division along with management of working capital cycle
• Increase in and sustenance of delivery volumes of WTG to about 1.2-1.3 GW annually

 

Downside factors

• Order book or execution volumes being lower than 600 MW, resulting in operating losses
• Overall operating margin being lower than 10-12%

About the Company

Founded in 1995, SEL is one of the leading global renewable energy solutions providers. Over the past 29 years, the group has installed over 20 GW of wind energy in 17 countries across six continents. The group comprises SEL and its various subsidiaries. Its 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.

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

As on / for the period ended March 31	Unit	2024	2023
Revenue	Rs crore	6,529	5,971
Profit after tax (PAT)	Rs crore	660	2,887*
PAT margin	%	10.1	48.4
Adjusted debt/adjusted networth	Times	0.03	1.84
Adjusted Interest coverage	Times	6.50	2.00

*Includes exceptional income of Rs. 2,721 crores;

Any other information: Not Applicable