Lanco Infratech is planning to ramp up its capacity to 15,000 megawatts, while simultaneously battling for gas supply concerns. The company’s chief financial officer J Suresh Kumar talks to Katya B Naidu and Arijit Barman about the roadblocks and silver linings. Edited excerpts:
Lanco is on a massive expansion drive. How many units will be commissioned in the next few quarters?
At present, we have an operating capacity of 2,100 megawatts (Mw). We have synchronised a 600-Mw unit each in Udupi and Anpara. This brings us to 3,300 Mw. We have another 600-Mw unit of Anpara due to be synchronised either in May or early June. Another 70-Mw hydro project in Himachal is likely to be commissioned by June or September. We will add 670 Mw in the next two quarters.
Are all these capacities operational?
Mechanically, both units are ready to generate. There is a difference between an operating capacity and an installed capacity, because although Udupi 2 has been synchronised, we are not operating at full capacity because of a transmission bottleneck. Once we start firing Anpara on coal, we can call it an operating asset.
Can we see a revenue growth in the next few quarters from this capacity?
The revenue growth will not come in the next two quarters, but in the December and March quarters. Power revenues will be steady like in the last two quarters, and will continue so for the next two quarters. We are giving guidance on the revenue growth, but we will certainly make upwards of 20 per cent return on equity on these projects.
Lanco is also expanding the Kondapalli power plant by 1,155 Mw. Reliance Industries (RIL) has cut production in KGD6 block, which supplies fuel to this plant. Is that a cause for concern?
It is an issue. We were expecting RIL to ramp up production, and not cut down. But things might get favourable in the 12 months, after RIL’s joint venture with British Petroleum.
The government is also looking at other avenues to supply gas, including Oil and Natural Gas Commission which is ramping up production. Lanco’s project will be given a priority in gas allocation whenever it is available.
Are you likely to raise any debt to finance your expansion? Will the high interest rate situation affect you?
Of the 15,000 Mw, we have already tied-up debt for over 9,300 Mw. Another 6,000 Mw will be brought into the financial closure mode in 12 months.
Also Read
We are not stressed about the interest rate scenario, as we fund the import components through trade finance products, typically getting 2.5 per cent. Even if I take domestic financing at 12.5-13 per cent, my weighted average cost is at eight-nine per cent, adding a notional hedging cost of three-four per cent on dollar liability.
Do you have any plan to raise equity?
For the 9,300 Mw that we are building and operating, the equity has been tied up. For the additional 6,000 Mw, I could cover 50 per cent of my equity requirement from internal accruals. I will need more equity in 2013-2014.
We plan to go for an initial public offering of the power business when the business is big and mature enough. If we drive our expansion according to the plan, we can do it over the next two-three years.
Griffin’s earnings will be consolidated into the balancesheet from the next quarter. Will that have any impact on the company’s margins?
There is no immediate impact. Upside from Griffin acquisition is in expansion. The current contracts in the local market do not give great realisations because it is sold at a very low price. The real impact of Griffin is when we move from 4.5 million tonnes production per annum to 20 million tonnes. By 2014-2015, you will see the profitability go up.
A lot of infrastructure stocks have been taking a beating in the last few months. When do you see confidence come back to the market?
We don’t know what happens in the market, but the stocks for the sector as a whole seem to have reacted to the macro noise on coal and interest rates. I feel there is over-reaction from the markets and investors. They have over-read into losses of state electricity boards and coal problems.
Analysts and investors have a perception and a view of the future. If their perception is not playing out and what the company has been saying plays out, investors will start getting confident. You will see that happening in the next two-three quarters. One will have to wait for cues from the quarterly results in the next few quarters.