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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
75
• 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
76
In Focus
• Positive growth path• Prudent investments• Focus on RnD• Strategic alliances• Strengthening brand image• Scope of diversification • Maintain profitability
Thank You