Suzlon Energy Ltd

1. WIND ENERGY A MAJOR CONTRIBUTOR TO ENERGY SUPPLY

With new installation of 38 GW during the calendar year 2010, worldwide installationsof wind energy generation crossed 197 GW which covers almost 4% of the global electricitysupply.

Traditional energy sources such as coal, oil or gas are not only facing limitation ofresources, but they are also causing greenhouse gas emissions and hence cannot be seen assustainable energy sources. At the same time, recent incidents have indicated very clearlythat nuclear power, also due to its big risks and high capex costs, is not a very viableoption economically, socially and environmentally either.

Instead, the world has to look for wind energy, in combination with other renewableenergy sources. It is important to underline that wind energy offers a very broad range ofapplications. It is versatile, can serve the needs of rural areas in unserved areas indeveloping countries, and cater to energy intensive industries in industrialised regionsand countries.

By 2015, total worldwide installation of wind energy is expected to cross over 442 GWwhich is almost 2.3 times of the current installation. This will cover about 7.5% of theglobal electricity supply by then.

2. SECTOR OUTLOOK

The sector outlook is progressively looking bright for the wind industry as it isexploiting an inexhaustible resource (i.e. wind) and is amongst the cheapest sources ofrenewable energy. Improvement in wind power’s technical effectiveness, development oflarger wind turbines, and improved knowledge of siting, servicing and maintenance has madewind power a economically viable and competitive source of energy.

The other key drivers include climate change, the Kyoto Protocol, the industry’sjob creation potential and a desire for greater "security of supply" for energy.Policy support models like Fixed Tariffs for the "feed in" of wind poweredelectricity, Renewable Portfolio Standards, price premium, energy taxes and other taxrelated benefits, Investment grants and Green Certificates, continue to boost developmentof wind market across the globe.

Wind energy has been accepted as a mainstream renewable technology by utilities acrossthe world, to meet their renewable portfolio targets as mandated international and countrybased targets.

During the period 2011-2015, wind power is expected to grow at an annual growth rate ofabout 17%. In Asia strong growth is expected, especially in China. India will continue todemonstrate high level capacity additions approximately to the tune of 3 to 4 GW per year.Growth in emerging markets such as Latin America, Southern and Eastern Europe and Africawill offset probable short-term sluggish growth rates in the mature markets of the world.

3. SUZLON POSITIONING

This year was an important one for the Company, marking 15 years of existence and 17 GWinstallations worldwide. Suzlon has achieved over 6 GW of cumulative installations inIndia, nearly half of the country’s total wind installations. Suzlon is the fifthlargest supplier in the world having a cumulative market share of ~ 9%.

Suzlon offers one of the most comprehensive product portfolios, ranging from 0.60 MWonshore turbines to one of the world’s largest commercial 6.15 MW offshore turbines,built on a vertically integrated, low cost manufacturing base. Added to that proventechnology, global R&D centers, 24 X 7 monitoring system with dedicated team focusingeach day on the customer satisfaction, has helped Suzlon to spread its operation across 5continents, 32 countries and more than 1,600 customers across the globe making Suzlon aglobal player.

Suzlon’s contribution towards combating climate change, building a greener andsustainable tomorrow was recognized at the COP16 global submit in Mexico where it waspresented with Gigaton Award for global leadership in emissions control and sustainabilitypractices in the energy category.

Mr. Tulsi Tanti, Chairman and Managing Director, was conferred the title "WindVisionary of Asia" by the Asian Development Bank. The recognition emphasizesSuzlon’s commitment to build the case for wind across the world and highlights adecade of tremendous work in key markets of Asia.

4. BUSINESS STRATEGY

Suzlon’s strategic intent for its business is enumerated as follows:

• Increased customer outreach

Suzlon operations are now spread across Asia, Australia, Europe, Africa and North andSouth America with operations in 32 countries. Suzlon boosted its customer profiles bysigning biggest contracts from IPP (Independent Power Producer) in the Indian market - a1000 MW order from Caparo Energy and a 202 MW order from the Techno Electric Group. Suzlonalso secured 218 MW order in Brazil from the Martifer Group reinforcing Suzlon’spresence in the global market.

In the European Onshore segment, the company’s international business arm, SuzlonWind Energy A/S, broke new ground with its first order in Sweden. The Company has alsoentered into an agreement with Volkswind Bulgaria, a subsidiary of Germany’sVolkswind GmbH. This aims to accelerate the manufacturer’s growth in the Bulgarianwind energy market and will develop projects exclusively using Suzlon wind turbines. InApril 2011, REpower entered into its biggest onshore framework agreement in Europe withJuwi for 720 MW covering upto 240 wind turbines of 3 MW systems.

In the European Offshore segment, REpower has signed a contract with Belgian offshoreproject development company, C-Power for development of 295 MW project in phase II and IIIof the first Belgian offshore wind farm, Thornton Bank. A bank consortium of sevencommercial banks together with European investment bank is providing necessary financingfor the said project. This represents the biggest ever project financing in the offshorewind industry. REpower has also signed another major contract with RWE Innogy fordevelopment of 295 MW project at Nordsee Ost. This is the first supply under the frameworkagreement concluded between REpower and RWE Innogy in February 2009 for the delivery of upto 250 turbines of 5M/6M turbines.

• Improving product portfolio

Suzlon and REpower have R&D and technology centers in Germany, the Netherlands,India and China. Its R&D initiatives have led to the development of Suzlon’s newS9X suite of turbines comprising the S88-2.25 MW, S95 and S97 2.1 MW turbines. This suiteof products, is an evolution of Suzlon’s proven S88-2.1 MW platform, and is builtaround the core doubly fed induction generator based technology.

A compact and modular DFIG design allows ease of serviceability and meets the latestgrid requirements for smoother wind power plant connectivity. New blade designs with rotordiameter of 95 meter and 97 meter offers a larger swept area with greater energy captureand power production from moderate to low wind speeds. To ensure the highest standards inquality, Suzlon’s blade testing facilities far exceeds industry baseline bysimulating total life cycle of blade (1 million cycles) in most extreme onsite conditions.

In the onshore segment, REpower has launched two new variant for low wind speedregions. One in its 3XM series-3.2M114 and another new MM series turbine, MM100 with ratedoutput of 3.17 MW and 1.80 MW respectively. The construction of 3.2M114 uses theeconomical hybrid tower type of construction with concrete and steel. The manufacturingprinciple also makes it extremely easy to dismantle. The MM100 is specially adapted forthe North American market. In February 2011, REpower received a unit certificate from GLRenewables certification for its 3.4M104 turbines. This confirms that the wind turbinesmeet the technical requirements of the Renewable Energy Act and the System Serviceordinance. In addition to the 3.4M104, the MM82 and MM92 were also certified last year. Asa result REpower is the first wind turbine manufacturer to have received unlimited unitcertificates (EZE) for its onshore turbines.

In the offshore segment, REpower has gained a level of skills that sets it apart frommajority of its competitors. The machine availability of REpower offshore turbines haveshown result at par with onshore turbines despite the adverse conditions in the openocean.

• Internal Operational Excellence Program

Suzlon transformation program christened ACE (Achieving Collective Excellence) startedin June 2009, has brought significant improvements in the areas of manufacturing,technology, product design, market strategy, leadership and the like. Turbine availability(uptime) has been consistently exceeding 97 per cent for its global operating fleet. Newproducts under S9X and 3XM series were timely launched with strong cross functionalcollaborations. Margin improvements were achieved through effective capacity utilisationand value engineering. Efforts are in place to reduce the deployment of working capitalthrough improvement in operational efficiencies.

5. RISK AND RISK MITIGATION

Some of the key risks identified and steps taken to mitigate the adverse impact of sameare noted below:

• Technology

Wind turbine technology is constantly evolving. A shift towards direct drive turbines,more particularly in large multi MW turbines in commercial market was witnessed last year.The promoters of direct drive concept claims that it is a simpler mechanism no gearboxmeans less maintenance and fewer components and it is likely to become competitive withtraditional drive train machines. Further development of technologically superior turbinesrequires investments, which may not turn out to be a business opportunity.

Suzlon believes that traditional drive-train designs with continuous innovations are aproven technology and would continue to be competitive in the years to come. The 97%machine availability of Suzlon models demonstrates the strength of the technology. Therisk of investments in innovation projects are addressed by structured periodic reviews ofall programs and investment by senior management. The research and testing centres atBaroda, India and Netherlands are focussed on WTG performance improvements and developmentof next generation wind turbine generators. Suzlon always believe in providing itscustomers with the best value for their investment, and they would drive theirtechnological work, to provide the same, at all times.

• Supply Chain Risk

Increase in commodity prices has the effect of putting pressure on margins. Alsoshortage of critical components like gear box, slew rings, pitch bearing, towers, controlpanels, glass fibre etc. may affect timely delivery of wind turbines.

Suzlon has mitigated supply chain risk to a great extent through its backwardintegration strategy, rate negotiation with vendors, alternative sourcing, indigenisationof critical components and various other measures like part of Copper cables was replacedwith Rubber Cables and Aluminium Cables etc and thereby leveraging Suzlon’s abilityto timely source components at competitive prices.

• Foreign Exchange Risk

A significant part of Suzlon’s revenue, costs, assets and liabilities, aredenominated in foreign currency. Unhedged trade and financial exposure thus createspotential to adversely impact our project and overall profitability.

Suzlon’s presence across geographies helps in providing natural hedging byoffsetting purchase and sales transactions amongst various currencies. Risks arerecognized at the contractual juncture and are hedged progressively at various stages ofproject life cycle, depending upon the nature of the transactions and in accordance withthe Hedging Policy of the company. During the year, risk management practices continued tofocus on minimising the economic impact on Company profitability arising from fluctuationsin exchange rates.

• Interest rate risk

Suzlon is exposed to interest rate fluctuation at the group level. The CorporateFinance Team is continuously involved in working out interest rate sensitivity andpropositions to mitigate the interest rate risk.

• Credit risk

Suzlon is exposed to high debt, taken to fund its inorganic growth. With increasedinterest rates and credit squeeze across the globe, funding of Wind Projects still remainsa challenge, leading to slow order inflow in markets like Europe and USA.

Suzlon has been able to bring down its net debt - equity ratio to around 1.4. Companyhas also undertaken USD 175mn Foreign Currency Bond issue in April 2011. Focus on costreduction, improved operational efficiencies and reduction in working capital deployment,is expected to help in reducing the liquidity pressure.

6. INTERNAL CONTROL SYSTEM AND ITS ADEQUACY

Suzlon’s internal management audit team periodically undertake independent reviewsof risks, controls, operations and procedures, identify control and process gaps andrecommend business solutions for risk mitigation. Management has launched "ProjectEvolution" to assess, evaluate, strengthen and institutionalise the "CorporateValue System" covering process, people and cultural alignment from ethical businesspractice standpoint.

The Audit Committee of the Board periodically reviews the management audit reports,audit plans and recommendation of the auditors and management’s response to thoserecommendations. The Audit Committee met four times during the year under review.

1. Share capital

Rs. in crore

The share capital increased by Rs. 44 crore from Rs. 311 crore as at March 31, 2010 toRs. 355 crore as at March 31, 2011 mainly on account of

(1) Issuance of 18.86 crore equity shares of Rs. 2 each @ premium of Rs. 61 each onrights basis to the existing shareholders of the Company.

(2) Issuance of 3.20 crore equity shares of Rs. 2 each @ premium of Rs. 58 each onpreferential basis to ‘IDFC Private Equity Fund III’ (IDFC PE) as aconsideration for acquisition of 4.13 crore equity shares of Rs. 10 each in SE ForgeLimited (SEFL), a subsidiary of the Company. Consequent to acquisition of IDFC PE’sstake in SEFL, SEFL became a wholly owned subsidiary of the Company.

2. Reserves and surplus

A summary of reserves and surplus is provided in the table below:

Rs. in crore

*Less than Rs. 1 crore

(a) Capital redemption reserve(CRR)

Capital redemption reserve increased by Rs. 30 crore due to redemption of preferenceshares of few subsidiaries during the current year.

(b) Unrealised gain on dilution

During the year there was a reduction in unrealised gain on dilution by Rs. 135 croredue to acquisition of 17.1% stake back from ‘IDFC Private Equity Fund III’ (IDFCPE) in SE Forge Limited (SEFL) which was diluted in 2009.

(c) Securities premium account

The securities premium account increased by Rs. 1,336 crore as a result of issuance ofshares on rights issue and preferential allotment of shares. It reduced by Rs. 9 crore dueto expenses incurred on issuance of shares under rights issue.

(d) Foreign currency translation reserve (FCTR)

The change in FCTR is due to exchange fluctuation resulting from translation of theaccounts of overseas subsidiaries into reporting currency of the parent company i.e. INR.

(e) Profit and Loss account

There is debit balance of Rs. 553 crore in profit and loss account as at March 31, 2011after transfer of Rs. 30 crore to CRR and Rs. 142 crore to Legal and statutory reserve.

(f) Minority share of losses

REpower acquired control of RiaBlades S.A and Ventipower S.A on February 03, 2011 andholds 3% stake. Minority share of losses represents losses of RiaBlades S.A and VentipowerS.A over the minority's share in equity on acquisition.

(g) General reserve and Capital reserve on consolidation

There is no movement in General reserve and Capital reserve on consolidation ascompared to previous year.

3. Loan funds

Rs. in crore

During the current year, the group has availed long term loans of Rs. 1,599 croremainly under debt consolidation and refinancing arrangement and this increase has beenprimarily offset by conversion of unsecured loan from promoters worth of Rs. 1,187 croreinto equity apart from repayment of short term loans of Rs. 726 crore and term loans ofRs. 151 crore.

4. Deferred tax liability (Net)

Rs. in crore

Net increase in deferred tax liability by Rs. 36 crore is on account of changes intemporary allowances and disallowances calculated as per the tax regulations applicable torespective entities within the group. We have assessed the likelihood that our deferredtax assets will be recovered from future taxable profits.

1. Fixed assets a. Movement in gross block and capital work in progress

Rs. in crore

Major addition to Gross block is on account of following:

(1) Goodwill of Rs. 221 crore primarily due to acquisition of additional stake inRepower and acquisition of balance 50% stake in REpower Portugal - Sistemas Eolicos, S.A(REpower Portugal) by REpower Systems AG.

(2) Addition of Rs. 207 crore is on account of acquisition of 50% stake of REpowerPortugal - Sistemas Eolicos, S.A by REpower Systems AG.

(3) Net additions to Plant & Machinery stood at Rs. 172 crore, technology relateddesign and drawings at Rs. 163 crore.

(4) Increase of Rs. 388 crore is on account of foreign currency translation.

b. Capital commitments

Capital commitment stands at Rs. 106 crore as at March 31, 2011 as compared to Rs. 115crore as at March 31, 2010.

2. Investments

Rs. in crore

Reduction in "long term investment Associates" is primarily on account ofprovision for diminution in value of investment in Hansen Transmissions International NV(‘Hansen’) of Rs. 216 crore.

Movement in other investments is mainly due to Investment in mutual funds which arepurely temporary in nature.

3. Current assets, loans and advances

Rs. in crore

a. Inventories

During the current year Inventory holding period has reduced from 81 days to 72 daysresulting in better utilisation of net working capital. There is a sizeable reduction ofRs. 643 crore despite targets of higher sale in the forthcoming quarters. All this couldbe made possible through consistent efforts of Supply Chain Management by valueengineering, identification of alternative sources, indigenisation of critical components,reduction in lead time and proper production planning and forecasting.

b. Sundry debtors

Debtors balance has gone up to Rs. 4,237 crore, as against Rs. 3,174 crore as at theend of previous financial year. This is primarily due to higher proportionate sale inIndia towards end of the year, delayed realisation from a large Chinese customer (sincerealised) and movement from un-billed debtors to billed debtors.

c. Cash and bank balances

As of March 31, 2011, the cash and bank balance stands at Rs. 3,121 crore as comparedto Rs. 2,904 crore in previous year. Corporate Treasury places the temporary surplus fundswith banks and asset management companies for short term maturities.

d. Other current assets

Other current assets representing unbilled revenue in relation to constructioncontracts have come down significantly to Rs. 1,679 crore as at March 31, 2011 as comparedto Rs. 3,018 crore last year due to completion of relevant contract billing milestone.

Rs. in crore

Loans and advances stood at Rs. 2,366 crore and Rs. 2,108 crore as at 31st March 2011and 31st March 2010 respectively.

4. Current liabilities and provisions

Rs. in crore

There is an overall increase of Rs. 405 crore in current liabilities and provisions.This is primarily on account of the following reasons

(a) Increase in sundry creditors is due to higher purchase in last quarter of the yearto meet the demand of increased business volumes.

(b) Increase in provision for operation, maintenance & warranty and performanceguarantees.

(C) Decrease in "Due to customers" on completion of contract milestones.

C. Cash Flow

Net cash inflow from operating activities amounted to Rs. 1,214 crore is mainly due tooperating profit. Net cash in investing activities amounting to Rs. 828 crore hasprimarily been applied towards purchase of fixed assets and acquisition of stake insubsidiaries. Net cash in financing activities amounting to Rs. 464 crore has been appliedtowards payment of interest.

D. Results of operations

On November 24, 2009, AE-Rotor Holding B.V. (‘AERH’), a wholly ownedsubsidiary of the Company sold 35.22% of equity stake in Hansen TransmissionsInternational NV (‘Hansen’). Following this disposal, the Group had a voting andeconomic interest in Hansen of 26.06% as a result of which Hansen ceased to be subsidiaryof the Company. Hence, the consolidated financial figures for the year ended March 31,2010 inter alia included the financial figures of Hansen till November 30, 2009, assubsidiary and subsequently as an associate.

For management analysis, the element of Hansen has been excluded from FY 2009-10 tohave better analysis with the current year figures.

Rs. in crore

Principal components of results of operation

1. Sales

Sales decreased by Rs. 254 crore ( 1.4%), from Rs. 18,133 crore in FY 2009-10 to Rs.17,879 crore in FY 2010-11. The decrease was primarily due to the reduction in demand as aresult of financing difficulties faced by our customers caused by ongoing difficulties inthe credit markets, more so in first half of the financial year. However, the sales insecond half of the year picked up.

2. Other income

Other income increased by Rs. 102 crore from Rs. 216 crore in FY 2009 10 to Rs. 318crore in FY -2010 -11. This increase was primarily due to increase in interest incomereceived from banks due to increased level of fixed deposits and increase in operatingincome.

3. Cost of goods sold (COGS)

COGS as % of sale increased marginally from 68.1% in FY 2009-10 to 69.7% in FY 2010-11.This is primarily due to change in sales mix, increase in commodity prices andcurrency translation impact on COGS of overseas subsidiaries. The overall trend of costper model continues to be under control and consistent efforts being taken to bring thecost down through value engineering, better rate negotiation and expansion of vendor base.

4. Operating and other expenses

The operating and other expenses have come down by more than 12% to Rs. 3,152 crore in2010-11 as compared to Rs. 3,599 crore in 2009-10. The effort to bring overheads down ispaying off.

5. Employees’ remuneration and benefits

Employees’ remuneration and benefit cost has remained almost static in proportionto sales. It has increased marginally from Rs. 1,629 crore in FY 2009-10 to Rs. 1,676crore in FY 2010 -11 representing 9.0% and 9.4% of sales respectively.

6. Interest

Interest has remained almost static in proportion to sales representing 6.4% and 6.1%of sales in 2010-11 and 2009-10 respectively. It has marginally increased to Rs. 1,136crore in 2010-11 as compared to Rs. 1,112 crore in 2009 -10.

7. Depreciation

The Group provided a sum of Rs. 657 crore and Rs. 482 crore towards depreciation forthe year ended March 31, 2011 and March 31, 2010 respectively. The current yeardepreciation includes Rs. 51 crore provided by REpower towards impairment losses. Increasein depreciation is also on account of additional capitalisation made during the currentand towards the end of the previous year.

8. Exceptional items

Charge on account of exceptional items stood at Rs. 253 crore in FY 2010-11 as againstgain of Rs. 212 crore in FY 2009-10. Current year figure includes

a) exceptional loss of Rs. 216 crore provided towards diminution in value ofinvestment in 26.06% stake in Hansen Transmissions International NV (‘Hansen’)and

b) loss of Rs. 37 crore towards cost incurred for reset of conversion price ofcertain series of foreign currency convertible bonds.

In comparison, exceptional gain in the FY 2009-2010 included

a) gain of Rs. 252 crore on partial sale of stake in Hansen, b) net gain ofRs. 122 crore from buyback and exchange of foreign currency convertible bonds aftersetting off costs for restructuring and refinancing of financial facilities and

c) charge on account of amortization of foreign exchange losses on convertiblebonds amounting to Rs.162 crore.

9. Profit

The consolidated EBIDTA has increased by 15% to Rs. 808 crore as compared to Rs.702crore in FY 2009-10. The same has arisen primarily on account of better operationalefficiencies in the business.

Loss before tax and exceptional items amounted to Rs. 878 crore and Rs. 827 crore forthe FY 2010-11 and FY 2009-10, representing 4.9% and 4.6% of total sales respectively. PBTis negative as EBIDTA for the year has been insufficient to absorb interest anddepreciation.

Tax expenses reduced to Rs. 186 crore in FY 2010-11 from Rs. 355 crore in FY 2009-10.In the previous year, a major part of tax expense was on account of re-assessment ofdeferred tax assets.

Loss after tax amounted to Rs. 1,317 crore and Rs. 970 crore for the financial year FY2010-11 and FY 2009-10 representing 7.4% and 5.4% of total sales respectively.

Losses attributable to minority is Rs. 21 crore in FY 2010-11, as against profit of Rs.9 crore in FY 2009-10 and share of the company in associate loss after tax recorded at Rs.28 crore in FY 2010-11 as against profit of Rs. 16 crore in FY -2009-10.

As a result of the foregoing factors, net loss increased from Rs. 983 crore in FY2009-10 to loss of Rs. 1,324 crore in FY 2010- 11.

Cautionary Statement

Suzlon has included statements in this discussion, that contain words or phrases suchas "will", "aim", "will likely result", "believe","expect", "will continue", "anticipate","estimate", "intend", "plan", "contemplate","seek to", "future", "objective", "goal","project", "should", "will pursue" and similar expressionsor variations of such expressions that are "forward-looking statements".

All forward-looking statements are subject to risks, uncertainties and assumptions thatcould cause actual results to differ materially from those contemplated by the relevantforward-looking statement. Important factors that could cause actual results to differmaterially from Suzlon’s expectations include:

• Variation in the demand for electricity;

• Changes in the cost of generating electricity from wind energy and changes inwind patterns;

• Changes in or termination of policies of state governments in India thatencourage investment in power projects;

• General economic and business conditions in India and other countries;

• Suzlon’s ability to successfully implement it’s strategy, growth andexpansion 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.