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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.
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
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.
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