A Business Research Report On

Suzlon Energy ------------------------------------------------------Submitted to

Instructor: Prof. M.M.Monippally

Academic Associate: Ms.PakhiAtre Sharma

In partial fulfillment of the requirements of the course

Written Analysis and Communication - II

By Group B10 Shrey Rathi Pratibha Pooja Sagar Kaushik Dutta Bagwan Zeeshan Ali Sushil Kumar Meena

Indian Institute of Management, Ahmedabad 3rd March, 2013

To, Mr. Tulsi R. Tanti Chairman and Managing Director Suzlon Energy Limited

From, WIMWI Consultants Date: 3rd march 2013 Subject: A detailed report recommending future strategy of Suzlon based on an in-depth analysis of past and current trends in Industry and Suzlons decisions. Dear Sir, With regard to your request for suggesting a suitable growth focused strategy for Suzlon in next 10 years please find attached the report detailing the same. We have analyzed the wind turbine industry in depth, understanding the trends in demand and competitive environment. Based on economic events and government policies in majority of markets we feel that wind sector will face a sub-dued demand for next 2-3 years after which the industry will revive back to double digit growth phase. We have also analyzed Suzlons strategy through the years and impact of the same while growing forward. For future growth we believe Suzlon should focus more on Servicing and operating wind farms, develop supplier relationships for procuring critical components, divest non-strategic assets and outsourced manufacturing requirements. A suggestive plan for short term debt restructuring is also given. We hope the report will help you in deciding the future course of action.

Regards, WIMWI Consultants

Encl: Report

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EXECUTIVE SUMMARY
Wind energy sector, biggest in the renewable energy sector, had performed brilliantly till 2008. This period was marked by high oil prices, increased awareness of environmental problems caused by traditional sources of energy and rapid advancements in technology. Several international conferences were organized to discuss the environmental issue and develop a political will to focus on renewable sources of energy. Several countries established targets for use of renewable sources of energy. Taking advantage of these environmental conditions, Suzlon embarked a path of rapid growth to become the seventh player in the industry. It diversified by forward and backward integration. It pursued the vehicle of mergers and acquisition to obtain an inorganic growth. However, the period of 2008-2012 was challenging for both industry and Suzlon. World economy was hit by first sub-prime crisis in US followed by European crisis. US and Europe were the biggest markets of the sector. This greatly reduced the investment possibilities in new wind energy farms. Another development was the increased production of Shale gas in US. This provided a cheaper alternative for energy production. Further, due to rapid expansion by firms, industry started showing the sign of over-capacity. Political outlook for wind energy in most of the countries also faded. In India, major incentive of accelerated depreciation was repealed. In the midst of all these negatives, some positive developments also took place. Fukushima disaster shattered the faith of the world in nuclear energy. Several countries, like Germany, decide to either limit or ban the use of nuclear energy. In some countries like Australia, Brazil and New Zealand, government showed positive signs for the industry growth by setting high targets for renewable energy and incentivizing it. Suzlon also faced several challenges. Aggressive and costly acquisitions introduced cash crunch in the firm. This was furthered by losses that were accumulated during these years. In order to gain some breathing space in cash flows, it started disinvesting. Despite these challenges, it continued its focus on research and development. New products were introduced. Focus on providing end to end service increased. It was also faced with the question of firm culture. With globalization and acquisitions, it needed to develop a Suzlon Culture. There is going to be slow growth till 2015. But beyond that this sector again shows promise. Investment in new technologies like direct drive turbines, hybrid plants and offshore wind farms is likely to happen. Recent political developments have also started giving signs that countries will eventually focus in renewable energy. Suzlon has divided its future strategy into Consolidation Phase (2013-2015) and Growth Phase (20162022). It will enter into business of consulting installation, operation and maintenance of wind farms. It will also increase its focus in offshore technology and enter direct drive technology. It will also enter into insurance sector for providing insurance to wind energy farms. It will focus capacity and geographical expansion only in Growth Phase. [Words : 480]

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CONTENTS
Executive Summary ........................................................................................................................................................... 3 Abbreviations Used ........................................................................................................................................................... 5 Wind Turbine Industry Sector ........................................................................................................................................ 6 Pre 2008 Era .................................................................................................................................................................... 6 2008 to 2013 era............................................................................................................................................................. 7 Expected Future ............................................................................................................................................................. 8 Suzlon as a player in global market .............................................................................................................................. 8 Acquisitions and Backward Integration ................................................................................................................. 9 Product Mix and R&D ................................................................................................................................................. 9 Forward Integration ...................................................................................................................................................... 9 Offshore Market .......................................................................................................................................................... 10 HR and Culture............................................................................................................................................................ 10 Disinvestments .......................................................................................................................................................... 10 Summary ....................................................................................................................................................................... 10 Aspirations......................................................................................................................................................................... 11 Suzlon Strategy: Moving Forward ............................................................................................................................. 11 Guiding principles ...................................................................................................................................................... 11 Product, technology and supply ............................................................................................................................. 12 Project and consultancy services ........................................................................................................................... 12 Operations & maintenance services...................................................................................................................... 12 Insurance Services ...................................................................................................................................................... 13 Markets .......................................................................................................................................................................... 13 Manufacturing Facilities........................................................................................................................................... 14 Quality Control............................................................................................................................................................ 14 Corporate Debt Restructuring (CDR) .................................................................................................................. 14 Conclusion ......................................................................................................................................................................... 15 Exhibits ............................................................................................................................................................................... 16 References ........................................................................................................................................................................ 30

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ABBREVIATIONS USED
PTC - Production Tax Credits IPP Independent Power Producers RPS Renewable Portfolio Standards MWh Mega Watt Hour ITEI Institutional Tax Equity Investors WTG Wind turbine Generators

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The sooner we get started with alternative energy sources and recognize that fossil fuels make us less secure as a nation, and more dangerous as a planet, the better off we'll be. -Lindsey Graham Energy is the prime mover of all the development processes. According to 2008 IEA report, over 81% of total energy consumed in world is derived from fossil fuels while renewable energy contributes to less than 13% (Refer Exhibit 1). Limited fossil fuel reserves, depleting ozone layer, global warming and other environmental problems advocate the cause for increasing energy production from renewable sources like solar, hydro-electric, wind, geothermal and biomass etc. Of all the renewable energy options, wind energy is by far the most advanced, proven, scalable and quickly installable. It has the potential to contribute more than 30% of the world energy needed within next 20 years. As the worlds Seventh largest wind turbine manufacturer, Suzlon has its footprint over 33 countries across 5 continents with cumulative market share of 7.6%. It is the largest wind solutions provider in India with 43% market share. Suzlon has formulated its international strategy by targeting high potential markets like China, Europe, and North America. Suzlons End to End business model offers unique solution from equipment supply to full turnkey solution for each market. Suzlons approach to supply chain management and logistics relies on vertical integration.

WIND TURBINE INDUSTRY SECTOR

Wind Energy demand is influenced mainly by cost-competitiveness of wind energy, availability of project financing and government policies. The primary customers for Wind Turbines are IPPs, ITEIs and Community Wind Farms. Suppliers to the industry include manufacturers of rotors, gearboxes, blades and other components.

PRE 2008 ERA

The world saw a sustained interest in renewable energy including wind energy only after the 1973 Arab oil crisis. Constrained Oil supply led to the development of new technologies during 1970s and 1980s. 2000s saw increasing awareness about global warming with various conferen ces and business summits being held on green solutions. Global wind energy installations were increasing at a CAGR of 28% during the period 2000-2008 (Refer Exhibit 2 and 3). New markets like US, China and India led the sector in contrast to traditional European players (refer exhibit 4). Growing wind energy demand encouraged many new players to enter the market. Wind turbine Industry was characterized by few large players and many small, local and fragmented players (refer exhibit 5). These players were mostly involved in manufacturing and assembling of wind turbines. With demand outstripping the supplies of components, suppliers gained a lot of bargaining power. On the other hand, buyers of wind turbines lacked the know-how of installing, maintaining and servicing the wind turbines/farms. Thus, there was a strong impetus on big players for backward and forward integration. A slate of mergers occurred during the period Vestas with NEG Micon, Suzlon with REPower, GE with Enron, Gamesa with Made and Siemens with Bonus. Supportive government policies were the main reasons for the surge in wind turbine demand. Government incentives include feed-in tariffs, RPS, tax benefits, subsidies and green certificate Page 6 of 31

systems (refer exhibit 6). Targets of achieving a percentage of energy from renewable source (RPS) were set by the states Solar and Hydro power are typical alternatives to Wind energy. However, with increasing life of wind turbines (from 12 years in 1990s to over 20 years in 2008), decreasing per MWh cost of installation and production (from 63$/MWh in 1999 to 40$/MWh in 2007) (refer exhibit 7) wind energy is becoming more cost-competitive as compared to other renewable sources (refer exhibit 8). Overall, the market outlook prior to 2008 was positive. High oil prices and spreading awareness about global warming kept interest in wind energy alive and many countries embarked to include wind energy in their long term energy mix.

2008 TO 2013 ERA

2008 saw major changes in world economy which had repercussions on wind turbine market. These changes and their impacts are summarized as: 1. Economic and Financial Recession of 2008/09: Decreasing capital availability reduced investments by IPPs, thereby diminishing the demand of wind turbines. The green agenda was overshadowed in many countries. However, the negative effects of recession were partially offset by declining prices and increased supply of wind turbines. 2. Shale gas revolution: Rapid increase in production of shale gas in US has exerted a downward pressure on gas prices across the globe. Production of shale gas in US increased from less than 1% in 2000 to over 20% in 2010. Shale gas provides a cheap way for energy production. Also, carbon emissions are lower than other traditional energy sources. Threat of shale gas becomes graver as two of the largest potential reserves lie in US and China. 3. Excessive Capacity Logistical difficulties and high cost of transportation of equipments from manufacturing sites to installation sites led to the development local manufacturing facilities. Many firms invested heavily in building capacity. However, sharp decrease in investments in farms resulted in the industry wide over-capacity. At the same time, these firms are riddled with high debts and decreasing cash flows. 4. Policy changes Kyoto protocol (effective 2005) imposes an upper ceiling on carbon emissions by industrialized countries. This paved the way for introduction of carbon credits. Farm owners can now generate additional income by selling carbon credits. In 2012, during Doha Climate Change talks, member countries agreed to new emission standards applicable from 2013 to 2020. 5. Fukushima Nuclear disaster Fukushima nuclear disaster in 2011 raised serious concerns over the safety of nuclear energy. Globally, anti-nuclear sentiment grew with countries deciding to either decrease dependence on the nuclear energy. This provides a valuable opportunity for growth of wind energy. 6. Offshore wind farms OWFs exploit the fact that high speed offshore winds generate more energy per turbine than onshore winds. They also decrease the hassle of procuring land especially in densely populated regions. UK is the leaders in OWF installations. Post 2012, OWF is expected to grow at 40% CAGR (Annual Report, Suzlon, 2012). Overall outlook for wind energy was bleak in short term. Average y-o-y growth of new installations decreased to 27.6% in 2012 from 37% in 2007. Growth in China, US and Europe slowed. However, new markets were identified Brazil, Australia, New Zealand, Japan and Turkey. Favorable government policies in these countries led to over 12.4 GW worth projects being approved. Offshore

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market also helped in offsetting the decreased onshore demand of wind energy. Industry had become more competitive and the market shares of top ten players are shown in exhibit 9

EXPECTED FUTURE
Despite the current market turbulence, basic fundamentals which have driven growth for wind sector still remain and will only get stronger over time: Energy Security, Electricity price stability, growing energy demands and reducing carbon emissions. After 15 years of 28% CAGR, total installed capacity in about 80 countries at the end of 2012 stood at 240 GW. However, current economic conditions do not warrant holding similar expectations in near future. Demand growth in most of OECD countries is very slow or non-existent and competition is fierce. China and USA have been the main drivers of the industry since 2009 but decreased demand and uncertain policy frameworks, respectively, diminish possibility of high growth at least until 2015. Brazil, China, India and Canada are dynamic markets but cannot yet make-up for lack of growth in larger markets of Europe, US and China. Opportunities for future growth are many as can be seen below: Policy changes: Overall government policies became more supportive. US reintroduced its federal PTC scheme. India saw revival of GBI and AD. All these changes point that new markets are emerging for wind power even as growth in mature markets is decreasing. Offshore wind energy: Offshore which is in early phase of development is expected to grow faster. Offshore requires relatively high construction costs but with increasing research the same will come down making it more cost-competitive (Refer exhibit 10) Hybrid Wind Plants: Scientists have started research on the combination of gas and wind energy production farms. This will help in ensuring smooth supply of power by the farm. When wind speed is low, power generation can take place from gas. Direct Drive Turbines: Direct drive turbines employ lesser components, have lower maintenance costs, are easier to install and are relatively cheaper than traditional turbines. This makes both installation and running costs of wind energy cheaper (Refer exhibit 11) New Alternative uses: The wind energy has been tested for cleaning water used for gas and oil production. The experiments are also conducted for the generation of hydrogen which can be used as next generation vehicle for energy. Major challenges: Most of the players in wind industry do not have cash flows to meet the financing of projects in the short term. The economic crisis has left the investors with heavy debt. Also, in the long term there will be an increase in competition from substitutes such as shale gas, solar energy etc.

Overall the prospects for wind energy appear strong in longer term, though industry will face a rough phase in short term.

SUZLON AS A PLAYER IN GLOBAL MARKET

Suzlon was set-up with an aim of providing green energy to power Indias growth in 21 st century. As a first mover in Indian Wind energy sector, Suzlon followed a blue ocean strategy and tried to capture maximum market share. Over years it has grown from a domestic supplier of wind turbines to a global brand in wind sector. In an intensely competitive global industry Suzlon has been able to make a mark through its focus on cost-effective but high quality products. Its key differentiator lies in its ability to

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provide end-to-end solutions right from site selection to installations to operations and maintenance. (Refer Exhibit 12)

ACQUISITIONS AND BACKWARD INTEGRATION

Suzlons vision has been to become an integrated solutions provider. Though it initially started off as a wind turbine manufacturer, through inorganic growth it has integrated backwards into the value chain. Sudwind acquisition in 1996 gave Suzlon the breakthrough in manufacturing capability and technological expertise. AE Rotor Holding B.V. acquisition gave Suzlon blade manufacturing capability. Pre 2008 era saw high demand and insufficient/unpredictable supplies of components. To this end, Suzlon acquired Hansen Transmission International a leading producer of gearboxes, in 2006. This not only reduced supply pressures for Suzlons projects but also gave it a lot of controlling power over its competitors like Vestas, GE etc. who sourced their requirements from Hansen. In 2007 Suzlon acquired REPower, a leading player in European markets with strong technological and R&D expertise. Combined with Hansen acquisition, this helped Suzlon shed its family-operated Indian business image. The acquisition also gave Suzlon access to developed markets of Europe and the firm embarked on a global expansion strategy. This backward integration strategy helped Suzlon to have better control on the supplies of critical components and at affordable prices. It also gave Suzlon an opportunity to leapfrog technological advancements. Vertical integration also helped SEL to have EBIT margins of around 25% against 13% of its competitors.

PRODUCT MIX AND R&D

With manufacturing based in India Suzlon enjoyed a lower cost structure (owning to lower labour and raw material costs) compared to its global competitors. However, in did not have the necessary technological expertise as its competitors. To alleviate this problem Suzlon undertook 2 measures one, it licensed its technology from small wind players like Sudwind, Aerpec, Enron Wind etc. and two, it partnered with various universities to introduce masters and doctoral programs in wind technology. During initial years, Suzlons product mix was limited to sub-1 MW turbines (Megawatt Series). With technical help from REPower, it started producing multi-megawatt turbine series. Renewable Energy Technology Centre (RETC) was formed by Suzlon and RE Power to boost its R&D capabilities and efficiency improvements. With its R&D facilities set up at strategic locations across the globe (refer exhibit 13), Suzlon is able to develop expertise in the different components used for making a wind mill. In 2009, Suzlon also faced the issue of faulty blades in overseas market and had to spend over $100 million for rectifying the same. Company also came under fire from Indian customers for supplying turbines having control issues, shaking in the wind, and producing less energy than guaranteed by sales contracts, causing utility companies to incur large costs. This was also a big dent on Suzlons brand image and resulted in a decreased order book size.

FORWARD INTEGRATION
With the aim of becoming an integrated solutions provider, Suzlon expanded its portfolio to include not only products but also services like installation, operations and maintenance of wind farms. It was

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also involved in designing, developing and manufacturing WTG, wind resource mapping, site selection, support in land acquisition, connecting wind farms to grid and after sales operations. It also provided consultancy services for wind energy solutions and feasibility analysis of projects. Thus, Suzlon was on its way to become a one stop solution for a clients wind energy requirement. It created value for customer, who now could contract out the entire development of wind farm to Suzlon.

OFFSHORE MARKET
Offshore wind farms are a recent phenomenon and the market is expected to grow at over 40% CAGR. RE Power is one among select firms globally who have the necessary knowhow of the technology. RE Power is also involved in development of high capacity turbines for offshore use such as 5M and 6M.

HR AND CULTURE
As Suzlon grew rapidly in different geographies there was a need to develop and define Suzlon culture. Suzlon is striving to create a culture that is agile, consumer-centric, performance-oriented and integrity based. This is being done through leadership programs managed by a global leadership and development team (GLD). To generate synergies among various geographies and functions, Suzlon built a Group Management Centre in Amsterdam.

DISINVESTMENTS
To fund acquisition of RE Power, stake in Hansen was decreased from 61% to 26% and additional FCCB debt was taken during 2007/08. However, decreased demand post 2008 led to default on payments by customers, delayed or cancelled projects etc. all of which has negatively impacted Suzlons cash flows. The company has posted net losses for last three years (FY 2009 -2011). Suzlon is faced with an unprecedented cash crunch that has crippled its ability to complete projects in time. In October 2012, Suzlon defaulted on payment terms of foreign debt (FCCBs) and was looking to restructure its debt. It is noteworthy that though Suzlon is cash strapped, RE Power has a healthy balance sheet. However, transfer of cash from RE Power to Suzlon is facing legal difficulties and is not possible immediately. In the short term, firm has started divesting assets (which are not strategically aligned) for raising cash. In 2012, Suzlon sold off its Chinese facility for around 340 Cr INR. On the positive, the total debt of Suzlon has seen a significant decline of 47.8 per cent since March 2009 (according to Business Today Research Bureau).

SUMMARY
Suzlon has a strong market position that strengthens its brand image and increases its bargaining power. A diverse product portfolio (600KW to 6MW Turbines) helps Suzlon better manage demand fluctuations and ability to cater to both community wind farms (smaller turbines) and IPPs (larger turbines). Strong R&D expertise helps Suzlon in reducing costs, designing more efficient wind turbines, experimenting on new offshore technologies and developing new equipments for low wind conditions. However, Suzlons weakness lies in excessive its dependence on external suppliers of key components and materials. Suzlon has faced supply shortages in past due to component manufacturers inability to scale up production quickly. Also, its operating margins have decreased from 1.8% in 2010 to 0.7% in 2011. Losses have increased from 9.8% in 2010 to 13.24% in 2011. Declining profit margins reflect the management's inability to deploy its assets in profitable avenues

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and also hinders expansion plans. But despite the short term cash crunch, order book of Suzlon is healthy at over $7.2bn or 5755MW (as of Nov 2012). Summary of strengths, weakness, opportunities and threats to Suzlon are given in exhibit 14. Exhibit 15 also gives a qualitative analysis of Suzlons capabilities and whether Suzlon has exploited its various capabilities to full extent. In short term Suzlon seems to be faced with difficulty in managing its finances. However, with strong order book there exists no fundamental problem with operations. Going forward, Suzlon would have to become more asset-light, flexible and operationally efficient.

ASPIRATIONS
To be technological leader in wind sector To be in top three wind companies To be global leader in providing profitable, end-to-end wind power solutions

SUZLON STRATEGY: MOVING FORWARD

Past few years have been quite uncertain for Suzlon. It has tried to grow aggressively through acquisitions. But full synergies in these acquisitions are yet to come. Also, the environment is not as promising for growth as it was in 2008. As a result, strategy for next ten years has been divided in two phases. First phase, from FY13-15, will be the consolidation phase. In this phase, focus will be on bringing synergies in the acquisitions that have been made, stabilizing cash flows, restructuring debt, expanding through products and services that can be provided with current capabilities. Second phase, from 2016 to 2022, will be expansion phase. In this phase, focus will be on increasing customer base, production facilities, and technological investments. A concrete strategy has been made for next ten years. The major steps that will be taken in next ten years have been discussed in detail in following paragraphs. For tentative timeline see exhibit 16.

GUIDING PRINCIPLES
Suzlon will base its future strategies on the following three pillars: 1. Efficient technology 2. Efficient manufacturing 3. Providing end to end solutions It will be guided by following four principals: 1. Lean: It should be able to innovate and bring cost efficiency. 2. Scalability: If demand increases, it should be easily able to increase its production capability 3. Flexibility: Geographical presence should be in such a way that it can reallocate regional resources when needed. 4. Agility: It should have the ability to respond quickly to the market conditions.

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PRODUCT, TECHNOLOGY AND SUPPLY

As the cost per unit of power produced in wind farms is very high and the positive attitude of government of various countries is fading, it is essential to innovate to bring down the cost per unit of power. This can be done by either reducing the cost of turbines, installation and maintenance or by increasing their efficiency. Current product portfolio, which includes control systems, generators, hubs, rotor blades and tabular towers, will be retained. Also, current focus on R&D of these products will be continued. This will give an advantage over major competitors who have reduced their focus on R&D (Vestas Annual report, 2011) Direct drive turbines, as opposed to gear box turbines, are less complex, easy and cheap to install and have low maintenance cost. As a result, Suzlon will invest in establishing manufacturing facilities for these turbines. Though, aggression in this approach will be minimal in initial years as the reliability of this technology has not been proved. With the acquisition of REPower, Suzlon has built capabilities in the offshore wind farm sector. As the power generation potential in offshore farms is higher than onshore farms, Suzlon will increase its offshore capacity. Risk in supply chain is increasing due to rise in commodity prices. Shortages of components like gear box, towers, control panels etc. can also affect the timely delivery of turbines. Suzlon has anticipated these changes and is trying to mitigate risk by vertical integration.

PROJECT AND CONSULTANCY SERVICES

Suzlon, in addition to supplying parts, has been providing complete installation services to wind energy farms. These services include land sourcing and permitting, wind resource assessment, infrastructure development, installation and commissioning. Suzlon will introduce modularity in this approach. In addition to providing complete installation package, it will also provide each of the above consultancy services separately if possible. For example, if a client is purchasing parts from other, Suzlon can assist the client in site selection. Suzlon has also developed a strong knowledge base by understanding the patterns of wind in different parts of the world. It can also sell this knowledge by predicting the wind patterns and warning the clients about probable wind speed drop which can cease power generation. Hence, it will include wind forecasting in its consultancy portfolio.

OPERATIONS & MAINTENANCE SERVICES

In its attempt to provide complete wind energy solution, Suzlon has been providing operations and maintenance services to its clients after installation is over. Here also modularity in services will be introduced. These services can be broken into operating farms, repair and replacement of parts, regular maintenance and up gradation While providing consultancy, operation and maintenance services, challenge will be imparting knowledge about competitors products to employees. This will require investment in training. The big question that needs to be answered is whether this investment will generate enough revenues. We believe that since there are not many players who provide quality end to end services, client will prefer Suzlon for full packages or for part services.

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INSURANCE SERVICES
Like any other industry, wind industry is also characterized by certain types of risks. Risk can be due to fire, storm, mechanical failure of turbines and lightning. It can be also due to uncertainty in power production due to wind variations. There is a well-established market in Europe for insurance to wind energy sector. Major players in this market are Northern Alliance, Naturesave, Vestas and Bruce Stevensons. Type of claims that are entertained by players include mechanical, lightning, fire, storm and loss of revenue (Danish Insurance Association, 1999). Since wind sector is highly risky and has not fully matured, there arent significant players in India providing insurance to this sector. Added to this is the lack of availability of experts in financial service industry to access the risk involved in this industry. Since there is very less competition in providing insurance to wind farms across the world, except in Europe and US, Suzlon can enter into this sector (in 2016). Since it has expertise to assess the risks involved, this can be a successful venture. Also, insurance cover will encourage more players to establish wind farms. Its major focus will be in India, Australia and Brazil because these markets have no existing players and have huge potential. It will be provided in four packages full risk cover, breakdown cover (cover against breakdown of parts), loss of revenue cover and public liability cover (damage or injury to third party).

MARKETS
Currently, Suzlon has presence in India, Australia, Brazil, China, Europe and US. During the consolidation phase, it will focus on developing business in its current areas of operations only. During expansion phase, it will go for geographical expansions. India: As can be seen in exhibit 17, there is huge untapped potential in India for wind energy. With reintroduction of GBI and AD in Budget 2013, Indian wind energy sector is poised for tremendous growth in short term. This will lead to a spur in demand by 2016. Suzlons average growth target is CAGR 20% for FY 2013-16 and 15% in FY 2017-22. Europe: Due to financial troubles in Europe, there will be very less growth in Europe (except Germany which is discussed separately). Assuming stabilization of economy by 2017, average growth of CAGR 12% is expected in Europe. These operations will be carried on mainly by REPower. Since land availability in Europe is a challenge, major focus will be on offshore technologies. Germany: After Fukushima nuclear disaster, nuclear power plants have been banned in Germany. There has increased focus on renewable energy and government is incentivizing it. As a result, Suzlon will target this market aggressively, starting from FY2013. China: China is suffering from capacity overflow. Suzlon has already shut down a facility in China. Chinese market is highly competitive and developed. We will continue focus in china while leveraging developed supplies market for outsourcing. Middle East: Due to heavy availability of oil, there is very bleak potential for wind energy. Hence, Suzlon will not enter this market. However, there is good potential for trading renewable energy certificates (RECs). Australia and New Zealand: There is huge potential for wind energy in these countries. Government has set aggressive targets for renewable energy production. Focus will be both on onshore and offshore technology and hybrid plants.

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US: Suzlon already has a strong presence in US. However, due to growth of shale gas energy production and decreased interest of government in renewable energy, low growth is expected in this market in short term. Suzlon will target a low CAGR of 10%. Others: Other potential markets are Brazil and Africa. Suzlon will focus aggressively in Brazil from 2017. It will enter Africa in 2019.

MANUFACTURING FACILITIES
Suzlon will not spend anything in capacity expansion during consolidation phase. It will invest in building a plant each in Australia (in 2017) and Brazil (in 2019) for rotor blades. Rotor blades are very large in size and have high transportation costs. Other investments in facilities, starting from 2016, will be done in India and/or China because of cost advantages.

QUALITY CONTROL
After the incident of supply of defective turbines, Suzlon is determined to work on its Quality Control (QC). Stringent quality control measures will be established at each facility, starting from 2014.

CORPORATE DEBT RESTRUCTURING (CDR)

The INR has depreciated 36% in the last 5 years and the 44% of the FCCBs for SEL are still unhedged for forex risks. Thus we can safely assume that the Mark-To-Market (MTM) loses for Suzlon will be considerable going further. The possible solution would be to restructure/refinance FCCBs through domestic debt (exhibit 18). Refinancing through domestic debt will result in high interest expenses Suzlon decreasing its PAT by a significant amount. Restructuring will lead to a higher dilution of promoters stake which currently stands at 44.16%. Suzlon can make the repayment through following alternatives: 1. Existing cash and cash equivalents or operating cash flows 2. Refinancing of debt 3. Additional dilution On the basis of current Debt to Equity position, net cash outflows and committed capital expenditure refinancing option will reduce profitability by ~8.3% . Moreover since the D/E ratio of the firm is more than 1.5X (1.8X as on FY2011), Suzlon would find it difficult to raise further debt. Therefore, with negative cash flows, the only alternative that Suzlon should opt is dilution of promoters stake. Current Debt: 11,000 crore with nine CDR and four non CDR lenders (exhibit 19). Suggested Action Plan Expected cash inflows from Edison, U.S customer: Rs 1,100 crore Savings from reduced fixed expenditure: Rs 300 crore Proceeds from sale of non-core asset by FY2015: Rs 2,800 crore Proceeds from sale of assets from Tianjin, China plant by FY2014: Rs 280 crore Proceeds from sale of SE Forge, SE Electricals etc. in FY2013: Rs 160 crore Proceeds from sale of Promoters stake: Rs 240 crore (Saikat, 2012)

In order to achieve a sustainable capital structure the company should enhance its working capital capacity by obtaining credit of INR 1500 crore from banks for working capital facilities, a reduction of interest rates, and conversion of interest costs into equity (Moneycontrol Bureau, 2013).

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Please refer to exhibits 20, 21, 22, and 23 for detailed calculations.

CONCLUSION
Next ten years will bring both challenges and threats. By the end of year 2016, it would have consolidated its business and uncertainty will be very less. Exhibit 24 shows the forecasted Income Statement of Suzlon for next ten years. Suzlon is determined to achieve its forecasted targets. [Words : 4586]

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EXHIBITS
Exhibit 1: Global Energy Mix in 2008

Energy Use (TWh) in 2008

Nuclear 6%

Renewable Sources 13%

Fossil Fuels 81%

Exhibit 2 : Global Wind cumulative and annual installed capacity from 1996 to 2016

Installed Capacity from 1996 - 2016

600000 Wind Power Generation in MW 500000 400000 300000 200000 100000 0

Existing Capacity (in MW)

Annual Additional Capacity (in MW)

*Forecasted Values Source: http://www.gwec.net/wp-content/uploads/2012/06/glob_ann_inst_wind_cap_1996-2012.jpg http://www.gwec.net/wp-content/uploads/2012/06/glob_cum_inst_wind_cap_1996-2012.jpg

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Exhibit 3 : Growth rate of global wind cumulative and annual installed capacity from 1996 to 2016

Growth Rate of New and Cumulative Wind Generation Capacity - Global

Growth Percent over last year 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 20 25 37 33 34 9 12 37 28 30 12 1 26 21 41 35 31 32 24 26 27 45 32 28 0 24 5 10 2 21 19 16 15 14 7 65 73

8 12

New Capacity Growth

Cumulative Growth

*Forecasted Values Source: http://www.gwec.net/wp-content/uploads/2012/06/glob_ann_inst_wind_cap_1996-2012.jpg http://www.gwec.net/wp-content/uploads/2012/06/glob_cum_inst_wind_cap_1996-2012.jpg

Exhibit 4: Annual Installed capacity by region from 2004 to 2012

Source: http://www.gwec.net/wp-content/uploads/2012/06/ann_inst_cap_reg_2004-2012.jpg

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Exhibit 5: Top Wind turbine manufacturers and their market shares in 2008

Top OEM in Wind Turbine Sector in 2008

REPower Mitsubishi (Japan), (Germany), 3.00% 2.60% Dongfang Other, (China), 3.40% 6.80% Nordex (Germany), 3.40% Vestas (Denmark), 17.80% Goldwind (China), 3.60% Acciona (Spain), 4.10% Sinovel (China), 4.50% Siemens (Germany), 6.20% Suzlon (India), 8.10% GE (US), 16.70%

Top 5 OEM's Vestas, GE, Gamesa, Enercon and Suzlon had a combined market share of 62%.

Gamesa (Spain), 10.80% Enercon (Germany), 9.00%

Source: BTM Consult, International Wind Energy Development: World Market Update 2008, 24.

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Exhibit 6 : Summary of government incentive policies for wind energy for different countries.

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Exhibit 7: Cost of producing one MWh of wind power (in equivalent 2007 Dollars)

Wind Power Price (in 2007 Dollars per MWh)

Wind Power Price in 2007 US Dollars per MWh 70 60 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: Wiser and Bolinger, Annual Report, 1619. Accessed from www.nrel.gov/docs/fy08osti/43025.pdf

Exhibit 8: Cost competitiveness of various energy sources in 2010 Cost (cents/kWh) Coal 5.5 Natural gas 5.2 Nuclear 0.57 Wind* 5 Geothermal 3.6 * Wind energy cost includes U.S. PTC
Source: http://meic.org/energy/global_warming_pollution/renewable-energy-alternatives-1/wind_cost, http://www.scientificamerican.com/article.cfm?id=can-geothermal-power-compete-with-coal-on-price, http://www.nei.org/resourcesandstats/nuclear_statistics/costs/

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Exhibit 9: Market share of top 10 Wind turbine manufacturers in 2012

Percent Market Share in 2012

Note that 5 Chinese manufactures now came in top 10 Vestas ranking compared to (Denmark) 3 in 2008. Share of 12.7% top 5 manufactures Sinovel (China) also decreased to 9.0% 46.2% only implying more fragmentation.
Goldwind (China) 8.7% Gamesa (Spain) 8.0% Enercon (Germany) 7.8%

Ming Yang (China) 3.6% Siemens Wind Power (Germany) 6.3%

Others 21.2%

Guodian United Power (China) Suzlon 7.4% (India) GE Energy (US) 7.7% 7.6%

Source: http://www.cleantechinvestor.com/portal/wind-energy/10502-wind-turbine-manufacturers-globalmarket-shares.html

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Exhibit 10: Global cumulative offshore installed capacity by region in 2011 and 2012

Source: http://www.gwec.net/wp-content/uploads/2012/06/glob_cum_offsh_inst_cap.jpg

Exhibit 11: Maintenance cost comparison between Direct Drive and Drive train Turbine

*XZERES 442SR is used as a comparative standard only and is representative of direct drive turbines Source: http://www.xzeres.com/wind-turbine-products/xzeres-442sr-small-wind-turbine/

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Exhibit 12: Suzlons business model End-to-end integrated solutions provider

Wind Resource Assesment and Land Acquisition

Infrastructure

Access road, Grid Connection and Power Lines

WTG design, development and manufacturing

Services

Project Execution, Installation Commissio ning

Conceptualization Equipment Supply

Exhibit 13: R&D and Manufacturing facilities of Suzlon

Wind Turbine R&D in Germany

Rotor Blade R&D in Netherland

Gear Box R&D in Belgium

Manufacturing Base in India, China

Innovation Centre Europe

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Exhibit 14: SWOT Analysis of Suzlon as of 2012

Strengths
1) Strong Market Position 2) Diversified Product portfolio 3) Strong in-house R&D facilities 4) Robust order book

Weakness
1) Dependence on External Suppliers 2) Decreasing margins on operations 3) Cash crunch in short term

Suzlon
Opportunities
1) Strong Order backlog 2) Growing demand for wind energy 3) Joint projects with solar, gas and hydroprojects

Threats
1) Intense Competition 2) Operational risks 3) Dependence on government policy 4) Shale gas Revolution

Source: Market line database, Suzlon. Accessed from http://advantage.marketline.com/Product?pid=9D1C9B19-BF3C-4966-A435-60171560A1FA&view= SWOTAnalysis on 03/03/2013

Exhibit 15: VIRO analysis of Suzlons Capabilities SUZLONS CAPABILITY VALUABLE RARE REPLICABLE EXPLOITED COMPLETELY

Complete solution provider Vertical Integration R&D Capabilities Wide Product Portfolio Large Client Base First Mover Advantage Low Operations Cost

Yes Yes Yes Yes Yes Yes Yes

No Yes Yes No No Yes Yes

No Yes Yes No No Yes Yes

Yes Yes Yes Yes Yes Yes Yes

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Exhibit 16: Timeline of future strategy for Suzlon Gantt Chart for Suzlon Strategy Consolidation phase Growth Phase FY R&D Direct Drive Offshore Tech Consultancy Weather Forecasting Different levels of operating services Insurance India focus Europe focus Germany focus China focus Middle East entry Australia & NZ focus US focus Brazil focus Africa entry Outside India manufacturing facility India manufacturing facility
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Cautious investment Cautious

Aggressive Investment Aggressive

Pilot CAGR 20% CAGR 10%

Actual CAGR 15% CAGR 12%

CAGR 20%

Continuing current operations only Not entering CAGR 15% CAGR 10%

Australia

Brazil

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Exhibit 17: Untapped Potential capacity of wind farms in India as of 2012.

Source: WISE report, 2012

Exhibit 18: Debt Repayment schedule Debt repayment schedule Current outstanding FY13E 654 389 465 860 1,979 65 86 540 (USD mn) FY16E 175 559 734

FCCBs Acquisition loan Term loan Total

FY14E 200 86 286

FY15E 90 200 129 419

Exhibit 19: FCCB Out standings as on May '2012

FCCB Out standings as on May '2012 Company Name SUZLON SUZLON SUZLON SUZLON SUZLON SUZLON Maturity period Jun-12 Oct-12 Jun-14 Oct-14 Jun-16 Oct-16 Issues Currency USD USD USD USD USD USD Issue size 300 200 90 20.8 35.6 175 O/S as on Fixed Exchange (USD mn) Rate 211.3 121.4 90 20.8 35.2 175 44.6 44.6 48.2 49.8 49.8 44.6 Redeemable amount ( bn) 17 9.7 6.7 1.8 2.9 10.5

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Exhibit 20: FCCB Restructuring

FCCB Restructuring Bond series I Particulars New bond issued (3:5) Buy back (54.6%) Option not excercised Total Cash paid on buy back Consent fee paid Gain

Bond series II

Original Restructured Original Restructured 59.3 35.6 34.7 20.8 29.4 44 211.3 211.3 121.4 121.4 300 246.9 200 142.2 16 24 11.8 1.9 25.3 31.9

Exhibit 21: FCCB redemption

FCCB Redemption Company Name SUZLON SUZLON SUZLON SUZLON Maturity period Oct-14 Oct-14 Oct-14 Apr-16 O/S as on (USD mn) 90 20.8 35.2 175 Redeemable amount ( bn) 6.7 1.8 2.9 10.5 Cumulative MTM loss ( bn) 0.9 0.2 0.3 2 Effective borrowing cost (%) 9 11.8 10.8 11.1 Current preveilng yield(%) 31 53 92 24

Exhibit 22: Likely dilution required

Likely dilution impact on FCCB restructuring Equity dilution on conversion of FCCB @ CMP(%) Promoter holding (%) Likely As at redeemable Q4FY1 Post conversion of amount Total Additional 2 FCCB @ CMP 48.6 49.5 31.9 52.8 26.6

Company SUZLON

Assumptions: 1. MTM calculated at exchange rate of 55.26INR/USD 2. FCCB converted till FY 2012 FCCB likely to convert for 20% CAGR is treated as equity and the balance as debt

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Exhibit 23: Regional growth rates from 2013 to 2022

Calculating average growth rate for Suzlon Shar e of mark et in base Year * 48% 12% 3% 2% 29% 2% 3% 1% 100%

FY

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

India Europe Germany China US Australia and New Zealand Brazil Africa ** Average growth of Suzlon

20% 5% 15% 15% 10% 10% 40% 15% 15.4 %

20% 5% 15% 15% 10% 10% 40% 15% 15.4 %

20% 5% 15% 15% 10% 10% 40% 15% 15.4 %

20% 5% 15% 15% 10% 15% 40% 15% 15.5 %

15% 12% 15% 20% 20% 15% 25% 15% 16.5 %

15% 12% 15% 20% 20% 15% 25% 15% 16.5 %

15% 12% 15% 20% 20% 15% 25% 15% 16.5 %

15% 12% 15% 20% 20% 15% 25% 25% 16.6 %

15% 12% 15% 20% 20% 15% 25% 25% 16.6 %

15% 12% 15% 20% 20% 15% 25% 25% 16.6 %

*Assumption based on data found in Suzlon Annual Report and Internet **Operation for Africa will start in 2019

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Exhibit 24: Forecasted Profit and loss statement for 2013-2022

Consolidated Profit & Loss account (In Rs crore) 2012 (actual) Estimated growth

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2.85% 2.85% 2.85% 7.75% 9.07% 9.07% 9.07% 9.19% 9.19% 9.19%
Income

Net Sales Other Income Total Income

21,082 180 21,262

21,683 22,301 22,937 24,714 26,956 29,401 32,068 35,015 38,232 41,746 185 190 196 211 230 251 274 299 326 356
21,868 22,491 23,132 24,925 27,186 29,652 32,341 35,313 38,558 42,102 Expenditure

Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Total Expenses

13,750 80 2,009 338

14,142 14,545 14,960 16,119 17,581 19,176 20,915 22,837 24,936 27,227 82 2,066 348 0 2,994
19,632

84 2,125 358 0 3,080

20,191

87 2,185 368 0 3,167

20,767

93 2,355 396 0 3,413

22,376

102 2,568 432 0 3,722

24,406

111 2,801 472 0 4,060

26,619

121 3,055 514 0 4,428

29,034

132 3,336 562 0 4,835

31,702

144 3,643 613 0 5,279

34,615

158 3,977 670 0 5,765

37,796

0 2,911 19,088

Operating Profit Interest Depreciation Profit Before Tax Tax (40%) Reported Net Profit

2,174 1,655 661 -142 -57 -85

2,236 1,655 661 -80 -32 -48

2,300 1,655 661 -16 -6 -9

2,366 1,655 661 50 20 30

2,549

2,780

3,032

3,307

3,611

3,943

4,306

500 775
1,274 510 764 Assumptions

500 845
1,435 574 861

500 922
1,610 644 966

500 1,006
1,802 721 1,081

500 1,098
2,013 805 1,208

500 1,199
2,244 898 1,347

500 1,309
2,496 999 1,498

*Net sales and Income assumed to grow by growth rate *If not stated, items are assumed to be proportional to net sales with 2012 as base *Depreciation durin 2013-105 to be same as 2012 as no expansion is done *Interest is assumed to come to 50% level in 2016, after debt has been repayed

Page 29 of 31

REFERENCES
Bahety,M.(2012) . Analysis beyond consensus The new ABC of research. Retrieved from http://www.edelresearch.com/rpt/showpdf.aspx?id=20786&reportname=/FCCB_redemption_turns_o n_the_heat_-_Jun-12-EDEL.pdf&lgt=656vfdg&type=ynaj9XvqmJoptbYzJzovtA== Das,S.(2012). This is how Suzlon plans to revive through debt recast. Retrieved from http://www.moneycontrol.com/news/business/this-is-how-suzlon-plans-to-revive-through-debtrecast_787856.html Bureau.(2013). Suzlon's debt restructuring proposal gets formal approval Retrieved from http://www.moneycontrol.com/news/business/suzlon39s-debt-restructuring-proposal-gets-formalaproval_812763.html Wiki. (2013). World energy consumption Retrieved from http://en.wikipedia.org/wiki/World_energy_consumption Iea. (2009). Renewable and Waste in World in 2009 Retrieved from http://www.iea.org/stats/renewdata.asp?COUNTRY_CODE=29 Vestas .(2013).Annual Report 2012. Retrieved from http://www.vestas.com/en/annual-report-2012.aspx InWEA.(2007). Policy at the Center. India: Indian Wind Energy Association Page Retrieved from http://www.inwea.org/centralpandr.htm GWEC.(2012). India Wind Energy Outlook. Retrieved from http://www.gwec.net/wp-content/uploads/2012/11/India-Wind-Energy-Outlook-2012.pdf EAI.(2012).India Wind Energy. Retrieved from http://www.eai.in/ref/ae/win/win.html

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IER.(2012).Overcapacity hits turbine market Retrieved from http://www.instituteforenergyresearch.org/2012/01/23/overcapacity-hits-wind-turbine-market/ EAI.(2012).Central and State Government Policies for supporting Wind Power Projects. Retrieved from http://www.eai.in/ref/ae/win/policies.html GBI RESEARCH.(2012). TOP 10 WIND T URBINE MANUFACTURING COMPANIES - VESTAS CONTINUES TO DOMINATE AS EMERGING CHINESE PLAYERS PROVIDE STIFF COMPETITION TO GLOBAL LEADERS Retrieved from http://www.researchandmarkets.com/reports/2305994/top_10_wind_turbine_manufacturing_compani es GWEC.(2012).Market Forecast for 2012-2016. Retrieved from http://www.gwec.net/global-figures/market-forecast-2012-2016/ T ANTI.T(2013). T ULSI T ANTI: WIND ENERGY WILL PLAY A MAJOR PART IN SHAPING INDIA'S
FUTURE

Retrieved from http://articles.economictimes.indiatimes.com/2013-01-04/news/36148944_1_wind-energy-indianwind-largest-wind-turbine-manufacturer Suzlon.(2012).Annual Report 2011-2012. Retrieved from http://www.suzlon.com/images/investor_annual_result/Suzlon%20Annual%20Report%202011-12.pdf GWEC.(2012). Global Wind Energy Outlook 2012: Global Wind Power Market Could Triple by 2020. Retrieved from http://www.gwec.net/publications/global-wind-energy-outlook/global-wind-energy-outlook-2012/

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