Farm Equipment Sector Strategy

Energy Sector- Suzlon Energy

Hakimi Consultants

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SUZLON-Company Overview

A globalwind powercompany.

Founded by Mr. Tulsi Tanti (Chairman & MD) in 1995.

Headquarter-Pune, India.

Employee Strength over 14000

Suzlon (including REpower) is the world's third leading wind turbine supplier group in terms of market share.

Global Market share=9.8% (Suzlon:6.4% +REpower 3.4%)

Geographical Presence in 30+ countries spread across 5 continents

Manufacturing Units in 3 continents.

R&D centers: Belgium, Denmark, Germany, India and Netherlands

Leading Supplier in India for the 12th year approx. 50% market share

Specialization in On Shore (Suzlon); Off Shore & On Shore (REpower)

Added over 5,000 MW of wind power capacity for over 1,600 customers in India.

Accounts for more than half of the Indias total wind turbine installations

Global - Industry Trends & OutcomesEnergy SecurityClimate Change & Global Warming

Cost Competitiveness & HedgingHedge against Geopolitical risks-Local and Secured supplyKyoto Protocol: Reduction of CO2 emissionsEU Declaration: 20% from RE by 2020US/India: 10% to 20% RPS/RPO mandates

Improvements in yield (cost/kWh)Cost/kWh of generation: US$ 0.03-0.06Wind Energy directly competing with conventional power

Global Wind Power ShareGlobal Energy Generation (TWh) Global Installed Capacity (GW)

*Source-Suzlon Q1 FY11 Result PresentationTHIS IS THE BODY SLIDES FORMATTITLE FONT TYPE IS FUTURA MEDIUMBODY FONT TYPE IS CALIBRI THEME BODY3 India - Industry Trends & OutcomesElectricity Demand Projections in IndiaCurrent Regulations and Benefits

80% Accelerated depreciation allowed in wind energy projects if they are commissioned before 30 September of the same financial year; or 40% if commissioned before 31 March. 10 year income tax holiday for wind power generation projects100% excise duty waiver on certain wind turbine partsReduced wheeling charges as compared to conventional energy100% FDI investment allowed in Renewable energy generation projectsGeneration Based Incentive (GBI) scheme for grid interactive wind power projects -Rs 0.50 per kWhDeclaration of preferential tariffs from Rs 3.395.32 per kWh by some states

Industry Analysis - ChallengesDecommissioning of Accelerated Depreciation Policy With the introduction of Direct Tax Code by 2012, accelerated depreciation policy will expire. This initiative may de-motivate the big companies of wind power because accelerated depreciation accounting method allows companies to write off investments at a faster rate than normal, which reduces tax liabilities.Inadequate grid infrastructureInadequate grid infrastructure in states with high wind potential has slowed down the growth of wind energy industryIrregular Tariff Changes for Wind Energy In many states, tariffs once fixed have remained unchanged over two to three years, despite significant changes in the market conditions. There is a need for a regularization of determining these prices as inadequate price levels will act as a deterrent to investment in wind based projects. High Competition from Foreign PlayersIncreased competition from global players such as Vestas, Sinovel and Enercon. India, a growing wind energy markets, is likely to see increased focus from players like Siemens, GE and Indowind.

Porters Five Forces

Competitive RivalrySupplier PowerThreat of New EntryThreat of SubstitutesBuyer PowerHuge Capital requirementSuzlon as a brand is preferred by clientsAdvanced Technology requiredAccess to resourcesQuality control Standards

Few potential BuyersSensitive to pricingPower Purchase Structure In India Switching cost is highBackward integration for buyers is difficultHigh demand for componentsSuzlon has successfully adopted Backward Integration which has reduced its dependency on suppliers. For the suppliers forward integration is very costly Other renewable technologiesPrice substitution from conventional sourcesAlthough financial incentives are there for wind energy from govt.Threat of New Entry (Low)

Buyer Power (Low)

Supplier Power ( Low to Moderate)

Threat of Substitutes (Moderate)

High Exit CostsCompetitive pricingLarge global players like Vestas, GE wind etc.Competitive Rivalry (Moderate to High)

SWOT AnalysisOpportunitiesWeaknessesIntegrated Business Model

Reduces supplier dependencyBenefit from cost efficiencies and economies of scaleHassle free solutions to customers Greater control over execution time line, cost & qualityDevelopment expertise in key componentsGlobal resource pool for faster designing & developmentMW and multi-MW WTG models and Rotor blades developed indigenouslyWind Resource mappingSite IdentificationLand AcquisitionWTG and Component ManufacturingSite Development, Infrastructure set-up and WTG installationOperations and Maintenance ServicesEnd-to-End Solution Provider

Technologies & CapabilitiesAcquisitions and AlliancesMarket Leader and Global presence

Among the top three WTGs companiesGlobal presence across 5 continents Market leader in IndiaCompetitive advantage through acquisitions of REpower & Hansen

StrengthsThreats

OpportunitiesWeaknessesSWOT AnalysisWEAKNESSES

Operational inefficiencies Huge growth in assets is diminishing the growth in profitsUnsupportive Stock PricesUnfavourable Ratings from rating agenciesWeak Strategic Financial ManagementInefficient Working Capital Management

StrengthsThreats

OpportunitiesWeaknessesSWOT Analysis

StrengthsThreats

High CompetitionThe govt. of India has approved FDI limits up to 74%. Although Suzlon is a market leader, its technology efficiency is not as compared to global giants like VASTAS, GE Wind etc. So this initiative can be a threat for Suzlon.Foreign Exchange RiskDue to global presence of Suzlon, there is default risk of exchange rate fluctuations. The exchange rates are highly fluctuating since last couple of years and hence it has become riskier for Suzlon to do business globally.Technology RiskSuzlon has to implement the fast changing technologies to compete in the market otherwise it will lose the competitive advantage.Hindrances / Objections to Wind PowerThe main objection to wind power is due to other environmental costs. Many wind parks remain shut-down for a part of the year because of bird migration. Larger turbines produce more power, but they also take more land to operate safely and effectively. Many eco-warriors object to the installation of wind parks by lobbying the govt. to look for alternative sources of energy.

OpportunitiesWeaknessesSWOT Analysis

StrengthsThreats

Suzlon-Current Growth Strategies

Horizontal growth acceleration through M&AVertical IntegrationImproving Cost EfficiencyFocus on High Growth MarketsStrategic Focus on Customer needs (End-to-End)R&D and InnovationKnowledge AcquisitionAcquired the technical know-how through permits and buying of smaller wind technology firms.Resource Mobilization Optimum utilization of low costs resources, labour and other infrastructural facilitiesVertical IntegrationTo eliminate supply chain constraints and ensure quicker delivery to customersMergers and AcquisitionsBoosting its core competenciesIntegrate with its operations, andHave manageable consolidation risks

Expanding Global PresenceAustralia - Sustainable and internationally competitive renewable energy industryUSA It has outpaced Germany in terms of capacityChina - Favorable policies & targetsIndia Robust domestic demandGlobal AcquisitionsHansen Transmission-Develops long term growth driver in terms of wind and industrial gearbox business.REpower Systems AG-Entry into large European markets; Complimentary product portfolio - offshore technology; Capitalize on know-how and brand equity

Organizational Structure

Functional AreasCorporate servicesManufacturingBusiness UnitsR&DIssues with the current Organizational StructureThe employees may experience dual authority like reporting to two bosses .The matrix structure forces the managers to spend a great deal of time in meetings, hence time consuming This structure also requires great effort to maintain power balance.Suzlon has opted Project Centered Matrix Organization which focuses on two key factors:Customer OrientationTechnology LeadershipThe Product & Project Management Organization ensures that customer expectations are met.The functional organization focuses on the technical side of the business.

Suzlon Technology GroupProduct and Project Management OrganizationFunctional Organization

Proposed Organizational Structure

CMD Suzlon AsiaFunctional GroupsTechnical groupsManufacturingAustraliaFunctional GroupsTechnical groupsManufacturingEuropeFunctional GroupsTechnical groupsManufacturingNorth AmericaFunctional GroupsTechnical groupsManufacturingSouth AmericaFunctional GroupsTechnical groupsManufacturingCurrently Suzlon is operating in more than 30 countries and expanding.

In the near future as Suzlon increases its foothold to other geographies, Geographical Organizational Structure will be more efficient in terms of managing different units of Suzlon and facilitating manufacture and deliver of products.

Better quality control over various geographic locations.

It will reduce cross culture management issues.

Potential New Target Markets

Argentina, UruguayMoroccoEgyptJapan, Philippines, Taiwan, ThailandMexico

Potential New Target MarketsIts wind resources are unrivalled in the Latin American region and estimated to be enough to supply the regions entire electricity demand several times over, but till date only a tiny amount of the potential, 60 MW has been developed .ArgentinaHigh GDP growth of 8% has led to a dramatic rise in electricity consumption and approx. 30 GW of new generation capacity will be needed by 2021. The government has set a target of renewable energy from 6.4% in 2008 to 20% in 2022, with an 800 MW target for wind capacity. ThailandThe country has a present generation capacity of 33 MW of wind power, but the potential is estimated at around 55 GW. The government has set a target for 40% of its electricity to be generated by renewable sources by 2020, up from the current 33%. PhilippinesThe country has an outstanding wind resource, especially in the Oaxaca region. Its installed wind capacity has increased more than 5 times since the end of 2009.MexicoAfter the recent nuclear disaster Japan is planning to switch alternate sources of energy like wind power, solar, etc.Other countries such as Uruguay, Egypt, Morocco also have promising wind energy potential.Others

Proposed Strategic InitiativesRepowering and Recycling

Wind-Solar Hybrid SystemsGearless turbine - Direct Drive Technology

Blue Ocean Strategy-B2C Brand Promotion Social Media

Repowering and Recycling

Repowering involves the replacement of old WTGs with new and more cost efficient WTGs.According to industry research, over 10,500 machines that were installed during the mid 80s and 90s will soon be replaced by larger, more efficient turbines.

84% of nacelle can be recycled93% of Tower parts can be recycled

42 % of the rotor parts can be recycled

52% of other parts can be recycledOur Recommendation Repowering is one of the growth drivers to the future market for wind power Suzlon should also initiate recycling dismantled wind turbines as well as production of more MWh per kilogram wind turbine.

Wind-Solar Hybrid SystemsHybrid systems make optimal use of sunlight and wind speeds - the two main resources readily available.

These can be integrated with different energy sources such as PV or diesel generators and requires little maintenance and can be easily assembled and installed on site.

Typical applications range from house or village electrification, small enterprises to water pumping and is ideal for electrification of remote areas where reliable power supply is not available and eliminates reliance on power grids.

Street Lamps using Wind Solar Hybrid technology are already a growing marketSuzlon being a leading player should work on to tap the big potential the sector has been offering.

The product has scope to be commercialized on a global scale and will increase the foothold of Suzlon in foreign markets.

Suzlon needs to upgrade its existing turbines and also add new products to its portfolio

Gearless wind turbines which work on direct-drive generator technology making them more efficient and cost effective to maintain.

Conventional gearboxes used in turbines are quite vulnerable to failure

Maintaining geared turbines for offshore installations incurs high repair costs

Gearless turbines still a developing technology

Huge market potential in Europe, US and Asia in the next decade. Our Recommendation:Acquire a company in the domestic market which has expertise on direct-drive generator technology and leverage on the technology

Gearless turbine - Direct Drive Technology

Blue Ocean Strategy - B2CTodayThe Road AheadB-to-C ConsumersB-to-B ConsumersVast majority of consumers today want to access more Renewable energy

Surveys shows that 90 per cent of consumers globally want more renewable energy ahead of further investments in fossil fuels and nuclear plants.65 per cent of people claim they would like to buy products made using wind energy

Suzlon should target more B-to-C companies. It can mean fast-tracking of more renewable and wind energy

Suzlon can move ahead of the competition and create a blue ocean by indirectly targeting B-to-C consumers and thus boost wind turbine sales.

Brand Promotion Social MediaAmple evidence of the power of internet in the B2B space 92% B2B requirements commence with an online search 75% B2B decisions are finalized online

What if something could convert this scope into business inflow for Suzlon? A response to this highlighting Suzlon could straight away get the business for SuzlonSuzlon by being live in the Social Media can generate more business

21Strategy - Medium Term Support Wind R&D in private sectors and educational institutions like IITs. Target firms which exceed pollution limits with its signature end-to-end services. Manufacture when business stable & market developed or consider Acquisitions Explore opportunities in African and South East Asian markets Focus on offshore markets Through forward integration venture in electricity generation through wind power Go for franchise model for transmission and distribution of wind power energy

Blue Chip MantrasSuzlons Wind Turbines business should aim to fit into each of the following 5 Blue-Chip Mantras:

Suzlon is a world class player in wind turbines.Global potentialR&D provides innovation Promising ReturnsExtremely Customer Centric

THIS IS THE BODY SLIDES FORMATTITLE FONT TYPE IS FUTURA MEDIUMBODY FONT TYPE IS CALIBRI THEME BODY23Debt RestructuringPresently outstanding debt of USD 2.6 bn (including FCCBs of USD 654 mn)Debt repayment schedules of USD 150 mn and 283 mn for FY13E and FY14E, respectively.FCCBs worth USD 389 mn due for conversion in FY13E, USD 90 mn in FY15E, while the balance USD 175 mn in FY16EProceeds of USD 187 mn from the Hansen stake sale of 26% and receivable of approx. USD 200 mn from Edison, to aid the debt repaymentsCompany to raise USD 1.1 bn via equity and debt in 2011Suzlon has burdened itself with high debt on its balance sheet with a leverage of 1.9x with interest payments of more than INR 1000 cr annually

It should not take further obligations that might affect its financials negatively in the short term

Future Projections(Rs cr)2010-112010-11 Q42011-12 Q12011-12E2012-13E2013-14ERevenue1809073724326260002990034385Net Profit-1103.4330960208023923782*calculated on the basis of existing market conditionsListing overseas in NYSE/DAX will improve the liquidity of the companys stock and provide access to new capital marketsPublishing additional set of financial statements in accordance with US GAAP / IFRS will be more relevant to its potential US and European investors, who make up more than 50% of Suzlon's revenue.Joint Ventures in select potential new markets instead of acquisitions which would reduce its investment cash outflowsPost complete acquisition of RE Power, Suzlon should leverage and garner maximum potential from RE and integrate REs operations with its global operations to increase synergy and optimizationReduce operational expenditures and increase efficiency to boost bottom-line

Financial Strategies25Gain competitive advantage through Corporate Social ResponsibilityForward integration in the value chain by Electricity Generation Focus on geographical diversification of business to reduce riskReduce carbon footprints by focusing on addressing emissions in all phases of wind plants life cycleExploit huge opportunities in the German market where Nuclear Plants are being phased out and Wind energy share is expected to increaseAchieve Six-Sigma standards in manufacturing operations Improvements in turbine size, efficiency, reliability and lifetime. Development of cost-effective local storage solutions such as fuel cells. Research on new cost effective technologies like Vertical Axis Turbines, Gorlov Helical Turbines . Diversify into other renewable technologies like Solar PV .

Strategic Roadmap

References www.suzlon.com Annual Reports and Investors Presentationshttp://economictimes.indiatimes.com/http://www.bloomberg.comhttp://www.wikipedia.com/wiki/ Reports (Source: http://www.gwec.net/)Indian Wind Energy Outlook 2011Global Wind Energy Outlook 2010

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