MANAGEMENT DISCUSSION AND ANALYSIS Global Wind Market and Outlook After a slump in calendar year (CY) 2013, the wind market bounced back strongly in CY 2014 by growing 44% with an annual installation of 49 GW. The market was mainly driven by surge in installations in China, USA, Germany and Brazil. The offshore wind segment grew marginally with over 4 GW under construction. Indian market experienced significant growth of 34% with 2.3 GW capacity installed in CY2014 due to restoration of Accelerated Debrciation (AD) and continued investment from Independent Power Producers (IPPs). Healthy project pipeline by IPPs coupled with ambitious target of 60 GW by 2022 from current level of 23 GW set by the new Government will continue to drive the market growth in India. The government has also gone ahead for amending the Electricity Act 2003, which is lying with the Parliament for approval and national tariff policy. The proposed amendments will lead to two distinct things as under: • Renewable Generation Obligation (RGO), which will be applicable to Greenfield conventional power capacities in the future, where in they will have to procure certain percentage of off-take from Renewable Energy as a function of their installed capacity; • Stricter enforcement of Renewables Purchase Obligation (RPO) as specified by various State Electricity Regulatory Commissions (SERCs) The industry is poised for a record volume in CY 2015 to reach annual market size of 58 GW. The growth will be driven mainly by the end of the policy cycle in key markets particularly in China, USA and carryover of offshore wind capacity in Germany. Brazil and Canada will also witness huge installations. The long term outlook of wind market continues to remain strong with Levelized Cost Of wind Energy becoming competitive vis-a-vis new fossil fuel plants in key markets. Wind market is likely to undergo a transition to market mechanism from 2017 to 2020 responding to regulatory reforms underway in key wind markets. The long-term future for wind is underpinned mainly by its efficiency and cost effectiveness in relationship with other conventional fossil fuels. New products are being introduced with a significantly improved yield curve and also to harness wind energy from low wind sites. In addition to cost competitiveness, energy security concerns and climate change issue continues to play key roles in shaping the future growth of renewables including wind energy. Group Outlook The Suzlon Group ('the Group') today is well positioned for a new phase of growth. The Group has over a billion dollar order book in India and a sizeable pipeline in International business markets. The Group remains a leading wind turbine manufacturer globally with over 14.5 GW of wind installation in 17 countries. Financial restructuring, including Senvion sale and turnaround efforts are making the Group leaner and stronger to harness growing opportunities both in turbine business and Operations and Maintenance Service (OMS) business. On top of a 60GW Wind Energy target, the Government has also set ambitious targets for Solar Energy of 100 GW by 2022. This is opening up opportunity to diversify and grow for the Group. India will remain a key market for Suzlon's growth in near term. The Group also have a major share in the volume from Public Sector Units (PSU) / tender segment wherein wind installations over 1.5 GW completed till date and with an amended circular issued by Ministry of Corporate Affairs (MCA), there is going to be a larger investment by both central and state owned PSUs in the future, where the Group is in a position to grab a major market share. Products and technology Technology is the key enabler for competitiveness in the wind space. The Group's state of the art R&D facilities in Europe and India have led to the development of a combrhensive product portfolio, ranging from sub MW to 2.1 MW wind turbines and tower height of up to 120 meter. With a focus on reducing the cost of energy and thereby improving IRR for the customers, the Group launched two new products over the last two years. Suzlon has started serial production of S97 with 120 meter hybrid tower which is the tallest and first of its kind wind tower in India. This will enhance energy output by 10 per cent to 15 per cent over S97 with 90 meter tower, converting many low wind sites into commercially viable sites. The prototype of new product S111 - 2.1 MW has already been installed both in India and USA. S111 is specially designed for lower wind-speed sites delivering energy yield improvements of about 20 per cent over the existing platform of S97 at same Hub height. This product is likely to give Suzlon a huge competitive advantage particularly in Indian wind market. The Group continued its product innovation and research and development drive at R&D centers in Germany, The Netherlands, Denmark and India. A Group updates Despite a tough year, Suzlon Group, including Senvion, achieved seventh and sixth place globally in annual and cumulative capacity installations respectively, in CY 2014. The global market share in 2014 as per MAKE Consulting was 4.9% in Annual and 7.1% on Cumulative basis. Suzlon Group, including Senvion, featured amongst top 5 OEMs in both America and EMEA (Europe, Middle East and Africa) region with a market share of 6% and 9% respectively as per the Make Report. Suzlon would limit its focus on key and profitable International markets. Suzlon also maintained a top three position in India with installations of 442 MW in FY 2014-15. Indian Wind market is forecasted to rebound on the back of reinstatement of Accelerated Debrciation (AD), increasing Feed-in-Tariffs in several states and with GBI benefits continuing to be in place for five years. Suzlon is well positioned to continue its market dominance. Our focus as a Group during FY 2014-15 was on combrhensive liability management, de-leveraging of balance sheet and on operational turnaround. The successful steps towards financial restructuring by the end of the year along with improving business efficiency and reduced fixed cost have helped Suzlon Wind to commence process of increasing volumes and reducing losses. However, in the process Suzlon has to book sizeable losses related to divestment of Senvion. Suzlon is now well positioned for resuming a new phase of growth with higher focus on key market. Key initiatives The Management Team has laid out clear plans to address key priorities in FY16, namely - 1. Regain market share in India 2. Improve contribution margin by maximizing energy yield, reduced cost of turbine and timely execution of projects 3. Focus on core and profitable International markets 4. Enhance machine availability and higher customer satisfaction through better OMS offerings 5. Establish and grow Solar and IPP verticals as independent businesses With these focus areas, the management team believes that the Group is well positioned to reach a level of long term sustainability to resume its growth trajectory and deliver significant value to its stakeholders. Business risks and mitigation The Group has an active risk management and mitigation strategy, taking a fairly wholesome view of the internal and external environment to proactively address challenges, to the extent possible. Key elements of the program are summarized below: Operational risks Technology: Introducing and improving salability of turbines for low-wind sites has been one of the subjects of continuous focus, with the objective to make technology deliver the maximum output at the lower wind speed sites. In addition to improving the technology for the future, optimizing existing models to deliver maximum power output at low wind is of significant importance to ensure best utilization of the current model. With these objectives, the technology for the existing S97 90m turbine was explored for improvement by realizing a prototype for 120m height. Now we entered into serial production and based on the demand ramp-up is under progress. Last year we had conceptualized S111 turbines and now the proto turbine of S111 is up and running successfully and this product will go for serialized production. Technological efforts in Operations and Maintenance of installed turbines continue to be employed for the assurances of supply of alternatives, particularly when there is a component phase-out. Technology continues to collect, compile and analyse field reports for possible technical issues that may be critical for future designs. Supply chain risk: Critical components like Gearbox, Bearings, Converter and Blades have a long ramp-up duration which would inhibit agility. The group is working constantly to create alternative sources through expansion of the vendor base, localisation and standardisation of certain components to keep the costs of procurement under check. Financial risks Foreign exchange risk: A significant part of the Suzlon Group's revenue, costs, assets and liabilities are denominated in foreign currencies. Un-hedged trade and financial exposure thus creates potential to adversely impact our projects and overall profitability. Foreign Exchange Risks arising from imports and exports relating to our operating cycle are recognized at the contractual juncture and are attempted to be hedged progressively at various stages of project life cycle, depending upon the nature of the transactions and in accordance with the hedging policy and strategy of the Company. During the year, risk management practices continued to focus on minimizing the economic impact on company's profitability arising from fluctuations in exchange rates. Interest rate risk: We were exposed to high interest rates at the Group level. Post formalisation of Corporate Debt Restructuring Proposal (CDR Proposal), risks associated with interest rate fluctuation have been substantially mitigated with fixing the interest rate regime on the term debts for a longer period. However, our INR borrowing interest rates continue to be linked to banks's base rate. And any upward revision in banks base rate will have a corresponding impact on our overall borrowing costs. In the brsent macroeconomic environments, such a risk is rather remote due to softening INR interest rates with declining inflation scenario and the trend is expected to continue in near future. We also have significant amount of foreign currency borrowings which are denominated in USD. Besides, we also avail buyer's credit in some of our import transaction which creates interest rate risk exposure. We currently do not hedge our interest rate exposures. Credit risk: Our operations entail Project Sales and Operations and Maintenance Services (OMS) of wind farm. Project Sales entail milestone based payments and are linked to financial closure at our customers. A large part of the payments are received as per milestone linked payment schedule during the project implementation phase and only a small residual portion, usually not exceeding 5-10% of the project cost remains as receivable after the project completion and hand over of the Wind Turbine Generator to the customers. Therefore credit risks are rather limited in the project business. Even after the project is handed over, there are significant dependencies between customers and Suzlon which works as a strong mitigant to any significant credit risks. Our Operations and Maintenance Services entail monthly maintenance charges recovery from a large number of customers. This risk is mostly quite fragmented in nature. We have adequate processes in place as part of the standard operating procedures in our OMS organization to deal with the risk associated with any defaults and also for dispute resolution. Internal control systems and their adequacy Our internal management audit team periodically undertakes independent reviews of risks, controls, operations and procedures, identifying control and process gaps and recommending business solutions for risk mitigation. The Company runs in-house risk and misconduct management unit which supports management to assess, evaluate, strengthen and institutionalise value system from the standpoint of ethical business practices. With regular reporting mechanism, a stage gate system has been established. Complaints received under whistle-blower policy are evaluated on a regular basis. The Audit Committee of the Board periodically reviews the company's management audit reports, audit plans and recommendations of the auditors and managements' responses to those recommendations. The Audit Committee met four times during the year. Corporate Social Responsibility (CSR) At Suzlon, our CSR Mission statement gives us direction in strategizing and planning towards achievement of our goal of "Powering a greener tomorrow". "Corporate Social Responsibility at Suzlon means living corporate values, with the goal of: • Having minimal impact on the natural environment • Enabling local communities to develop their potential • Empowering employees to be responsible civil society members • Committing ourselves to ethical business practices that are fair to all the stakeholders So that we can collectively contribute towards creating a better world for all" Suzlon has made a positive choice of engaging in a business which helps the environment by reducing pollution of electricity generation. As responsible corporate, it also implements many activities in focused manner to enhance natural resources through CSR. Suzlon Foundation, a Section 25 non-profit company formed in 2007, helps Suzlon in its efforts to achieve environmental, social and economic sustainability by enhancing natural, social, human, physical and financial resources around its wind farms and factory areas. Going beyond philanthropy approach, it has incorporated sustainability perspective even in its CSR programs which are implemented through Suzlon Foundation. Overall Outreach: In 2014-15 we have reached out to 512 villages, worked with 123,271 families and 20,404 students of 299 schools, vaccinated 160,311 animals to increase productivity, and installed 175 solar systems for alternative energy source where there was none. The stakeholder contribution to our programs has been worth staggering Rs 44.05 lakh. Preserving Natural Resources: Being in renewable energy sector, brserving natural resources is the mainstay of the programs under CSR. During the year 14-15, we involved 13192 students and villagers to plant trees in schools and villages and to nurture them. 23,267 trees have been planted and awareness sessions on brserving natural environment have been conducted. Plantation has been done along the roads and around 68 Wind Turbine Generators and seeds were broadcast on the hills. Clean India Drives were conducted in all locations in 7 states where we have wind farms. We also collected and recycled 2902 Kg solid waste. Enabling local communities: Social sustainability can be achieved only if we empower the local communities and support local institutions. In the year under report we have supported and strengthened 764 community based organizations. The ultimate aim is to make the groups so empowered that they themselves are able to take up small development activities needed in the village, and find solutions for bigger once by collaborating with govt. and other agencies. Empowering employees: An organization can only be as responsible as its employees. Thus, employee involvement forms a considerable part of CSR activities. They are encouraged to participate in socially and environmentally responsible programs. Total 1,766 number of employees participated in these activities contributing 1,138 days. Committing to ethical business practices: Responsible action needs to be followed in spirit, not just on paper. The grooming begins with CSR sessions in induction programs of new joinees. This session includes exercises on responsible practices. Apart from this, in effort to disseminate Suzlon's Code of Conduct to all levels, an Integrity Workshop Training Module has been evolved by Suzlon Foundation. These sessions were conducted for 458 employees in 5 states. We received brstigious CII-ITC Sustainability Award Commendation for Significant Achievement in Corporate Social Responsibility for the year 2014. Sustainability in Value Chain Suzlon has always been a proponent of environmental, social and economic sustainability. Being a renewable energy company, it already contributes substantially towards mitigation of climate change. Sustainability aspects are addressed through various initiatives taken up by business units and CSR team. Aiming to enhance sustainability in supply chain, Suzlon has taken up focused activities to improve: • Energy Efficiency • Waste Management • Strengthening Environment Management System ISO 14001 a) Securities brmium account The securities brmium account stood at Rs 6,833 Crore as compared to Rs 5,193 Crore on March 31, 2014. The increase of Rs 1,640 Crore is on account of issuance of new equity shares during the year. (b) Foreign currency translation reserve ('FCTR') The change in FCTR is due to exchange fluctuation resulting from translation of the accounts of overseas subsidiaries into reporting currency of the parent company i.e. INR. (c) Statement of profit and loss Statement of profit and loss moved significantly due to the impairment provision in the value of goodwill on divestment of Senvion in addition to the business losses incurred during the year.. 4. Deferred tax liability, net Deferred tax liability stood at Rs 649 Crore as compared to Rs 792 Crore on March 31, 2014. Deferred tax assets stood at Rs Nil as compared to Rs 54 Crore on March 31, 2014. Net decrease in deferred tax liability of Rs 89 Crore is primarily on account of deferred tax charge for changes in temporary allowances and disallowances calculated as per the tax regulations applicable to respective entities within the group, reversal of some deferred tax assets and exchange fluctuation resulting from translation of the account balances of overseas subsidiaries into reporting currency of the parent company i.e. INR. Net block stood at Rs 5,844 Crore as compared to Rs 13,515 Crore in brvious year. The net reduction of Rs 7,671 Crore includes Rs 6,072 Crore towards provision for impairment in the value of goodwill (refer Note 7 of consolidated financial statements). Balance reduction is primarily towards debrciation and impact of currency translation on remaining goodwill and fixed assets based outside India. b. Capital and other commitments Capital commitment rebrsents estimated amount of contracts remaining to be executed on capital accounts and not provided for, net of advances stood at Rs 137 Crore as compared to Rs 135 Crore on March 31, 2014. Other commitment rebrsents commitment for purchase of goods stood at Rs 3,661 Crore as compared to Rs 3,982 Crore on March 31, 2014. 3. Assets other than fixed assets and investments a. Inventories Inventories stood at Rs 3,361 Crore as compared to Rs 4,033 Crore on March 31, 2015. During the year inventory holding period has marginally reduced from 102 days to 99 days. There is reduction of Rs 672 Crore which is primarily on account of improved project execution. b. Trade receivables Trade receivables stood at Rs 2,754 Crore as compared to Rs 2,687 Crore on March 31, 2014. During the year there is marginal increase of Rs 67 Crore. c. Cash and bank balance Cash and bank balance stood at Rs 2,673 Crore as compared to Rs 2,630 Crore on March 31, 2014. Cash and bank balance with Senvion stands at Rs 2,067 Crore, the same being under 'ring fencing' mechanism agreed with the lenders of Senvion. d. Loans and advances Loans and advances stood at Rs 1,760 Crore as compared to Rs 2,363 Crore on March 31, 2014. This includes advances to vendors for goods, services and land, tax credits and payments, security deposits, brpaid expense etc. e. Due from customers Due from customers stood at a reduced figure of Rs 2,091 Crore as compared to Rs 3,258 Crore on March 31, 2014. It rebrsents unbilled revenue in relation to construction contracts, primarily outside India. f. Other assets Other assets stood at Rs 2,627 Crore as compared to Rs 635 Crore on March 31, 2014. There is an increase of Rs 1,992 Crore of which Rs 1,800 Crore is towards share application money receivable from an investor group towards brferential allotment of equity shares and Rs 250 Crore is towards forward contract receivables. a. Reduction in trade and other payables on account of payment to vendors and movement in exchange rates. b. Reduction in advances from customers on account of order execution. c. Conversion of brmium payable on redemption of FCCBs into new FCCBs. d. Utilisation from guarantee and warranty provisions. C. Cash Flow Net cash generated from operating activities is Rs 1,119 Crore. Net cash used in investing activities is Rs 787 Crore, of which Rs 250 Crore is towards investment in mutual fund and Rs 736 Crore is towards purchase of fixed assets. Net cash used in financing activities of Rs 199 Crore is primarily on account of proceeds from long-term and short-term borrowings of Rs 1,112 Crore and cash utilized towards repayment of long-term borrowings of Rs 308 Crore and payment of interest of Rs 1,010 Crore. Principal components of results of operations 1. Revenue from operations Revenue from operations reduced marginally by 2% from Rs 20,212 Crore in FY 2013-14 to Rs 19,837 Crore in FY 2014-15. 2. Other operating income Other operating income reduced by 38% from Rs 191 Crore in FY 2013-14 to Rs 118 Crore in FY 2014-15. 3. Cost of goods sold ('COGS') COGS as a percentage of sales reduced to 68.7% during the year as compared to 71.4% in the brvious year. The improved ratio reflects favourable product and market mix, continuous efforts by the Group in value engineering and improved sourcing abilities and favorable movement of currency. 4. Other expenses The other expenses have come down to Rs 3,793 Crore in FY 2014-15 as compared to Rs 3,877 Crore in FY 2013-14, in spite of exchange difference loss of Rs. 485 Cr in FY 2014-15 as compared to loss of Rs. 256 Cr in FY 2013-14. Continuing efforts of management to bring down the costs so as to have improved break-even point are paying off in bringing down the overheads. 5. Employee benefit expense Employee benefit expense reduced marginally from Rs 2,231 Crore in FY 2013-14 to Rs 2,227 Crore in FY 2014-15 rebrsenting 11.0% and 11.2% of sales respectively. The efforts to achieve optimal manpower costs are likely to pay off in future. 6. Finance cost Finance cost reduced marginally from Rs 2,070 Crore in FY 2013-14 to Rs 2,065 Crore in FY 2014-15 rebrsenting 10.2% and 10.4% of sales respectively. 7. Debrciation and amortisation The Group provided a sum of Rs 809 Crore and Rs 777 Crore towards debrciation and amortisation for the year ended March 31, 2015 and March 31, 2014 respectively. 8. Profit / (loss) The consolidated EBITDA has increased from negative Rs 141 Crore in FY 2013-14 to positive Rs 316 Crore in FY 2014-15. The improvement is primarily on account of favourable product and market mix, better operational efficiencies and reduction in overheads. Similarly consolidated negative EBIT of Rs 493 Crore for the year shows improvement from negative EBIT of Rs 918 Crore in FY 2013-14. Loss before tax and exceptional items though continues to be substantial, stands at a comparatively lower figure of Rs 2,504 Crore as against Rs 2,916 Crore in FY 2013-14. Charge on account of exceptional items stood at Rs 6,312 Crore as compared to charge of Rs 487 Crore in brvious year. The exceptional loss for the year comprises of provision towards impairment in value of goodwill of Rs 6,072Crore on account of divestment in Senvion, forex loss on restructured FCCBs of Rs 103 Crore, provision for tax litigations of Rs 81 Crore and Infrastructure development charges of Rs 55 Crore. Tax expenses increased to Rs 317 Crore as compared to Rs 144 Crore in brvious year. It is primarily due to write off of deferred tax assets during FY 2014-15. Loss after tax stands at Rs 9,133 Crore as compared to Rs 3,548 Crore in brvious year. Share of loss of minority is negative Rs 24 Crore as compared to profit of Rs 28 Crore in brvious year. As a result of the foregoing factors, net loss for the year stands at Rs 9,158 Crore as compared to Rs 3,520 Crore in brvious year. Cautionary Statement Suzlon Group has included statements in this discussion, that contain words or phrases such as "will", "aim", "likely result", "believe", "expect", "will continue", "anticipate", "estimate", "intend", "plan", "contemplate", "seek to", "future", "objective", "goal", "project", "should", "will pursue" and similar exbrssions or variations of such exbrssions that are "forward-looking statements". All forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from the Suzlon Group's expectations include: • Variation in the demand for electricity; • Changes in the cost of generating electricity from wind energy and changes in wind patterns; • Changes in or termination of policies of state governments in India that encourage investment in power projects; • General economic and business conditions in India and other countries; • Suzlon's ability to successfully implement its strategy, growth and expansion plans and technological initiatives; • Changes in the value of the INR and other currencies; • Potential mergers, acquisitions or restructurings and increased competition; • Changes in laws and regulations; • Changes in political conditions; • Changes in the foreign exchange control regulations; and • Changes in the laws and regulations that apply to the wind energy industry, including tax laws. For and on behalf of the Board of Directors Tulsi R. Tanti Chairman & Managing Director DIN : 00002283 Place : Mumbai Date : July 31, 2015 |