In an interview with CNBC-TV18, G Venkatesh Babu, MD of Lanco Infratech said the government has not moved on capping merchant tariffs yet.
The entire power sector has been under pressure recently, mainly on the back of a media report that came out last month. The reports suggested that the Ministry of Power is proposing to cap tariff sold from power projects, which have captive coal blocks or assured domestic coal linkages.
However, according to Babu, the capping of tariffs is unlikely on fuel supply and structural issues.
Below is an edited transcript of Lanco MDís interview on CNBC-TV18. Also watch the attached videos.
Q: Some of the recent excitement is on account of your company getting gas allocation possibly for some of your new projects. Is there any clarity on that?
A: As regards gas allocation is concerned, our projects are ready for commissioning so EGoM is planning to take it up in sometime and the ministry of power recommended Lanco as the only company due to get gas allocation. So we are waiting for the registration to take place. In the meanwhile there is some idea of blending LNG also as far as government is concerned, hopefully that comes pretty fast.
Q: Companies such as yours which were under quite a bit of cloud in December because there was talk of a new tariff policy that would look at capping the kind of tariffs charged by some of those which source domestic linked coal. Any news that you have heard on whether or not thatís going through or is it still up for discussion?
A: As regards power plant we have a combination; some very small portion is on merchant and other plant are based on long-term PPAs (power purchase agreements) but looking at the macro level scenario, what you see is first of all, the states are calling for bids. So for that reason we cannot tie-up a long-term PPA. Second thing is even the ministry of powerís regulations lately has said until a developers ties up 85% of its power on a long-term PPA basis he will have to import equipment by paying duties and these duties for a large power plants work out almost about Rs 550 crore.
Second part is looking at the tariff prevailing in the markets, if you see the power exchange the tariffs are not very high to call merchant tariffs as unreasonable because now the fuel being so restricted you are eating almost about 50% domestic fuel and balance 50% you are importing and blending it. If thatís the case your tariffs anyway go up to almost about 3.75-4 on cost basis, just 16% return.
Q: Even so this has happened in the past and it happened ahead of general election in 2009 where the CRC stepped in and capped the tariff. How real is the fear right now and is it something that you are taking up with the power ministry or the power companies?
A: They have not capped the tariff till date; it has been an open market and open market is being encouraged. Given the state that the price of fuel is uncertain and the interest rates what banks are charging compared to what they were charging three years ago from 9% to almost 14%....now these are the essential costs per unit of power. So if these are uncertain, no one can take a long-term risk on charging specific tariffs, making the economics of power plant pretty bad.
So thatís another practical point of view which the ministry also considers before taking any decisions as to capping and they are also of the understanding that there are too many open issues which need to be tackled before we see that people are benefiting out of merchant tariffs. Merchant tariffs which were as high as Rs 6-7 it was almost two years ago and the last one year the tariffs have been so low that they donít even come across thatís an unfortunate part and this part is not getting highlighted across.
Q: Can you give your investors a sense of what kind of tariffs one should expect or project from Amarkantak II going forward and whether those will be enough to cover fuel cost because thatís been a big concern as you outline, the moving up of fuel cost without commensurate passed down into tariffs?
A: We have Amarkantak I and II. Amarkantak I is been sold on merchant basis, there is a tariff of about Rs 4 and since we get part domestic coal and part import coal as a blend so the extent there can be some margins. As far as Amarkantak II is concerned, temporarily there are discussions between Lanco and Haryana government where we are trying to pass through some of the cost. So in Amarkantak II, we are expecting 16% return on equity as for the project on the whole is concerned.
Q: People have also been fairly concerned about delays in the commissioning of Udupi and Anpara projects. Can you give us a firm timeline on when you expect commissioning?
A: As far as Udupi is concerned its unfortunate, the plant is ready, out of 1,200 mw the first 600 mw is been operated and power is being supplied to Karnataka government.
As fas as the second 600 mw is concerned, the plant is ready but the transmission line which is to be linking the plant, which is the responsibility of Karnataka government and unfortunately the Karnataka government has given a force-majeure notice to Lanco saying we are not able to build the transmission line on time because ministry of environment hasnít given them clearance.
So this is a government issue which has come out to the company but in the meanwhile they are acknowledging the fact that they will pay the interest during construction for delay in the building of transmission line to the extent the plant mitigated from the commercial risk.
The fact is it is a waste of countryís resources having built a plant with so much of difficulty over four years time after spending about more than Rs 6,000 crore, part of it is still held up for clearances is between governments; central government clearance and state government. If this is the state of affairs for the state government itself then you can see what will be the impact on other developers who are dependent on the ministry of environment or such government agencies.
Q: There is an additional concern on companies such as yours because of what has happened with the currency and the kind of impact you may suffer on your margins. Have you done any collation on what you should be working with in terms of the rupee dollar and how much of an impact there may be on your margins this year?
A: What we see is particularly the projects under construction we take base credit which goes for longer tenure rolling over six months and the base credit comes at a cost of almost about 3% rate of interest and the rupee rate of interest is almost about 14%.
So differential rate of interest between base credit and the rupee rate of interest is acting as a natural cushion for hedging or not hedging, to the extent our breakeven point was coming to almost about 52.5 whether we hedge or donít hedge. Having not hedged we are unfortunate the rupee has moved up to almost 52.5-53 levels. So from that perspective we are standing at neutral level from an overall project perspective.
As regards future projects are concerned surely it will have an impact in terms of general industry, so the cost will be higher than we import for all the equipments for building the power plant.
Lanco Infratech stock price
On November 30, 2015, at 13:56 hrs Lanco Infratech was quoting at Rs 6.32, down Rs 0.26, or 3.95 percent. The 52-week high of the share was Rs 7.40 and the 52-week low was Rs 2.46.
The latest book value of the company is Rs 7.49 per share. At current value, the price-to-book value of the company was 0.84.
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