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Jan 04, 2013, 04.28 PM IST | Source: CNBC-TV18

Lanco Infra may look at stake sale option for new projects

The recent tariff hike in Tamil Nadu has come as a relief to Lanco Infratech which is confronted with delayed payments from various state electricity boards. The company believes a similar hike in other states will help the company improve receivables.

The recent tariff hike in Tamil Nadu has come as a relief to Lanco Infratech which is confronted with delayed payments from various state electricity boards (SEBs).The company believes a similar hike in other states will help the company improve receivables.

In an interview with CNBC-TV18, K Rajagopal, CEO-Power, Lanco Infratech said that it is very critical to implement SEB restructuring package to improve their situation and is pending since quite sometime now.

SEBs have been facing financial stress due to power procurement costs in the past. Over the last one year, many of them have gone into debt restructuring and Tamil Nadu being one of them, has raised funds via government bonds.

The company is looking to unlock value to meet equity requirements for its new projects and for the same it may look at stake sale options for a few projects.

Last month, there were reports that Lanco has begun talks with JSW Energy and Adani Power to sell a power plant in Karnataka as banks pile pressure on debt-laden power companies to sell assets and improve cash flow.

The company is also concerned about bridging gap between the cost of recovery and cost of production and significant fall in its plant load factors overall due to fuel shortage also needs to addressed.

Below is the edited transcript of his interview on CNBC-TV18

Q: There is a suggestion that power tariffs could be increased. How important or crucial would it be? Do you think it is believable that the tariff hikes could be of the magnitude that is being spoken about?

A: They are quite necessary and essential at this point of time. In the last few years, if you take a span of four years we are paying almost twice the cost of petrol but the power costs have gone hardly around 20 percent in the last four-five years. That has put the distribution companies’ (discoms) financial positions in precarious position. The gap between cost to serve and cost of recovery needs to be closed at the earliest to save the financial health of discoms which will enable them to buy more power and increase their reach in supply to various class of consumers. So there is no other way but to enhance the tariffs in line with the cost to serve.

Another significant thing that we have noticed in the last few years is due to short supply of the fuel; either coal or gas the Plant Load Factors (PLFs) have significantly fallen rising the average cost of generation, which is also putting pressure on the discoms’ financial health. Therefore, not only tariff increases are required, which is important but simultaneously there is also a need for a reduction in the aggregate technical and commercial (AT&C) losses. Also there is need for increased availability of fuel, to raise the average PLFs of generation in the country, which has been falling in the last two-three years. This is a very disturbing trend.

Q: How significantly would it improve the receivable situation that you have from some State Electricity Board (SEB) like Karnataka?

A: Tamil Nadu has increased the tariffs almost close to 37 percent last year and that has significantly improved the receivables from the state. Slowly they have started clearing the outstanding debt for the private power generators. Similarly,Uttar Pradesh (UP) has increased tariffs but the results are yet to be seen but they have slowly started repaying some of the outstandings.  Even in Karnataka, the tariff increase would definitely help the discoms to start clearing the outstanding.

The cash flow resulting from the tariff increase is one component of the cash flows to clear the outstanding dues. The major thing would come from the restructuring package that is announced by the government wherein 50 percent of the outstandings are to be converted into bonds issued by them and taken over by the state government.

Unless these major restructuring packages are implemented, the substantial reduction of the outstandings as of March 12 will not happen. The cash flows from the tariff increase will definitely help but it has to be supplemented with the implementation of the restructuring package, where it will improve the cash flows for the discoms to clear these outstanding liabilities.

Q: There has been some talk that you are actively looking to sell your Udupi plant of 1200 MW and you have started discussions with a couple of private players, can you confirm that?

A: I will not comment on that specifically but we are definitely looking at unlocking the value of some of the assets we have already created, to meet our equity requirements in the new projects that are ongoing. In fact because of the market conditions, we could not raise the equity as we planed to, in terms of dilution of our holding company. We would be waiting for an opportune time to realise better value. In the meantime, we are looking at the opportunities to unlock some of the value, of some of the assets we have already completed. At an appropriate time we would be definitely coming back to you on this.

Q: We hear that both JSW Energy and Adani Power could be interested. If you do get a buyer, whoever it is, would you be looking to sell 100 percent of the stake in Udupi plant?

A: It depends on how the terms of the offer are looked at.

Lanco Infratech stock price

On October 22, 2014, Lanco Infratech closed at Rs 6.95, up Rs 0.12, or 1.76 percent. The 52-week high of the share was Rs 14.94 and the 52-week low was Rs 5.57.


The latest book value of the company is Rs 11.11 per share. At current value, the price-to-book value of the company was 0.63.

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