Some relief for Lanco Infratech

Lenders have agreed to restructure debt worth Rs 8,000 crore through the CDR route

After a long wait, Lanco Infratech has got a breather, as its lenders have agreed to restructure Rs 8,000-crore debt (related to power generation business) through the corporate debt restructuring route. More relief would have come had a larger portion of its consolidated debt of Rs 33,900 crore (as on September 2013) brought under CDR.

At present, analysts are estimating an interest cost of about 13-14 per cent for the domestic debt. On Rs 8,000 crore, the company is estimated to be paying Rs 1,000-1,100 crore in interest costs annually, or about 40 per of the total interest cost estimated for FY14.

Under the CDR, Lanco would not have to pay interest for about two years. While this alone should help the company post profit as against the expected loss of Rs 1,600 crore for FY14, the interest costs would be capitalised. That apart, analysts also expect the rate of interest to fall as part of the CDR package. Even a 100 basis points cut in interest rate would save Lanco Rs 80 crore in interest outgo.

Apart from these savings, Lanco is also looking at the CDR to improve its operations, which is a key concern. The company is likely to seek additional funds from the banks to revive its business, mainly under-construction projects. All these come at a time when Lanco is facing challenges in terms of recovering dues from clients as well as in monetising assets. As of September 2013, it had receivables of Rs 3,000 crore from state power distribution companies (discoms). Notably, some relief is also expected on this count, as state discoms are also getting a financial package from the government to improve their balance sheet.

Though analysts believe the debt restructuring move is positive, there are other issues which would determine the course of its revival. “Lanco is currently trading at 0.5 times its FY14 book value, which might look inexpensive. However, we do not see a significant upside unless clarity emerges on fuel supply (especially for merchant/gas plants), off-take and off-take disputes, and stake sale and debt reduction,” said Amit Golchha of Emkay Global.

For instance, both its power generation and engineering, procurement and construction (EPC) businesses have been facing several challenges. It has power generation capacity of about 4,700 Mw but most of it was operating at very low plant load factor (PLF) of about 40 per cent due to lack of fuel.

The contribution of these capacities to cash flows and revenues is thus very low and is hurting profitability due to interest costs. Projects are also suffering because of disputes over the power purchase agreements. The EPC business (35 per cent of revenues), which has huge order book of about Rs 25,000 crore, was also facing challenges. It reported 46 per cent decline in revenues in FY13 to Rs 5,382 crore due to execution issues and lack of sufficient working capital, which should get some support if the company is able to resolve the liquidity issue.

Overall, the CDR package would provide relief but improvement on the business front is crucial for sentiments to improve meaningfully.