The engineering, procurement and construction (EPC) business of Lanco Infratech took a beating in the Q3 of FY13 and T Adibabu, COO-Finance of the company believes the cash flows at the discom levels are to be blamed for it.
Lanco Infratech reported consolidated net loss of Rs 464.6 crore against a profit of Rs 60.9 crore year-on-year in the third quarter of FY13. The engineering, procurement and construction (EPC) business of Lanco Infratech took a beating in the Q3 of FY13 and T Adibabu, COO-Finance of the company believes the cash flows at the discom levels are to be blamed for it. Liquidity issues have been affecting the EPC activity and it is likely to improve from Q4, he added.
"The EPC business is going to be good from the next quarter onwards. In FY14, definitely EPC should be much better compared to the current year," said Adibabu.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Your Engineering, Procurement and Construction (EPC) and construction business took quite a knock this quarter, both in terms of revenues as well as in the margins declining on a YoY as well as on a QoQ basis. Even in Q2 this segment seems to have faced some challenges. Could you please highlight what is not working well for the segment?
A: The whole story starts with the cash flows starting at the discom levels. The receivables of the group are increasing on a QoQ basis wherein the liquidity is becoming an issue. The liquidity at the project companies is ultimately passed onto the EPC level also. As a result of that the EPC activity is getting affected.
We thought the discom resolution will happen, but I think the solution has started only in the current quarter where states have started entering into the package that the central government has announced, whereby the liquidity position of the discoms should improve and we should realize most of our receivables this quarter and next quarter.
As of December 31 we have Rs 3,500 crore as receivables from the discoms which is definitely affecting the liquidity of the group and the EPC business also which is inter-dependent on these things. It is getting affected because of this. Once the liquidity situation eases at the discom level and once the generating companies start getting the liquidity, the EPC also will get into its full form, maybe from next quarter onwards.
We do agree that there was some slowdown in the previous quarter due to liquidity related problems, mainly due to discoms not paying on time. Coming to the margins at EPC level, they were not dropped on percentage basis. On a percentage basis they have improved compared to the previous year. This is because of the EPC contract mix that we have.
The EPC business is going to be good from the next quarter onwards. In FY14, definitely EPC should be much better compared to the current year.
Q: Your Kondapalli and Amarkantak plants also posted sharp QoQ declines in EBITDA and slipped into losses. This is probably on the back of lower merchant realisations and probably fuel constraints, supply of fuel, availability of fuel. Can you elaborate on what the realizations were and what will the trend of realizations be this quarter?
A: You are aware that the supply of gas is becoming a critical issue. Month-on-month the gas supply is getting reduced, whereby the plant operating capacities are getting reduced. That was the main reason to have under-recovery of the fixed overheads, particularly in plant II where it is on a merchant basis. The low supply of gas is affecting the plant utilisation whereby the EBITDA levels are becoming less compared to the previous quarters.
Even in case of the coal plants, they have more or less come up from their teething problems and they are now established well. Coal is still a concern. Coal supply is not at satisfactory levels. We are making alternative arrangements, but still we are not able to supply the full requirement of coal to the plants.
As I was mentioning, the liquidity to the discoms also is affecting the procurement of coal in time and thereby the plants could not run efficiently at full capacity. We are hopeful that once the discom resolution is done and once Coal India also gears up for the additional supplies, the coal supply should get eased maybe in FY14.
Thereby, the plant operating capacities of all the coal plants should improve because most of the operating capacity today is around 60 percent of overall weightage. For 60 percent, you need to migrate to 85 to 90 percent levels and that is possible only when we get the required fuel that is gas and coal. Gas may take some more time, but we are hopeful that by next year we will have better supplies of coal. As a result, the plant operating capacities can be run more efficiently increasing the EBITDA levels to the industry level.
Q: Analysts were factoring in a lot of interest cost increase, but this is a 28 percent increase in QoQ interest cost. How will the trend look like hereon?
A: Last year all the plants were not operating. This quarter all the plants were operating, thereby the interest of all the plants were loaded into the P&L account of the current year. Whereas, last year all the plants were not operational and therefore, the component of interest was less compared to the current year. Interest rates are still high and once the interest rates come down, there will be a substantial relief in terms of the interest cost to the group.
Q: Could you elaborate the operations of Griffin Coal? How much were the operating losses, given that they saw flooding of mines in the quarter gone by?
A: Griffin is able to do better mining this quarter. The quantities were better compared to the previous quarter, but the export content was less compared to the previous quarters. The overall realisation per tonne was a bit less compared to the previous quarter. That is because the exports were less. Otherwise, the production was better and this quarter also the production would be much better.
Going forward, from next year the coal mining should be up to 4.7 to 5 million tonnes from the present 3.7 million tonnes. Therefore, Griffin should operate at a breakeven level in FY14.
Q: What is the progress on the stake sell that the company has planned in its power Special Purpose Vehicles (SPVs)? Any developments since the last time we spoke?
A: Definitely there is a development but, the whole process is a bit slow because of the industrial conditions. But, it is happening and it will definitely happen. However, it is only a question of time, whether it will take one month or two-three months we cannot say. But, it is progressing well.
Q: What is the current debt, gross and net?
A: The debt is around Rs 35,000 crore, wherein 50 percent is for the operating plants and 50 percent is for the plants which are under implementation. The plants which are under operation are the Anpara plant, the Udupi plant, the Kondapalli plant and the Amarkantak plant.
The plant level operating efficiencies have improved a bit and they are doing well. But, the only thing is once coal is made available, these plants will do well. The interest servicing from these plants is not an issue and the debt servicing from these plants is not an issue. For the plants which are under development, the interest is part of the overall project cost and it is to be funded from the term loans.
Q: The cabinet recently gave an in principle nod to coal price pooling, on pooling domestic and imported coal prices. Your company should be a direct beneficiary as and when this comes through. Can you quantify the likely gains and which projects will benefit?
A: Coal India today is supplying 80 percent or 85 percent of the coal and that is roughly around 62 to 63 percent. But, effectively what we are getting is only around 50 percent plus. With the pooling mechanism at least Coal India is assuring that they supply this 80 percent of 85 percent. So we will at least get 62 to 63 percent.
In the process, at least up to 62-63 percent of coal is assured to us. There maybe an advantage to the generators, the advantage maybe per unit and can be anywhere between 15 to 20 paise. It will not be a substantial advantage, but the substantial advantage will be the regular supply of coal to the plants. Thus, the operating capacities of the plants can be improved.