Saturday, July 16, 2016

Lanco Infratech Ltd: Buy
CMP: Rs.5
Photo: The Economic Times
Lanco Infratech Ltd's Kondapalli expansion, the gas-based plant, which was being developed in a phased manner, is located near Vijayawada in Andhra Pradesh. The company. informed in January, 2016, that its subsidiary, Lanco Kondapalli Power Ltd, has successfully declared the Commercial Operations Date (COD) for its expansion capacity of 371 MW (Phase III B Project) with effect from January 9. It is at present operating at ~30% PLF, because of gas allocation under present gas pooling mechanism.

Besides, the company said its Amarkantak Unit 2 (300 mw) restarted power supply to Chhattisgarh from April 17, 2016. 

Its EPC order book consisting of power, solar and others stood at Rs.27,079 crore, 80% of which is internal projects. Lanco Infratech Ltd, is present in EPC, conventional and solar power generation, coal mining and infrastructure and property development  

The EPC sector and the power sector together contributed to 87% of the gross revenues. EPC and construction sector contributed to 37% of the gross revenue.

The company has a total outstanding receivables of Rs.17,81.6 crore from various state electric utilities as of March 2016. “Based on internal assessment and various discussions with the customers, the management is confident of recovery of receivables,” the company said.

Better performance by operational assets helped Lanco Infratech recover from losses in the earlier quarters. The Gurgaon-based company had recorded a consolidated profit of Rs.137 crore during the quarter ending December 31, 2015 bringing down its cumulative loss for the first nine months by 95% to Rs.65 crore against Rs.1,412 crore in 2014-15.

The company posted a consolidated net profit of Rs 98.98 crore in the Q2FY16 after a gap of three years. In a statement accompanying the results, the group said approved CDR scheme and additional funding to the company and the lenders approvals of the cost overrun proposals for the projects under construction and the effort to bring strategic investors, disposal of assets, would also bring in the additional cash flows into the system.

Moreover, resolution of pending issues at both Anpara and Amarkantak is expected to improve cash flows and recovery in financials is expected to be gradual, due to the inherent asset value.

Lanco Infratech's promoter L Madhusudhan Rao has found a white knight in fellow utility operator OP Gupta to bail him out of the Rs..41,000-crore loan mess even as bankers want to split the business into three — power, EPC and other businesses such as road and gas — which would also involve conversion of a majority of loans into deep discounted bond. 
The engineering procurement and construction, or EPC vertical, would have a loan of Rs.2,300 crore on its book but the debt burden would be reduced as the company has proposed to convert 90% debt into equity. Interestingly, the new promoter Gupta, who is brought on board by the company, will get majority stake by investing Rs.150 crore.
A further 90% of Rs 5300-crore debt will be converted into deep discount bonds, known as Optionally Convertible Redeemable Preference Shares (OCRPS), with a five-year tenure offering 9.75% interest rate. The company management informed lenders that Gupta has two power plants — a 313 mw plant in Tamil Nadu and another 400 mw plant in Gujarat.
As per the proposal, Lanco Infratech will be the holding company for all three verticals in which Rao's stake will be reduced to 26% from 70% at present, while lenders would have 57% equity stake. The company has also sought an additional loan of Rs 4,000 crore from banks to complete some of its existing projects. Speaking to ET, two senior bank officials said that they are disappointed that the new promoter will own majority stake in the company by infusing "just about Rs 150 crore". 
Meanwhile, after recording profit for two consecutive quarters, due to the improvement in performance of some of the subsidiaries (providing better business outlook) Lanco Infratech a reported loss of Rs.200.7 crore for the quarter ending March 31, 2016 as against a loss of Rs.563.2 crore in January-March 2015. 

The company managed to reduce its yearly loss too due to better performance of its EPC and construction business. It reported loss of Rs.265.6 crore last financial year as against loss of Rs.1,975.3 crore for 2014-15. The company said it would continue to look at sale of assets and getting strategic investors for some of its businesses.

There were media reports in April, 2016 that lenders to Lanco Infratech were looking to rope in a strategic investor for the company’s 8,000 MW power portfolio. At the end of December, the company had 3,460 MW operational of power projects and 4,636 MW of projects under construction. 

Its 500 MW Teesta Hydro Power in Sikkim, the majority of which is now owned by a consortium of lenders (The consortium is led by IDBI Bank and members include Allahabad Bank, Andhra Bank, Axis Bank, Oriental Bank of Commerce, Punjab National Bank, ICICI Bank and State Bank of India (SBI) and its subsidiaries, among others), attracted three potential buyers that include at least one foreign company.

The hydro project, with an estimated cost of over Rs.3,000 crore, has suffered several delays leading to an interest payment default by the promoter. The consortium of banks converted part of its debt into equity to hold 51% in the project under the strategic debt restructuring (SDR) scheme approved by Reserve Bank of India earlier last year. The total debt for the project stood at nearly Rs.2,200 crore while Lanco’s equity stood at about Rs.700 crore. Lanco had divested its 1,200 MW coal-based power plant in Udupi to Adani Power earlier last year.

Lanco’s loans were restructured by the CDR cell in December 2013 with a moratorium of two years from the cut-off date of April 1, 2013, and repayable in 30 quarterly installments starting from June 30, 2015.

Recently, there were also media reports that Piramal Enterprises, led by billionaire Ajay Piramal, is betting big on the infrastructure sector and the diversified company has entered the race to pick up a stake in debt-ridden Lanco Infra's thermal power portfolio.

Preliminary talks have been initiated between Lanco Infra which is looking at inducting strategic investors to reduce its debt & the structured investment group of Piramal Enterprises which falls under Piramal Capital. A few overseas distressed asset funds are also interested in the portfolio. On completion and on a fully operational basis, the enterprise value of the 6 power plants of Lanco Infra is estimated between Rs.42,000 crs to Rs.45,000 crores. 

As mentioned above, in the third quarter of FY 16, the company had Kondapalli Phase 1, 2 and 3a, Amarkantak Phase 1 and 2, Tanjore and Anpara power plants of capacity 3,025 MW under operation. Thus, its seems from above that the company is on the verge of a turnaround. Therefore, buy the shares of Lanco Infratech Ltd at Rs.5, for a short term target of Rs.9.
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