Lanco Infratech not ready for a distress sale, at least for now

Bengaluru: Debt-laden Lanco Infratech Ltd has postponed asset sale by at least two years due to lower valuation for power assets, L. Madhusudhan Rao, executive chairman of Lanco Infratech, told reporters on Monday at the company’s annual general meeting (AGM).

Lanco Infratech—which has engineering, procurement and construction (EPC), power, solar energy, coal mining and infrastructure businesses—has a total debt of Rs.34,000 crore.

Rao admitted that the debt is likely to rise to Rs.45,000 crore by FY18 if the company does not sell its assets to pare down the huge debt burden.

But Lanco Infratech is expecting to secure better valuation later for its power assets, which are slated to become operational in the next two years. Lanco Infratech plans to bring operational power of 2,720 MW by FY17 and 1,320 MW by FY18. These include four of its under-construction projects—coal-based Amarkantak phase II, Babandh and Vidarbha of 1,320 MW capacity each and Mandakini hydro power project of 76 MW.

The company will have a consolidated power capacity of 8,000 MW by FY18.

“For a company, as long as the project is under construction and they have equity, there is not much to worry as banks will then finance and they can wait to sell the project. But if they do not have equity for an under-construction (project) or have no power purchase agreement for an operational plant, it will lead to distress sale,” said Venkataraman Rajaraman, director and head, infrastructure and project finance, India Ratings and Research.

Rao wants to sell 3,000MW worth of power assets after FY18 to reduce the company’s debt by Rs.18,000 crore.

Rao said assets will be selected for sale based on the value propositions then.

“Debt at an entity level is not a concern. The principal reason to sell the assets is to raise equity so that there is liquidity,” said Rao.

Decline in economic growth, slowing consumer demand, delay in securing statutory approvals and non-completion of land acquisition have stalled dozens of infrastructure projects, including highways and power plants, in India in recent years. That has, in turn, hit cash flows of domestic companies, making it difficult for infrastructure developers to repay debt, which has led to a pile-up of bad loans in the banking system.

Though there are buyers in the market, sellers are on a weak wicket in negotiating deals as a number of them have high levels of debt on their balance sheets and limited options for further fund-raising.

“Issues like unavailability of fuel, unviable power tariffs not reflecting on cost of generation and poor financial health of state electricity boards resulted in a less than optimal performance level of this power vertical,” Rao said.

Banks, which have so far kept these companies afloat, are also getting tough as they try and clean up their own books, leaving some companies with no choice but to sell assets.

“To pare debt, now is not the right time as the appetite to buy large projects is very low,” said Rao.

“International buyers are not interested because of sector concerns and Indian strategic partners are also facing similar challenges. The per MW enterprise value (that one can get after FY18) would be Rs.8 crore-8.5 crore, so we would sell assets of around Rs.25,000 beginning FY18,” he said.

Rao said at least 70% of the total asset value sold will be used to bring down debt.

Lanco’s installed power capacity in March this year stood at 4,660 MW, of which it has already sold the 1,200 MW Udupi thermal power project.

Earlier this year, Adani Power Ltd completed its acquisition of Lanco Infratech’s 1,200MW Udupi power plant in a Rs.6,300 crore deal.

“The next 18-24 months are going to be challenging for the company and we have to be careful that all our untied capacity will have to turn to performing power purchase agreement (PPA). But the projects are likely to perform well going forward as the documentation for PPA has much clarity coupled with the fact that the competition has now started bidding keeping in mind all the risk factors, unlike earlier,” Rao said.

The company ran into losses of Rs.2,037 crore in FY15.

It also has two road assets in the portfolio of projects, selling which may not influence the debt status much.

“This is the time to consolidate. In the last two years we could not do much in the operating power assets nor were we able to execute it effectively. Most of the infrastructure companies are now looking at setting the house in order. Value creation can happen only with new projects which companies will start biding only after two years,” Rao said.