Australian court's ruling on Griffin Coal positive for Lanco

Size of its debt and operational issues in the power sector continue to plague the company

Lately, Lanco Infratech has been in the news, and for the right reasons. While there has been some talk on asset sale (1,200 Mw Udupi plant) in India, a big boost has come from a recent ruling by the Australian Supreme Court in favour of its subsidiary, Griffin Coal Mining Company. In December 2010, Lanco, through its step-down subsidiary, agreed to acquire Griffin Coal Mining and Carpenter Mine Management for A$750 million. The deal was to give Lanco access to proven coal reserves of 1.1 billion tonnes. Prior to the acquisition, Griffin Coal was supplying coal (through coal supply agreements) to its subsidiary Bluewaters power station at subsidised rates.

Since Griffin Coal was making losses, Lanco decided to end the unviable coal contracts with Bluewaters and sought to sell the power company to a Japanese consortium. Australia’s apex court has allowed Griffin to revise the coal contracts and has also rejected a petition by Perdaman Chemicals and Fertilizers to block the sale of Griffin Power (parent of Bluewaters power station). Both these developments are positive for Lanco Infratech. In a note, Spark Capital says the renegotiated coal supply agreements will let Griffin Coal to operate without further financial support from Lanco.

The ruling also allowed the sale of Bluewaters by the promoters of the Griffin group to a Japanese consortium (Sumitomo Corp and Kansai Electric). The management has indicated to analysts that the sale of Bluewaters has been finalised at $1.2 billion. Also, the coal supplied to the power company will be revised retrospectively from FY11.

However, risk from further litigation is not yet over. Kotak Institutional Equities, however, explains that Perdaman is also contending a separate winding-up case against Griffin Coal and has claimed damages totalling about A$3.5 billion over revision of its earlier coal supply agreements — though the ruling on that case is awaited.

Apart from this, analysts say Lanco is also looking to sell some of its India assets and divesting a part of its stake in holding companies, which would be positive as the company is sitting on a consolidated debt of Rs 32,700 crore. Despite this, analysts remain sceptical on its shares. Regulatory uncertainty and operational issues (low plant load factor due to fuel linkage issues in India) in the power sector continue to be an overhang.