Friday, February 20, 2015

Opinion: One business is getting back to profits and another waiting for next victim

Two businesses are in news. They have gone through the up-down cycles. They attracted investor interest in the beginning but turned out to be nightmares. They almost went out of business but there is revived interest in them. One is moving back towards profits after several years of losses (Suzlon) and another (Spice Jet) is waiting for its next victim.

Suzlon wind turbine maker had left a deep scar in many retail investors. Its debut and the run after IPO in the initial years made it an index stock but an acquisition mistake proved too expensive for it. Its stock performance made investors lose most of their capital, do not mention the gains. But it is getting back to business of making profits and turning out to be an investment grade stock again after a gap of many years for the following reasons.

  • It could not hold to its acquisition of Germany's REpower (later renamed Senvion). When things looked bright for Suzlon, it had ambitions to become a top global player and REpower was expected to add to its prowess with its offshore wind turbines business expanding the portfolio of Suzlon. But the aftermath of global financial crisis in 2008, Suzlon could not arrange long term finance at lower costs, and the interest costs were more than operational profits Suzlon was making, so it could not service its debt and had to default on FCCB’s and to refinance with most banks losing its credibility as a profitable business. Last month, it exited from REpower in a distress sale. Along with it, the debt load on Suzlon too had come down. Had this decision been made a few years ago, it would have prevented its promoter Tulsi Tanti from the embarrassment of pledging all his holdings.
  • Dilip Shanghvi, a prudent business man (who runs Sun Pharma) taking a stake in Suzlon and infusing much needed capital into the business is a big boost to Suzlon. It always had a good top-line but the borrowings made the business suffer. This money coming from a drug-maker as equity will free Suzlon from the fever it had suffered for long time.
  • Improving business environment: With the new Govt. set to boost spending in renewable energy, Suzlon’ revenue is set go higher. And the recent move from RBI in reducing the policy interest rate has indicated that interest rates are set to come down from here. With its revenue going up and finance cost coming down, Suzlon seems all set to show profits in next financial year.

Spice Jet too went through a rough period and many were guessing it will go out of business like Kingfisher Airlines but it is finding new investors. Unlike Suzlon, there are no hopes of it getting back to profits because the structure of the business. It was not financing that is the issue here. Though there are exceptions, very few airline businesses generate profits. Competition is intense and margins are thin.  More the sops they offer to customers, higher are the losses. More flights they
operate, quicker is the cash burn rate. If you had bought those discount tickets and flew with Spice Jet, you too had helped Spice Jet in burning their money.

Income statement of Spice Jet. Source:

Take a look at their income statement and their operational profit; it appears they do not make money no matter what. So the Marans had it enough, and got out of this expensive fancy business. But there are new suitors to give it a fresh lease of life. Will they be able to change the structure of the business? Competition will not let it do. And if they operate in the same fashion, fresh capital won’t last long. What will happen then? Another new investor may walk-in. If not, Spice Jet will have to learnt to live within its means and not worry about its market share. If it does not, it has to follow the ‘king of good times’ for whom good times seem to be over.