Can Suzlon weather global swings

Updated: Mar 25 2006, 05:30am hrs
Two years ago, Citicorp International Finance Corporation, the venture arm of Citibank, invested Rs 50 crore in the worlds sixth largest wind turbine maker, Pune-based Suzlon Energy. After Suzlons listing, the stake is worth Rs 2,500 crore.

Like Citicorp, ChrysCapital III, LLC too put in Rs 50 crore and would be getting almost similar returns. Early investors in Suzlon have made handsome gains in the company thanks to its listing at a time when the markets are hitting all time peaks every other week.

Suzlons acquisition of the worlds second largest wind turbine gearbox producer-Belgiums Hansen Transmissions International NV for 465 million in cash last week came in the middle of an unprecedented high Suzlon chairman and managing director Tulsi Tanti is experiencing.

Highly focused on his stock price, Tanti punches a few keys on his calculator and says: That is a 50 times appreciation. Suzlon has gone much beyond IT companies with this kind of returns. He was referring to the appreciation in Citicorps Rs 50 crore investment. Suzlon is one of the few stocks in alternative renewable energy in India right now.

It may seem like nothing is going wrong for Indias largest wind turbine maker right now. Globally, however, rising stock of wind energy companies is beginning to ring alarm bells.

Bloomberg quotes windmill companies and Matthew Patsky, an environmental technology analyst at Winslow Management Co. saying declining oil prices may hurt investments in alternate energy companies, Crudes 16% drop from its 2006 high could foretell further declines, reducing demand for renewable-energy equipment such as solar-power cells from Germanys Solarworld AG and wind turbine generators from Indias Suzlon Energy Ltd.

The Bloomberg World Energy-Alternative Sources Index, which tracks Bonn-based SolarWorld says Suzlon Energy and 13 other stocks had jumped 30.7% in 2006 and reached a record on March 3.

Suzlon has more than doubled since its initial stock sale in October when oil prices rose by 40% in 2005. The Bloomberg report warns of crash and burn among alternate energy stocks that have soared and later tumbled.

Suzlons market cap of Rs 37,000 crore may have surprised most but Tanti does not understand why. He believes his company was always heading there.

Still, it hasnt been a fairy tale journey for this traditional Gujarati business family from Rajkot. Business took this family to Surat, then Ahmedabad and finally a lock, stock and barrel shift of the entire clan to Pune.

Tantis entry into wind power was necessitated by the rising power costs their textile business faced. And this wind power project was the first building block of Suzlon 11 years ago. Interestingly, Suzlon gets its name from Tanti familys philosophy of doing business with Soojh-boojh and loan.

In the mid-90s venturing into the wind business meant struggling in an uncertain policy environment and also coping with reluctant state electricity boards. Their attempt to sell wind power projects to corporates was almost radical. Technology too was not easily available and some hard knocks came Suzlons way.

It meant days spent in anticipation of just a meeting with company bosses and then selling them the concept. Bajaj Auto was one such prized catch. Not an easy task but Suzlon managed to convince Rahul Bajaj about the feasibility of the project. Bajaj Auto is one of the largest grid power suppliers and 90% of its production is taken care of through this energy. Bajaj has recovered its capital cost.

Today Suzlon no longer needs to do concept selling. Others like the Godrej Group, MSPL Ltd, Ramco Group, Alembic, Bannari Amman group and a large number of textile units in Tirupur have taken to wind energy. There is a huge requirement for wind turbines as it means low cost of power and freezing power cost for 20 years, says Tanti.

While the Indian market continues to be main focus, it is Suzlons global ambitions that has fuelled its stock growth. Suzlon has frayed into China and US with manufacturing facilities. China has targeted producing about 10 % of its power from renewable energy, mainly solar and wind.

Suzlon is investing $60 million in China in an integrated wind turbine generator manufacturing base and a technology centre. In the US, it has set up a rotor blade manufacturing and turbine repair facility in Minnesota.

Tanti has also over the years established a footprint in Germany and The Netherlands through small acquisitions. However, these were more technology acquisitions that gave Suzlon access to R&D and technology.

It is this same search for technology in the crucial area of gear boxes that led the company to acquire the Belgian company, Hansen Transmissions.

Apart from rotor blades, gear box is the most important component for wind turbine generators. They are expanding their turbine and rotor blade manufacturing capacities in India and in China and US so this investment in gear box fits in, says Nalin Bhat, analyst with Angel Broking Ltd. Suzlon is targeting expanding markets in Europe in France, Italy, Germany, Portugal, Spain and the US.

Suzlon Wind Energy Corporation Chicago is supplying 157 mw of turbine capacity for Edison Mission Group. These 75 units of 2.1 MW units will be delivered in 2006 and 2007.

This is a repeat order from Edison, which has plans to expand its wind power portfolio from 316 MW to 1,200 MW by 2009.

This fiscal the domestic market will contribute 85% to the companys turnover while 15% will come from exports. Within three years it will be 50:50, says Tanti.

Going forward, says Tanti, the strategy for growth in the international market and risk distribution will be that 25% of the sales would come from India, 25% from China, 25% from Europe and 25 % from US and this should be achieved in the next three to four years.

The roadblocks, if any, will be the political risks and how politics impacts policies, says Tanti.

As a lot of growth in wind power segment is policy driven and also state of the resources available in the traditional power sector will have an impact, he says.

With 1,400 MW installations, it is currently at number five and wants to be among the top three most preferred suppliers in the globe.

This year Suzlon will be executing around 950 MW, which is an 80% growth and more business will be coming in 2007 as exports take off, Tanti points out.

Suzlons growth internationally is linked to oil prices and the kind of support renewable energy receives from governments.

On the home front too, it will have to contend with challenges like acquiring land in the right sites, continuation of tax concessions besides hazards like treading on delicate community concerns like the one it had to deal with in Maharashtra when farmers blamed them for drought and windmills blowing away rains from their lands.

Dark clouds notwithstanding, Suzlon has managed to carve a niche for itself in the $ 12 billion wind power industry giving Tanti a place in Fortunes billionaire club in India.