 "Lanco remains in the woods")
Last year, it had sold its 1,200 Mw Udupi thermal power project to Adani Power for a little over Rs 6,000 crore. The deal fetched a value of Rs 5 crore a Mw. So, he was confident of selling the first batch of assets totalling 3,000 Mw capacity at an enterprise value of Rs 25,000 crore or around Rs 8 crore a Mw in 2018. Its gas power plants were not on the list.
After the Udupi sale, Lanco has 3,450 Mw of operational capacity — 1,586 Mw under gas-based and 1,800 Mw under coal-based projects, with another 4,636 Mw of capacity under construction, much of it exposed to delay and cost overrun. The 500 Mw Teesta hydropower project was taken over by lenders led by ICICI Bank, converting the loans into equity under the Strategic Debt Restructuring scheme. A total of 3,025 Mw of capacity was under operation, at an average Plant Load Factor of 54 per cent in 2015-16.
On June 10 this year, CNBC-TV18 had a report that Lanco Group had shortlisted four entities (including Tata Power, JSW Energy and Piramal Enterprises) among those interested in buying its power assets. It said the entire 8,000 Mw, including the gas power plants and the projects under execution, were on sale. Also, that the prospective buyers were bidding at about Rs 3 crore a Mw, while the company was seeking Rs 4.5 crore. Spokespersons of Tata and JSW termed the reports as market speculation; Lanco did not comment for the report.
When asked by this newspaper, Lanco's senior officials and spokespersons did not respond to requests for their views on the current state of affairs on valuations, debt and this year’s plan.
Analysts say in the past year, power supply in South India has surpassed the demand, which has hit power producers. In a recent open access arrangement, Indian Railways had signed a long-term deal to buy 2,000 Mw of power at Rs 4.90 a unit, as compared to an earlier power purchase deal from Andhra Pradesh power utilities at Rs 6.60 a unit. The seemingly perennial power deficit region has suddenly become a power surplus one.
Industry sources say 2,000 Mw of power is ready to flow for as low as Rs 4.25 a unit but there are no buyers. In the past, Tamil Nadu and undivided Andhra Pradesh had purchased power even at Rs 20 a unit to meet their peak demand. Those days are unlikely to return anytime soon to help raise valuations, say industry observers.
There was also speculation that additional quantities of natural gas could be available from 2017, sufficient to run the country's entire stranded gas power capacity. Demand is currently growing at six per cent annually, compared to 10-12 per cent in the past; the additional capacity coming is several multiples of that.
In hindsight, the irrational exuberance demonstrated by Lanco over the prospects of better valuations in the future came on the back of additional funding by lenders. Only after the lenders approved cost overruns of 50-60 per cent for three large projects — Amarkantak phases 3 & 4, Babandh and Vidarbha Power projects, each with 1,320 mw capacity — did the work on these revive in April, 2015, after a gap of two years. While the approved cost overruns would take the project cost of each of these three projects to Rs 7.95 crore a Mw, compare that with what buyers are offering in the context of the emerging supply-demand situation.
Sombre figures
The additional funding from the bankers was utilised and reflected back into the books through the company’s own EPC (engineering, procurement and construction) division. It gave a sense of revival in the EPC business and improvement in revenue. Sale proceeds of the Udupi deal helped reduce the debt by 15 per cent, with a Rs 500 crore saving on interest costs adding further to this feel-good factor. Then came the December 2015 quarter, a net profit for the first time after four years of continued losses, though the turnaround was largely helped by lower costs. It is unclear if such a combination of factors will come to the rescue of the company in the current year.
FY16 ended with a consolidated net loss of Rs 265.6 crore as compared to one of Rs 2,065 crore the previous year. Net sales income stood at Rs 8,170 crore, as compared with Rs 9,467 crore in the previous year. Though focused primarily on the power sector, the company also has investments in road projects and property development, beside the EPC business, mostly pertaining to the execution of own power projects. Of the gross profit of Rs 2,036 crore before tax and interest, the power business and EPC & construction contributed Rs 1,758 crore and Rs 462 crore, respectively. The valuations at which the prospective buyers reportedly offered to buy these power assets (Rs 24,000 crore for 8,000 Mw, according to the report) is way below the company’s expectations, as the capital employed in the power sector was Rs 33,000 crore as on March 2016.
A Credit Suisse report in October last year put a little more than 90 per cent of Lanco’s debt under the high stress category, next only to the Vedanta group in the country. Though the Udupi power sale helped reduce the debt by 15 per cent, it would also reduce operating profits, as the project contributed 69 per cent of overall operating earnings, according to the report. Despite the Udupi sale, the consolidated debt of Lanco Infratech rose a little over 12 per cent to Rs 42,330 crore as on March.
During 2015-16, finance costs had come down to Rs 2,514 crore, compared to Rs 3,060 crore the previous year. The interest coverage ratio improved to 0.92, from 0.26 per cent the previous year. An interest coverage ratio of 1.5 is the minimum acceptable level, even while the ability to repay loans is still considered questionable. The debt to equity ratio continues to be in a negative zone for a second year. Lanco's net worth was negative and further down to minus Rs 723 crore from minus Rs 448 crore the previous year.
As in the case of Adani and GVK, Lanco also has exposure to coal mining assets in Australia, as owner of the loss-making Griffin Coal Mine in Western Australia. According to Tim Buckley, director, Energy Finance Studies Australasia at the Institute of Energy Economics and Financial Analysis, revenues from the Griffin Coal Mine were down 12 per cent to $76 million and a gross cash flow loss was reported for every tonne of coal sold.
“Operational results continue to run below expectations due to ongoing legal disputes with state electricity distribution companies, natural disasters, less than anticipated delivery of fuel for Lanco’s power generation facilities and asset forfeitures and contract cancellations with the India government. Interest costs continue to be capitalised against new projects that are not able to be commissioned to plan, due to various ongoing delays,” Buckley said.