Lanco financials may be strained till next fiscal

Rising interest rates and a long work-in-progress pipeline are likely to strain Lanco Infratech’s performance.

Analysts see the pressure on the infrastructure company’s balance sheet to persist at least till fiscal 2013.

The indications were already visible in the performance for April-June quarter with the net profit declining by 9% to Rs235 crore.

The company officials had attributed this to a drop in the realisations in the power segment. Lanco has also committed a capital expenditure of about Rs8,000 crore, including a debt component of about Rs6,000 crore.

“With high leverage, a visible equity funding gap and its earnings disappointments, we see limited investor appetite for the stock. We view the company’s RoE (return on equity) as anaemic (despite high gearing), making a weak investment case,” Shilpa Krishnan, Sumit Kishore and Deepika Belani, analysts with JP Morgan, said in their report on August 24.

In fact, market analysts see the pressure on the company remaining quarters of this fiscal, while a revival in the situation is expected only in fiscal 2013 primarily on account of the power segment.

“A strong improvement in fiscal 2013 net profit is predicated upon the power segment, where we expect a revival of the Udupi project, commissioning of Anpara, and better profitability of Amarkantak-II, as the unremunerative PPA is renegotiated by fiscal 2012-end. In the interim, we believe there is upward risk to the rate cycle, which could exert pressure on Lanco’s parent debt and cause project cost overruns. Further investments in projects could impair cash flow. The pursuit of growth beyond pre-existing plans could add to its precarious leverage,” the JP Morgan analysts said.

The weaker construction profits, lower plant load factors in the power projects and lower merchant prices of the power generated are being seen as key contributors to the pressure on the balance sheet.

Though it is still early days, analysts from various brokerages estimate the full year performance for fiscal 2012 to remain significantly away from the numbers reported for fiscals 2010 and 2011.

The estimates available so far indicate to a topline of `8,200 crore for fiscal 2012. However, the net profit is expected to drop significantly. While the return on capital employed for the full year is expected to at about 6.4%, the RoE is projected to be at about 3.4%.

The power segment is expected to hold the key for the company with average megawatts under operation at about 2,400 in fiscal 2012.

While the regulated capacity is estimated to be at about 670 mw, the PPA capacity is pegged at about 747 mw while the merchant capacity is estimated to be at about 987
mw.

However, the analysts project a drop in merchant power revenues from Rs2,128 crore in the last fiscal to about Rs1,684 crore by the end of March 2012.