1QFY13 net loss exceeds our forecast, consensus expected profits
As against our forecast of a normalized loss of INR1.3bn (consensus
forecast at INR48mn profit), Lanco posted a normalized net loss of
INR2.1bn in 1QFY13; reported net loss (including exchange fluctuation
loss) stood at INR4.4bn (vs. our forecast of INR3.9bn). Consolidated
EBITDA surprised positively (30%/10% above our/consensus forecast)
potentially on the back of greater proportion of profits in external sales.
Higher-than-expected interest cost and depreciation on consolidation of
financials of Udupi / Anpara and start-up of Budhil, along with steeper
loss at Griffin Coal exaggerated normalized consolidated net loss.
Profitability in its power generation business suffered on three counts –
Profitability of Anpara facility suffered as Plant Availability (PAF) was
only 60% coal handling / transport infrastructure constraints. Anpara
operated at a PLF of 40% and incurred a net loss of INR1.8bn
Mounting receivables at Udupi and Amarkantak (Unit-2) pending the
notification of interim/final tariff order (for Udupi) and final tariffs by
HERC (for Amarkantak, Unit-2) necessitated higher working capital
funding, in turn denting profitability.
Low PLF at Amarkantak (Unit-2) and Kondapalli-II due to fuel shortage
EPC – Lower sales, cost overruns and f/x loss take toll of profits
EPC business financials were disappointing – revenues declined 9%
YoY and EBITDA margin shrunk by ~10pps YoY to 8.2% on account of
f/x linked losses and costs overrun in near-completion projects (Anpara,
Udupi and Budhil).
Group leverage crosses 6x; our investment thesis under review
Lanco’s group leverage (including subsidiaries and Associates) reached
6.8x as of June 2012 (net debt to equity stood at 6.6x) indicating growing
severity of cash flows. Our investment thesis (rating, TP and earnings
estimates) for Lanco is under review until after a meeting with the
management wherein we seek more colour on cash flows, leverage,
planned equity infusion and project-specific regulatory issues. Stock
trades at 0.5x FY12 P/Book.
Receivables expected to get liquidated beginning September
Receivables against sale of electricity to discoms rose to INR 27.7bn as
of June 2012 (up from INR23.7bn as of March 2012); key consumers
being Karnataka (INR10.6bn), UP (INR9bn), Tamil Nadu (INR3bn) and
Haryana (INR1.5bn). Management expects: [1] Recovery of up to 60% of
outstanding from Karnataka following the issuance of interim tariff order
later this month; [2] Realization of receivables from Haryana by March
2013 (following judgment on tariffs by HERC) and from Tamil Nadu by
December 2012; [3] Realization of receivables from UP to be contingent
on central Government funding.
Amarkantak – Coal supply for Unit-2 restored in 2QFY13
Unit-2 (300MW) at Amarkantak operated at a PLF of 48% in 1QFY13
due to suspension of coal supply by Coal India (CIL) for 35 days pending
clarification sought by CIL from the Government on interpretation of the
eligibility criteria for securing linkage coal (whether a long-term PPA with
a trading licensee, which in turn has a back-to-back PPA with a discom
qualifies for securing linkage coal); coal supply has been restored in
2QFY13. Meanwhile, pending HERC’s (Haryana electricity regulator)
judgement on tariffs applicable under the PPA with Haryana discoms,
receivables continue to rise as Lanco bills on regulated-return based
tariffs, whereas revenue realization is at INR2.32/kWh.
Udupi – Interim tariff order expected shortly, Unit-2 COD in 2QFY13
As the transmission line linked to evacuation of power from Udupi is
nearly complete, Unit 2 is expected to begin commercial operations
within the current quarter. Management clarified that despite Unit-1
operating at a PLF of 85% and PAF of 92% in 1QFY13, losses were
higher as interest outgo shot up (due to incremental working capital
borrowings necessitated by mounting receivables). Further, Lanco
expects the Karnataka regulator to issue an interim tariff order (wherein
bulk of the increased project cost would be recognized) later this month,
which would facilitate liquidation of ~INR6bn (of INR10.6bn) receivables
on the books within a few months.
Anpara – Coal handling/supply bottlenecks hurting PAF
Anpara’s profitability suffered in 1QFY13 as PAF was only 60% (PLF
was 40%) due to coal handling / transport infrastructure constraints.
While coal procurement from open market is permitted by the UP
Government (in wake of sub-par linkage coal supply from CIL), existing
infrastructure poses difficulty in handling multiple rakes and side-opening
wagons. Management expects PAF and PLF to rise by 3QFY13 as
linkage coal supply improves and coal handling bottlenecks are sorted
out with the help of the Government.
Kondapalli-II – Remains eligible to secure KG-D6 gas supply
Kondapalli-II operated at a PLF of 39% in 1QFY13 (vs. 60% in 4QFY12)
due to reduction in KG-D6 gas supply; realization was INR4.3/kWh. The
facility remains eligible to secure KG-D6 gas as Lanco has signed a 1-yr
PPA with APSEB at INR5.3/kWh, with realization being subject to gas
availability (i.e. no penalty in case KG-D6 gas supply is curtailed further).
Griffin Coal – 1QFY13 loss sharply higher as exports took a hit
Although 1QFY13 coal production rose 10% YoY to 0.8mt, revenues
were down 35% YoY and loss at EBITDA level stood at INR736mn. As
per the management, [1] Exports took a hit as customers did not honor
contracts and preferred to buy on spot, given the drop in seaborne
thermal coal prices and negligible contractual penalties; [2] Overburden
removal suffered in 1QFY13, which would impact production ramp-up in
2QFY13 as well; [3] Currently Griffin incurs a cash cost of A$45/ton – the
aim is to bring it down to below A$40 as production is ramped up from
3.8mtpa currently to 5.5mpa by FY14; [4] No major capex towards mine
expansion and evacuation is expected until FY14.
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