Investing Lessons from the ‘Black Hole’ Called Suzlon

“What’s in a name? That which we call a rose by any other name would smell as sweet,” wrote Shakespeare in Romeo and Juliet.

You can experience the truth of these words when you come to know that a company whose name was derived from the adage ‘be careful about loan’ or ‘sujh bujh ke loan lena’, is now one of the worst indebted companies in India, and one that has been extremely careless with it borrowing.

I’m talking about the wind energy major Suzlon (sujh+loan) – once a darling of the stock markets and now as worthless as Punam Pandey.

The company’s management, which narrated a promising story to the analysts and investors during the company’s pre-IPO conference in 2005, is now struggling to keep their company above water.

The promoter, Tulsi Tanti, once regarded as the poster-boy of India’s globalization story, is now being blamed for bringing his company and its shareholders down to their knees.

All this has happened because Suzlon chose the path of rapid growth without considering the big risks that come attached with it.

1. It took on bigger and bigger loans from banks to fund mindless expansions,
2. Acquired companies bigger than itself by promising unbelievable future benefits,
3. Launched new products to capture market share without working in improving the quality of existing products.

As it stands now, its financial statements are overburdened by losses, debt, and negative return ratio…and shareholders who invested in the stock’s IPO in 2005 have lost 90% of their money.

In fact, those who invested in the stock at its peak in January 2008 have lost 96% of their capital!

That’s an amazingly high rate of permanent loss of capital.

A black hole
If you have read about black holes, you know that these are arguably the strangest and most mysterious objects in the universe.

Their bizarre properties can challenge the laws of physics and even the very nature of reality itself.

I imagine a black hole whenever I look at Suzlon, as the company continues to defy all norms of financial and business management, and continues to suck in massive amounts of shareholder wealth.

While analysts have started talking about a turnaround for the company based on just one quarter of decent performance, history has enough proof that turnarounds rarely turn around.

Even if the company were to mend its ways and get back to austerity, this would last only till the next boom when the original character would come into play again.

There are several lessons for investors from the Suzlon story, some of which include:

• Good times don’t last, especially when it comes to businesses built on shaky fundamentals and ‘growth at all cost’ mentality;
• It’s only when the tide goes out that you see who’s been swimming naked;
• Some companies are simply black holes, which will suck in all your capital if you aren’t careful;
• There are no poster boys, only dream merchants – and most dreams end up in nightmares;
• Sujh-bujh (intelligence) is good, but ‘loan’ can destroy.

Anyways, here are a few charts that tell the Suzlon story…

1. Sales: See the surge and then the fall…led by the global crisis and the company’s own product quality issues…

Data Source: Ace Equity
2. Profit after tax: Bleeding black and blue…

Data Source: Ace Equity
3. Free cash flow: No profit, so no cash to show…

Data Source: Ace Equity
4. Debt to equity ratio: No cash, so how to grow? Borrow, borrow, borrow till you go near-bankrupt!

Data Source: Ace Equity
5. Return on equity: Sorry, we don’t really care for our equity investors! All we care for is ‘loan’ and ‘growth’…

Data Source: Ace Equity
Now for the worst chart (especially worst for those who’ve dared to invest in the stock)…

Data Source: Ace Equity

Here is what the legendary investor Warren Buffett wrote in his annual letter to Berkshire Hathaway shareholders in 2008:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”

Suzlon is one such business. You can’t sleep at night if you are an investor here, or in any business that displays such characteristics of rapid growth, mindless expansion, and excessive borrowing.