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After making several attempts at monetising assets and retiring some of its debt, Lanco Infratech is now resorting to the corporate debt restructuring (CDR) route. While this could provide some relief in the interim, the Street believes the problems relating to debt are far from over.
"I think CDR could provide some breather in the near-term, but the debt issue will remain as economic environment still remains challenging," says Rupa Shah, who tracks the company at Prabhudas Lilladher.
Considering the same reasons, the Street, too, was not very enthusiastic about the news of CDR, which is reflected in the subdued performance of Lanco's share price over the past three trading sessions. On Tuesday, it scaled to its all-time low of Rs 5.57.
"The stock has been one of the weakest performers in our utility coverage, given the company's weak free cash flows and high leverage. We do not see this reversing unless some of the industry issues are resolved," said Parag Gupta of Morgan Stanley in a research note dated July 10, 2013.
According to analysts, the concerns will not abate until the company is able to resolve its debt issues and enhance operational performance.
High debt
The firm's latest move pertains to restructuring of about Rs 9,000 crore of debt relating to the power generation business. The company's consolidated debt stood at Rs 31,377 crore as on March 2013. While the details of restructuring are yet to be revealed, analysts assume an interest cost of 13-14 per cent for the domestic debt. On the Rs 9,000 crore debt, even if the company is able to negotiate one per cent reduction in interest rate, it would save Rs 90 crore a year.
The move comes at a time when the firm is facing huge interest outgo. In the March 2013 quarter, for instance, the company incurred an interest expense of Rs 682 crore on profit before interest and depreciation of Rs 940 crore. Its interest coverage, which has been falling in the last few quarters, is quite low currently. Further, besides reduction in borrowing cost, if the company can manage to get an extension of the duration of near-term repayment obligations, it could help in managing both, interest cost and liquidity. Analysts believe that over the next 12 months, the firm is expected to have debt payments obligation of Rs 2,000-2,500 crore.
Lack of enough cash flows and delay in monetisation of assets are among the reasons that have led to the current situation. A large part of the firm's funds is also stuck in several ongoing projects due to delays in execution along with receivables from the state electricity distribution companies to the tune of Rs 2,972 crore. If the CDR goes through, some of these immediate liquidity issues can be addressed. This is will be helpful given that things typically slow down during election times.
What's equally important is that on the business side as well, the company needs to see revival in its operations, which could enable it to generate enough cash and thus address the issues with respect to liquidity and servicing loans. The company has large power generation capacity of 4,732 mw, but its projects are running at very low plant load factor (PLF). In June, the average PLF of its key projects of about 3,716 mw was recorded at 44 per cent, compared to 67 per a year ago due to issues of coal and gas availability. Hence, even as its power capacity (power segment 57 per cent of revenue) has gone up, the contribution to profitability and cash flows is very low. Analysts suggest the availability of fuel is unlikely to improve anytime soon.
Rising receivables and uncertainty over power purchase agreements have also impacted cash flows, which, in turn, have led to concerns over its engineering procurement and construction (EPC) business (35 per cent of revenue) as well. EPC business undertakes activities for the group's projects. It has strong order book of about Rs 26,000 crore, but a majority of its projects are facing execution issues, leading to delays. In FY13, EPC revenue has fallen by almost 46 per cent to Rs 5,382 crore.
