CDR a short term breather for Lanco Infra

While this could bring short term relief, street believes that company's problems are far from over

After making several attempts to monetise assets and thus retire some of its debt, Lanco Infratech is now resorting to corporate debt restructuring (CDR) route. However this could provide some relief in the interim, Street believes that 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 Street too was not very enthusiastic about the news of CDR, which is reflected in subdued performance of its share prices over the past two trading sessions.

“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 10^th July 2013.

High debt

Out of consolidated debt of Rs 31376.85 crore the company is expected looking to restructure about Rs 9,000 crore of debt. The details of restructuring are yet to come. Currently analysts assume the domestic debt to have interest cost of about 13-14%. On Rs 9,000 crore debt even if the company is able to negotiate one percent that would save Rs 90 crore.

This could come at a time when the company is facing financial difficulties. For instance, in March 2013 quarter, the company incurred an interest expense of Rs 682.15 crore on an income before interest and depreciation of Rs 940.12 crore. It has very less interest coverage, which has been falling in the last few quarters.

Further besides borrowing cost, if it can extend the duration of near term maturities that could help in managing interest cost and liquidity. Analysts believe that over next twelve months the company is supposed to have a debt payments obligation of about Rs 2000-2500 crore.

However this is suppose to be facing challenges given lack of enough cash flows and delay in monetisation of assets. That apart a large part of its money is stuck in several ongoing projects due to delays in execution along with receivables from the State discoms to the tune of about Rs 2,972 crore. If the CDR goes through some of these immediate liquidity issues can be addressed especially in the light of forth coming general elections in the country.

Uncertain business environment

On the business side as well the company needs to see revival in its operations, which could enable it to produce enough cash and thus address the liquidity issues and servicing interest. 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 about 44% compared to 67 per a year ago reflecting issues of coal and gas availability. This is why in power capacity (power segment 57% of revenue) has gone up but the contribution to profitability and cash flows is very low. That apart rising receivables and uncertainty over power purchase agreements have impacted cash flows, which in tern have led to concerns over its Engineering Procurement and Construction (EPC) business (35% of revenue) as well. EPC business has strong order book of about Rs 26,000 crore but majority of its projects are facing execution issues and thus led to delays. In FY13 EPC revenue has fallen by almost 46% to Rs 5382.17 crore.