India’s Largest Wind Turbine Stock Moves Like a Yo-Yo on Default Fears

Should You Buy Suzlon stock Now?

The Indian stock market had recently seen a large number of stocks of highly leveraged companies fall after the Essel group issues. The whole problem started after one of India’s largest infrastructure groups IL&FS defaulted on its debt repayments. The IL&FS group which was a large conglomerate of companies in different areas of infrastructure, financing and consulting was badly managed and run. The directors had enriched themselves over the years through fraudulent transactions by creating shell companies.

The group had a debt of almost $15-20 billion with many of the top fund houses invested in the bonds and debentures of IL&FS and its numerous subsidiaries. This default sent a shockwave across the whole financial system raising the yields of almost all fixed income securities. Many of the heavily indebted groups such as Essel group and the ADAG group found it hard to roll over their debt that led to a heavy sell of in such stocks.

Suzlon, which is India’s largest wind turbine company, also found its stock go into free fall as the company still has huge debt on its books despite a large equity infusion by the Sun Pharma group. As default fears rose the stock fell to around INR 3 levels. The other problem with Suzlon was that the wind industry in India is doing badly, over the last one and one and a half years, as the regulatory and policy landscape has changed. From a fixed feed-in tariff regime, wind energy capacity is now developed by states using a reverse auction mechanism which has severely decreased the margins across the supply chain. Also, what it has done is reduced the capacity as tenders take a much longer time period for wind farms to be commissioned when compared to fixed in tariffs.

This has led wind energy capacity to fall to just around 2 GW last year, which was much less as compared to 2017. Also, the entry of international wind turbine players such as Vestas, Senvion into the Indian market in a big way has increased the competition at a time when the overall market size has fallen by half. Suzlon which was just starting to recover from its debt debacle was seen to be again facing the wall leading to a sharp crash in the share price.

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However, the recent rally in the share market has led to a sharp increase in the prices of these highly leveraged company stocks. Suzlon has been one of the key beneficiaries as the concerns over default has greatly decreased. The ADAG group has managed to sell some assets while Essel group has also managed to sign an agreement with lenders not to sell its shares till September. The uptick in market confidence has led to Suzlon seeing its share price rise rather than anything changing fundamentally with the stock.

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