The fizzling Suzlon Energy

In the financial year March 2005, Suzlon Energy did an Annual Sales of Rs. 1942.48 crores. They did an Operating Profit of Rs. 473.40 crores, the Operating Margins being 24.37%. Capital employed was Rs. 1300 crores. RoCE came out to be around 35%. Debt/Equity ratio was about 0.50.

In the financial year March 2012, Suzlon Energy did an Annual Sales of Rs. 21,082.37 crores. They grew their Sales by 10 times from 2005. Operating Profit came out to be Rs. 1544.36 crores with the margin percentage being 7.33%. Capital Employed is around Rs. 15,500 crores. RoCE is at around 10%. Debt/Equity ratio is 2.

The maximum Sales was recorded in the year 2009 at Rs. 26,081 crore. Maximum debt was also acquired in the same financial year of 2009 as debt jumped 4 times from Rs. 390 crores in financial year 2005 to Rs. 14,700 crores. Most of the debt was meant for fixed assets for fixed assets walloped 3 times to Rs. 13,281 crores from Rs. 4568 crores. Capital Employed for that year is Rs. 24,500 crores. Operating Profit for the same year is Rs. 2849.71 crores at margin of 11%. RoCE came out to be around 10%.

A few interesting observations can be made from the above paragraphs. Sales was growing between 2005 and 2009 at around 190% CAGR, while RoCE in 2005 dropped from 35% to 10% in 2009. Definitely, the company required debt to fuel its expansion as business wasn't generating that kind of money to be invested in Fixed Assets, especially Operating Margins also suffered greatly. And, one can add to it frequent dilution of equity. Since financial year March 2010, company is in loss, primarily because of the huge interest expenditure incurred by huge debts. And in the quarter June 2012, there is, in fact, an operating loss for the first time.

Overall, the purpose was just to state that the business suffered greatly because of its astronomical expansion within a short span of time. The debt condition is deteriorating enough along with interest expenses. This states here that sometimes too much growth can also ruin the business especially if the growth is dependent on debt and when RoCE from the business is lower than the interest expenses. Infact, in the financial year 2007, RoCE started deteriorating when debt increased from Rs. 400 crores in 2006 to Rs. 5000 crores in 2007. Since then, debt has been on the uphill and RoCE and shareholder returns are all downhill.