Suzlon Strategic Analysis

Suzlon EnergyStrategic Mangement

Riddhima Agarwal 02Gargi Datta 13Avinash Lobo 34Sumit Kumar 35Nikhar Shah 55Sowmya Krishnamoorthy 63

… provides innovative, efficient and customized wind power solutions

that drive economic development, while preserving nature and

mitigating the effects of unbridled development – creating a more

sustainable, greener tomorrow

Suzlon Energy Limited

A Major Force in the Global Wind Industry (Ranked 5th Worldwide)*

Provides end-to-end wind power solutions

Broad spectrum of services: Design & Development Wind farm project developer and operator Manufacturing Marketing EPC Project Delivery Operations Maintenance of Wind Turbine Generators

* by capacity installed

Company Vision

“ To be a technology leader, to be among the top 3 wind energy

companies in the

world by leveraging technological leadership and commercial

acumen to exceed

customer expectations and be the most respectable brand which

grows fast & is

the most profitable company employing the best team in the

sector”

Company Mission

“To pursue technological advancement and combine innovation,

providing end-to-end

solutions and a vertically integrated manufacturing strategy to deliver

maximum value

to the customer, and to lead the way in ‘powering a greener tomorrow “

Company Values

People Strength

Aggressive vertical integration strategyStrong R&D program

Expanding manufacturing capability

The Growth Story

1995: First wind farm project in Gujarat (3 MW)

1997: Det Norse Veritas (DNV) certifies Suzlon with the coveted ISO 9001/2

1998: First Wind Turbine in Maharashtra, Satara District

2000: Commissioned 50 MW Wind turbine generator at Vankhusavade, Maharashtra

2001: Formation of subsidiaries: Suzlon Wind Energy Corp, U SA & Suzlon Energy Gmbh, Germany

2002: First Export Order, Its First Wind Turbine in the USA

2003: Representative Office in Beijing, China

2005: Korean Order for a 150 MW for the Jeju Wind Farm Project

2006: 200 MW Wind farm Project for Australia Gas & Light Company

2007: 400 MW deal with PPM Energy of Portland, USAAcquired German Wind turbine company RE Power

Most Recently…

Entered markets in Spain, Nicaragua and Turkey

Backward integration into cast and forged steel

7

Industry Overview and Analysis

Global wind Industry

In 2006, over 15 GW of new wind power capacity was installed worldwide

Demand for renewable energy by consumers

Rising oil and gas prices

Rising worldwide demand for energy especially in developing countries

Social shift toward "green" thinking has positioned wind as a energy

source for the future

Global Trends

Installed Capacity

Cumulative Capacity

Global wind turbine flow

Global Market Share: Top 10 Wind Turbine Manufacturers (2007)

Source: BTM, 2007,Windpower Monthly

Global Market

Indian Market India – The 4th largest installed wind power

capacity in the world and the wind energy leader in the developing world.

Domestic policy support for wind power (Ministry

for Non-Conventional Energy Sources ,MNES)

Rise of a leading global wind turbine manufacturer

(Suzlon, 52 % market share in India & 5th largest

in the world)

PESTLE Analysis

Political

Central Govt Incentives• Concessional import duty on specified wind turbine parts• 80 percent accelerated depreciation• Customs and Excise duty relief• Loans through IREDA• Tax holiday for power generation projects

State Govt Incentives• Wheeling• Banking• Buy Back• Third Party Sale• Other Incentives

16

Economic

Rising Oil Prices

Cost Pressures due to downturn

Social

Electricity Security

Consumer Demand for Clean Energy

Obama plans to invest $150 b in renewable energy

Technological

•400-watt wind turbine•Uses wind energy to charge batteries•Increased the use of wind turbines in suburban areas

AIR-X

•Solar•Ethanol

Alternate Forms

•Flywheels•To Increase the use of wind energy

Improved Storage

Enviornmental

Kyoto Protocol

Adverse effects on terrestrial ecosystems

Effect of bird migration patterns

Legal

California- 25% from clean energy by 2020 and 75 % by 2050

US Energy Regulations- 20% from clean sources by 2020

The European Union - 22% from clean sources by 2010

China-To raise the total percentage 10% by 2020

Porter’s 5 Force AnalysisBargaining Power of Buyers(Low)

Threat Of Substitute(Low)

Competitive Rivalry

(Medium)

The Intensity of Competitive Rivalry

Consolidated Industry-Top 4 garner 94% new installations

High price competition with limited product differentiation.

High Growth

The competitors diverse in origin and in strategies.

Very high exit barriers

Medium

Bargaining Power of Suppliers High

High dependence

Critical Components

Geographically sparse WTG manufacturers

Threat of forward integration

Bargaining Power ofBuyers Low

Institutional buyers

Demand Supply Mismatch

Complete Solution

No backward integration for customers

The Threat of Substitute Product Low

Other renewable energy sources (Under developed)

Non –Renewable energy (Expensive)

High dependence on Govt incentives

The Threat of New Entrants Low

Entry Barriers

• Capital Intensive• Economies of Scale and Scope• Geographical Constraints

Ease of entry

• Low Differentiation• Low Switching Costs

Detailed Competitor Analysis

Competitors Analysis :- Growth in Market Share

Competitors Analysis :- Future Capex

Competitors Analysis

Suzlon’s Strategy

Suzlon : Key Strategies

Skill Amalgamation

Cost Reduction

Reverse Outsourcing

End to End Solutions

Vertical Integration and Acquisition

Integrated manufacturing capability

Wide range of offerings

Skill Amalgamation

Blend of the best possible skills / resources across the globe

R and D in Europe

Low Cost manufacturing in India and China

Suzlon has continuously reduced capital cost per unit of power generation

and also has maintained a consistent new product launch schedule

Cost Reduction

Reverse Outsourcing

• International headquarters in Aarhus, Denmark

Base of wind energy expertise and extensive network of

components suppliers

Large available workforce

Europe - Global R & D center of wind power

Talent hub due to presence of Danish wind companies,

Vestas and NEG Micon,

End to End Solutions

Suzlon – Vertical Integration through Acquisitions

Acquisition of Hansen

Manufactures gear boxes for wind turbines

Gearbox is key bottleneck in the industry due to lead times

Was a source of comfort to other wind turbine makers

Vertical Integration and Acquisition

Step 1 - Acquisition of Hansen for gearbox capacity Siemens AG taking control of the market leader in

gearboxes, Winergy AG Gearbox is a supply bottleneck for WTGs because of long

lead times

Capacity expansion

Step 2 - Enhancing gearbox capacity

Integration

Step 3 - Internal sourcing of gearboxes from Hansen Suzlon to start sourcing gearboxes

Hansen in FY08 with 8 % , 25 % and 35 %

of Hansen’s sales going to Suzlon in FY08E, FY9E and FY10E

Vertical integration by FY08

70,000MT of forging & machining capacity,

120,000MT of foundry & machining capacity

rotor blade testing facility

Suzlon World No 2 in terms of Vertical Intregation

Vertical Integration Matrix

Integrated Manufacturing Capability

Support high growth regions-India, China and the US by

increasing its in-house manufacturing capabilities

Lowering wind turbine costs

By gaining greater control over the supply chain,

By enabling quicker and more efficient assembly and faster

delivery times to customers

Allows to cut logistics and transaction costs since fewer

parties are involved along the chain

Strong access to local networks

SUZLON – RE Power Integration• News –

On 1 September, Tanti struck a deal to buy Martifer Group’s 22% stake in Repower Systems AG, the last step to complete acquisition, giving Suzlon a 90% holding and access to the German wind turbine maker’s technology which it needs

• Mr. Tanti said, “ Suzlon has a clear advantage over rivals because, unlike other wind turbine companies that are either assemblers or manufacturers, it is vertically integrated. With access to RE power’s technology , Suzlon can take a shot at becoming one of the world’s top three firms in wind energy”

RE Power

• Leading turbine producers in the German wind energy

sector

• Market share in excess of 10% (third-largest in Germany).

• It develops, produces, and installs wind turbines.

• Its product range comprises of 1.5 to 5MW turbines

• Technical strength for offshore wind development sites

• 5 MW - The largest wind turbines in the world.

• Technologically advanced wind turbines

• Comprehensive expertise in planning and constructing

turnkey wind farms.

RE Power - A strategic fit for Suzlon

• Access to the – World’s largest market in installed capacity,– Superior R&D technology– Established infrastructure and customer base,– Technology for offshore development

• Suzlon, with its existing infrastructure base and R&D capabilities,

could have easily taken three-four years to significantly penetrate

the European market.

• Also, large number of projects are expected to come in the

offshore market and this acquisition gives Suzlon the technology

break through to enter the segment

Problematic Strategies

Dependence on U S markets

US wind turbine sales are dependent upon Production tax Credits (PTC)

Dependence on US markets

PTC non extension effect

The US Energy Bill has extended production tax credits

(PTC) till 31st Dec 2009 only, creating uncertainty for wind

farm developers

In the past, US wind markets have reacted negatively to

PTC not being extended

Renewable Energy Portfolio Standard: by 2020 utilities in all

US states source 15 %-20 % of power from clean sources

PTC driven US wind market

Financial and Operational Analysis

Scale of Operations

•  Presently the company is running an order book backlog of 817MW (Rs 4,000 crores)

• Suzlon will have to increase the capacity of its plants from 1.5MW - 2MW to 3.5 MW

- 4 MW to compete with its global peers

• Inspite of rising inputs the company enjoys pricing power which is indicated by the continuous price increases over the past few quarters

• The company has been growing both organically and inorganically

Operational Efficiency

• The revenues are growing therefore the dip signifies a substantial improvement expected in efficiency.

• For this the company is pursuing a lot of initiatives

• The dip in margins in 2007 is due to an increase in opex and higher interest expense

• Decreasing trend in operating margins led to dip in return ratios

Operational Efficiency

• The total assets are growing at a faster rate compared to EBIT. Hence there is a continuous decrease in ROTA

• The company has tried to improve the ROTA through sale and leaseback however:• Sale and leaseback of land highly limited due to regulations and multiple

ownerships• Cancellable lease on WTGs• Lease rentals not fixed but dependent on the output

• On further analysis we find the figure of sundry debtors in the doubtful category, is increasing YOY

• Also cash and bank balance has been increasing manifolds YOY

Operational Analysis

• Declining fixed asset turnover led to decrease in operating margins and ROCE

• Suzlon has set up manufacturing facilities in the US, China, and Europe to be close to its customers; thus, helping it improve its cash conversion cycle

Flow of Funds

Cashflow Analysis

• The cashflow seem unstable due fluctuations in capex

• The operating cashflows however are improving

• The sudden increase in cashflow from financing is due to long term borrowings in 2007 and fresh issue of shares and debentures in 2008

Financial Leverage

Six units of Suzlon Energy were downgraded from stable to negative by crisil on basis of high D/E and the impact of global slowdown

Increased borrowings to fund acquisition of Hansen in FY07 raised debt equity and led to a dip in interest coverage and DSCR

Loan book increased sharply. However, borrowing cost dipped due to low cost borrowings on account of ZCCB

Financial Leverage - Impact

Profitability Analysis

• ROCE has seen a decline inspite of YOY growth in PAT due to increases YOY capex for capacity building

• Also PAT has been affected by increased costs of shipping and loss in unhedged forex exposure and credit crunch

• There has also been exceptional expenses to resolve the blade crack issue in their S88 turbines in US and Portugal

Growth in NW:• The company raised INR 21.8 bn through a

follow-on offer of equity to selected QIBsat an issue price of INR 1,917 per equity share of INR 10

• The effective 100% holding in Hansen, a subsidiary, was diluted during the year to71.3% which led to a gain of INR 12.0 bn

• Investments increased to INR 31.4 bn in FY08 as against INR 0.2 bn in FY07 due to investments in REpower.

• Cash and bank balances stand at INR 69.6 bn in FY08 as compared to INR 15.4 bn in FY07. The increase was mainly due to increase in term deposits with banks, placed from QIP, Hansen IPO proceeds, and loans taken for investment in REpower shares.

Profitability Analysis

The decline in profitability has been a concern in

the board room too and some measures have

been already taken

Control inventory

Better collection

Improve COGS

In the Market

The volume trend is an expression of :

• Change in dividend payout policy owing to

high growth trajectory planned

• Falling ROE

• Recent Negative impact events

• Downgrading of ratings

• Impact of global slowdown

Falling prices make them vulnerable to being

overtaken

SWOT Analysis

Strengths

Integrated Business Model

In-house Technology and Design Capabilities

Market leadership in India and Global presence

Growing at 29% CAGR for past 10 yrs, higher than industry growth rate

Prudent acquisitions and alliances

Cash flows

Global Production

Strong Management

Pricing Power

Diversified Product Line

Weakness

Operational risk Cash conversion Growth in Assets overweighing Growth in Profits

Financial performance Value to share holders Profitability Stock price Leverage Ratings

Opportunities

Environmental awareness and government initiatives

Favourable Tax Exemptions

Untapped Offshore market

Steady source of demand

Other renewable energy opportunities seem bright 

Alliances with Power Sector

Vast coast lines of India and low cost

Threats

Intense competition

Over dependence on US

Foreign exchange risk

Technology risk

Expiry of Federal Production TAX credits in USA may slowdown the

growth

Strategies Going Ahead

Future strategies

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• Continuing Rapid Growth

• Being in the profitable sectors - US and

Europe

• Manage risks of over dependence

• Improve value to share holders

• Improve operational efficiency

• Manage Backlogs

• Improve Industrial Relationships

• Solar Energy

Conclusion

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In Focus

• Positive growth path• Prudent investments• Focus on RnD• Strategic alliances• Strengthening brand image• Scope of diversification • Maintain profitability

Thank You