Lanco looks at selling assets as way out of debt

It is also banking on debt restructuring to stem the losses, but analysts aren't hopeful

For more than two years now, Lanco Infratech has been looking to sell off some group assets to improve its cash flow. It's not really what a leading private sector power player would want to do, not when it had ambitions of running an ultramega power project. But even its Australia-based Griffin Coal, its first overseas acquisition, is up for valuation for strategic investment though the company ideally may have wanted to keep the entire pie because it fitted into its overall business.

It is also not the best of times to seek investors for Griffin with global coal prices lower than what they were in 2011, when Lanco acquired the asset for $750 million. But then, for Gurgaon-based Lanco, counted among the top infrastructure groups in the country, both asset sale and debt restructuring have become important parts of its strategy, like they are for many industry peers.

This year, the company managed to hive off two power plants. The first one to go was the 70-Mw Budhil Hydro Power in Himachal Pradesh, which Lanco sold to Greenko for Rs 650 crore in February. In August came the bigger deal when the company reached an agreement with Adani Power to sell the 1,200-Mw Udupi Power Plant in Karnataka for Rs 6,000 crore. "This transaction will support the company in reducing its debt and will enable Lanco to receive about Rs 2,000 crore as cash. Additionally, Adani Power will take Udupi Power's long-time debt of around Rs 4,000 crore," the company had said in a statement on August 13.

Though the cut-off date for the transfer of ownership of Udupi Power Corporation Ltd (UPCL), the step down subsidiary of Lanco that operates the imported coal-based thermal power plant, was August 18, the company said, while adopting its results for the second quarter ending September 2014, that Adani was yet to complete the conditions precedent under the definitive agreement signed by the two. In fact, the financials of UPCL from August 18 to September 30 this year were taken by the company on its own balance sheet. UPCL added Rs 272.58 crore in revenue and Rs 25.84 crore to Lanco Infratech's consolidated loss of Rs 561 crore during the period. Its debt increased marginally to Rs 36,697 crore compared to Rs 36,022 crore in the previous quarter.

Lanco Infratech recorded standalone loss for the 10th quarter in succession. But the roadmap to recovery hinges not just on the success of corporate debt restructuring, for which it signed up in December 2013, but also on more asset sales that the company has committed to its lender. Besides Griffin, where it is looking for strategic investors, its two thermal power projects at Amarkantak in Chhattisgarh and Babandh in Odisha are also on the block. Except for the 1,920 Mw Amarkantak project, which on the strength of its coal linkage agreement with South Eastern Coalfields, can get buyers, both Banbandh and Griffin do not offer good prospects.

For Banbandh, Lanco was partially dependent on the Rampia captive coal mine, but the government cancelled the allocation to it in line with the Supreme Court's order undoing the allocation of coal mines. The captive coal mine could have boosted the power plant's valuation, but the cancelled lease is now a big negative in any deal.

The story with Griffin is similar. The acquisition marked the strategic entry of Lanco into the global resources industry at a time when the coal market was booming in 2011. It made the company the largest individual supplier of thermal coal to Western Australia's industrial coal market with over 1.2 billion tonnes of coal resources. Lanco planned to ramp up the mining production capacity fourfold to around 18 million tonnes per annum by 2018, a big jump from the present production level of 4 million tonnes. The project, however, reported negative earnings before interest, tax, depreciation and amortisation, of Rs 30 crore for the quarter ending September 2014 since realisations dipped 9 per cent quarter on quarter due to lower exports and lower spot coal prices.

Griffin's acquisition cost for Lanco stands at $1 billion after taking interest into account. To meet this cost, each tonne of coal should return at least $2.5 and an additional $5-6 to cover the capital expenditure. Now, more than about meeting the cost, investors are concerned about the balance payment of $150 million to be made for the acquisition.

Besides, Lanco's problem with receivables from customers is also far from over. As of September 30, the group has receivables from various state electricity utility companies and other customers for sale of power aggregating to Rs 2,466 crore, though this is a decrease from Rs 3,032.5 crore in the previous quarter. Its net current liabilities are Rs 2,376.49 crore and current maturities of long term borrowings Rs 1,963.32 crore.

At the same time, operating assets are not generating the expected revenues because of short supply of coal and non-availability of gas. Based on an internal assessment and various discussions it had with its customers, the company says it is not only confident of recovering the receivables, but also of inducting strategic investors and disposing assets, which would bring in the additional cash flows into the system.

Yet analysts remain far from convinced. "We do not see a significant upside unless clarity emerges on fuel supply, especially for merchant and gas plants, and off take and there is significant debt reduction," says Amit Golchha, research analyst, Emkay Global Financial Services.

It appears Lanco Infratech does have a long way to go before it can breathe easy.