Gas supply issues a concern for Kondapalli unit II: Lanco

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Lanco Infratech  is in talks with investors to sell a minority stake in its power business to raise USD 600-750 million to fund expansion, a senior executive said on Tuesday.

Lanco will consolidate its power business under one vertical and raise funds by the first quarter of 2012-13, Philip Chacko, director, investor relations, told Reuters.

Lanco has ready-to-generate capacity of 4400 MW and is constructing 4900 MW of power plants. It also has a pipeline of another 4000 MW where construction is yet to start.

Below is an edited transcript of Chacko's interview on CNBC-TV18. Also watch the attached video.

Q: Your construction business seems to have performed really well. Can you first take us through your performance in that business and the reasons for this better than expected performance?

A: Yes. About 95% of our revenue comes from both the construction business and from the power vertical. The construction business today has an order book of Rs 26,500 crore and over the last 10 years we have really established our credentials as a very strong power developer in the country.

We have got over a decade of experience in the power vertical. In our EPC business we have got 4800 man organisation today and a very strong EPC capability. Looking at our order, which we have booked for the current year, there has been an increase in the topline-the gross revenue of 50% from Rs 3100 crore to Rs 4600 crore.

This essentially is lot of projects where substantial progress has happened over the last quarter. We had had Lanco Amarkantak, Lanco Udupi, Lanco Babandh where substantial progress has happened over the last quarter. This is also linked to our long pipeline of projects which is under construction, over 4900 megawatt of projects which is under construction.

These on an average would have completed around one-and-a-half to two years of construction. So, we still have another two to two-and-a-half- years still pending. So we do have a very healthy order book in the EPC business as of today.

Q: Where the external revenues in the construction business are coming from? What kind of orders have you executed and what are the margins on those orders?

A: I may not be able to give you specifically on the margins, but definitely, we can tell you that we have won a large project for Moserbaer in Chhattisgarh. We've also got large project at Koradi for Mahagenco and we also have a large Middle East Asian project of around 125 megawatts. So these are the large projects, which we have in our EPC business.

Overall, you can say, around 28% of our order book constitutes external projects for these outside parties.

Q: Your current order book consists of about 72% of internal orders. Is this a concern in terms of consolidation earnings going forward because you would end up eliminating earnings from the intersegment transactions? Are you seeing external orders coming in and to what extent?

A: Look at it on both the sides. As a business, it is important for us to have our own EPC capability. This essentially means that whatever margins are there in the EPC business, we are able to capture that within the system itself and while we may be eliminating them as a consolidation, but definitely this is a cash profit which is there in the system. On a cash basis, we are much better of and that's one reason why we keep telling all our investors to look at the cash profits which the company has generated.

That actually gives a real reflection of the performance of the company and if you look at our cash profits quarter-on-quarter, this quarter, we have had a jump of 23% in the cash profit to Rs 468 crore. Likewise if you look at it on a nine month basis there has been a jump of 18% to Rs 1,180 crore of cash profit that the company has got today.

So, essentially one should not be so bothered about the elimination part of it because these are essentially cash profits, which are very much there inside the system. Going forward we also have a focus on the external third party contracts depending on the margins and the profitability of these projects, we hope to add to our pipeline as well.

Q: The operating margins at Griffin have improved from about a loss of Rs 200 crore to a profit of about Rs 55 crore, even though top line has not increased all that much. What has changed really in Griffin operations?

A: There are two parts to it. One is over the last nine-months, it has been a learning curve for us. We have been able to carry out incremental improvements in the plant. The cost we are cutting down gradually, so there will be a definite improvement quarter-on-quarter in Griffin. The other large impact in Griffin was the impact of forex loss.

The previous quarter we had large forex loss of around Rs 167 crore whereas in this quarter we have got a substantial profit of around Rs 102 crore in Griffin assets. But once you knock that off you look at the operational profit in the company. We have become fairly EBITDA neutral. We have been able to cut down the losses in the company substantially. So that's a definite positive improvement in Griffin assets as of now.

But if you look going forward the real value in the asset is in the 1.1 billion tonne of reserves that is there with Griffin which over a period of time we will be able to ramp up capacities to a maximum of 18-20 million tonnes.

So what that means is by the year 2017, we should be able to do 11 million tonnes & thereafter scale it up to 18 million tonnes. The value in the company Griffin is definitely in the addition of capacity that we can do going forward because essentially most of this would be exported & that is where we get the highest realisations.