Lanco Infra Looking To Sell 1200 MW Udupi Power Plant

The debt-ridden power sector, which is gripped by financing issues that are taking a toll on the sector and its players, is most likely to witness its first casualty soon. As per a report in the Economic Times, Lanco Infratech is in talks with two private power companies to sell its 1200 MW Udupi power plant. The company currently has a total 3924 MW of capacity under operation. As per its website, Lanco is constructing 4898 MW of power capacity and another 7103 MW of projects are under various stages of development.

We, at DSIJ, have got this news verified from the company’s spokesperson, who said that selling is not the only option and it is also exploring other options such as JVs.

The plant in question is located in Karnataka and has two generation units, each with a 600 MW capacity. The first unit was commissioned in Nov 2010 while the second one in Sept 2012. However, the project was delayed due to the earthquake in China as well as due to a delay in setting up a transmission line.

This project has a 100% Indonesian coal linkage and is funded by a consortium of 14 banks. Power Finance Corporation (PFC) is the leading lender, with exposure to the tune of about Rs 450 crore. The total cost of the project was about Rs 4275 crore, of which 75%-80% funded through debt. The power linkage for 90% of electricity is with five electricity supply companies (Escoms) in Karnataka, while the remaining 10% is tied with Punjab State Power Corporation.

After commissioning of first unit, the project has seen a greatly varying plant load factor (PLF, a measure of efficiency). The plant’s PLFs ranged between 24%-94% during the period of operation of Unit I. After the commissioning of the second unit, the PLF of the plant declined to 70% in the Sept 2012 quarter from 89% in FY12.

The Udupi project is a major revenue driver of Lanco's power business, with a contribution of 36% in units generated and 42% in power segment revenues (as per the Sept 2012 quarter results). As per the quarterly results data, the per unit realisations from this project was Rs 4.50 per unit, 16.40% more than the total realisations of Rs 3.86 in the Sept quarter. In fact, we believe that the realisations of Rs 4.50 are far better considering that it is a long-term power purchase agreement (PPA)-based project having good revenue visibility.

Reports say that Lanco is in talks with JSW Energy and Adani Power, who are interested in this project. The company's balance sheet carries a debt of Rs 29000 crore, much of which is due to the loans taken to set up power projects. As per its Sept quarter results, it has a debt-to-equity ratio of 7x. Its interest cover ratio is also drastically low, standing below 1x. In the first half of the year, it has seen losses at the PBT levels (profit before tax).

Both the low interest cover ratio and the losses at the PBT level are an alarming signal to its lenders as well as shareholders. Its liquidity ratio, specifically the cash ratio which stands at 0.04x, shows signs of financial stress going ahead. No wonder that the lenders have asked the company to sell some of its assets and improve its cash flows.

If Lanco sells this power project, it will see a huge setback as a strong revenue line will be gone. The company may use the proceeds to lower its debt, but that will not be enough to please the shareholders and lenders.

The project will prove to be a cash driver, and hence, both JSW Energy and Adani Power may be interested in it. Adani Power has coal mines abroad, and thus, it will have a coal linkage. It also has a port business, so it may be interested in this project. Needless to say, though, it will mean an addition of further debt in its towering debt portfolio of about Rs 38000 crore.

JSW Energy, on the other hand, has seen its financials improving a bit in the last two quarters. Its debt stood at a little over Rs 9000 crore by the Sept 2012 quarter. Thus, this company too may bid for this project.

Lanco Infra’s shares have risen by 6% on the BSE (due to the positive judgment passed by an Australian court on Lanco's coal mine). The shares of Adani Power and JSW Energy are trading marginally positive as at 1 PM on Dec 24, 2012.