Lanco's woes are unlikely to resolve soon

Although it is trying to reduce debt and improve liquidity, fuel availability and supply rates a concern

Lanco Infratech relied heavily on debt for an aggressive growth path. The move seems to be backfiring.

The 70-fold jump in turnover in the past six years was heady. However, it was fuelled by a 223-fold jump in debt. The results are obvious. Today, the company is battling with liquidity issues, as some of the assets and businesses it created have turned a drag on earnings and cash flows.

In the December 2012 quarter, the reported loss was almost five times the Street expectations. Scheduled repayment of some debt in the next 12 months and large receivables from state power distribution companies (discoms) have raised fresh concerns over the company’s revival. No wonder, Lanco is making headlines for trimming personnel and selling stake in some assets, including three power projects. While it plans to sell stake in some power projects and is making efforts to recover receivables, not much is expected in the near term. Fuel availability remains a concern, which is why analysts sound sceptical and advise monitoring the situation.

Thanks to issues regarding fuel availability and rates at some of its already operational projects (capacity 4,000 Mw), the company has already scaled down its initial plans to achieve power generation capacity of 15,000 Mw by end-2015. The problem of fuel availability has meant low capacity utilisation at some of its key operational power plants. For example, its gas-based Kodapalli (Andhra Pradesh) 734 Mw project reported 31 per cent plant load factor (PLF or capacity utilisation) and the 600 Mw coal-based Amarkantak (Madhya Pradesh) project reported 57 per cent PLF due to lack of fuel in the December 2012 quarter. The 1,200 Mw Anpara (UP) project has also become a big cause of concern due to lack of fuel and cash flow issues. All these projects are running at losses.

 

  And, due to a dispute over rates of supply, the company has seen its receivables from discoms rise to Rs 3,500 crore (as at end-December 2012). Among these, the 1,200 Mw Udupi (Karnataka) project has seen receivables reach Rs 1,750 crore. The company is billing the power sold at about Rs 4.6 a unit, while the buyer (discom) is only paying Rs 3.12 a unit.

As a result of higher receivables and drying of cash flow, Lanco’s reliance on borrowed funds has increased, leading to higher interest cost. This is also why the EPC (engineering, construction and procurement) business, which is working capital-intensive, has slowed. In the December 2012 quarter, the segment reported 70.3 per cent decline in revenue. A year before, construction accounted for a little over half of revenue. Its share has now come down to a mere 12 per cent in the December quarter, leading to further pressure on the financials.

In this backdrop, and given that its resources business (Griffin coal mines) also continues to run in losses, servicing of debt (consolidated debt is Rs 39,000 crore) and interest is becoming a challenging task. Not surprisingly, Lanco and its power subsidiary’s debt ratings have been lowered by the rating agencies.

Over the next one year, the company’s debt repayment will be Rs 2,600 crore. To meet its obligations, Lanco is looking at recovery of dues from discoms and improving of cash flows at its Udupi and Anpara projects. Lanco’s management is expecting the UP (Anpara) and Karnataka (Udipi) discoms’ dues of Rs 1,500 crore to be settled over the next six months. This, with a possible stake sale in power projects, could help improve liquidity. The timing and quantity of these amounts need to be monitored.

“I think receivables should improve now, as a result of possible implementation of new tariffs (rates). Additionally, if the stake sale happens in the power business, the company can raise Rs 1,500-2,000 crore, which will help bring down its debt and meet immediate obligations, and contribute equity funding for the upcoming projects. Griffin, too, with the implementation of new coal supply rates should break-even and, thus, will require less working capital,” says Rupa Shah of Prabhudas Lilladher.

Some others are not sure. “Considering the multiple issues with various projects, earnings visibility remains low,” said Amit Golchha, who tracks the company at Emkay Global. Overall, while these moves will help ease liquidity, the issue regarding fuel availability remains. The latter is crucial for the company to improve its revenue and profits, and key for boosting investor sentiment, which is unlikely any time soon.