Source - CNBC-TV18
Talking about the company's high debt burden, Mr G Venkatesh Babu MD of Lanco Infratech said interest rate hike is plaguing the entire infrastructure sector. He added that "The rise in interest rates from 9% to 14% is the cause of the current pressure.”
Further, he also said that the company is not considering short-term investors for raising funds. Mr Babu said that "The company is in talks with PE firms to raise USD 600 million because the macro issues affecting India are temporary and PE investors will understand that much better than short term investors. The fund raising will happen over the next six months by June 2012.”
Below is an edited transcript of G Venkatesh Babu's interview to CNBC-TV18.
Q - Can you take us through what the current debt situation stands at? What sort of interest payments would you be servicing for the remaining part of the fiscal and what exactly is the outlook for 2012 in order to pairing it off?
A - Typically, on the power sector we fund our projects based on 75 to 25 debt equity or 80 to 20 debt equity, considering the share price and scale of the projects and from that perspective when you are starting a project you start off with debt equity of 4:1. Hence, when you see debt equity ratio at 3.5 or 4, it doesn’t allow me from a pure power sector player from a capital in terms of scale. To see our scale we have already commissioned about 4000 MW. And, given the scale all the numbers of projects are found on that debt equity ratio and now that we have commissioned the project over the last 12 months, almost 50% of the size have been increased 2000 MW from FY11 to almost 4000 MW to FY12.
Therefore, we are going to get lot more cash inflow coming in over the next few years now, starting from March 2012. It will bring down the debt-equity levels to some extend and most of our special purpose vehicle projects have whole 100% of our equity. We have capacity to have strategic investors and it is one way where we can have more capital inflow and further reduce debt equity.
Also, we have mandated Macquarie to raise equity to the extend of USD 600 million for a power holding company where we see focused investors on the power side coming and taking your position in Lanco Infratech power holding company. We are looking at future liquidity flow coming in more wildly and this will help us to build the additional 5000 MW plant, which is already under process in various stages. Therefore, we are well prepared for that.
Due to the increase in interest rates from almost 9% to 14% there has been a tremendous strain on not just Lanco but on the entire infrastructure sector. If the government is trying to address inflation and trying to say that we are going to increase interest rates to almost by 50%, they should also see the impact on infrastructure sector which is so capital intensive and has projects running for almost 25 years.
On these projects, they all work on a certain fixed or normal return of 16 to 18% levels when they bid for projects. Since, there is no long term debt for Indian power sector or Indian ports or airports, people tend to borrow around the adjusted interest rates which are prevailing in the market. Therefore, government should take a larger view and say beyond a certain band, the interest rates should be moved, either upside or downside.
If today interest rate goes up to 18% and we bid for 18000 levels, consumer pay 18% interest rates and if the next day it comes down to 10%, that benefit should be passed on to the ultimate consumer from the developers side, once again. Hence, the government needs to look at both sides.
Q - Could you provide us little more details by when are we likely to see the fund raising actually come through into the balance sheet and what kind of relief that you will provide?
A - The fund raising will happen over the next six months The markets will be active by middle of January and since then the information memorandum will be discussed with many of the prospective investors, PE funds and we see this happening over the next six months, by June 2012.
Given the volatility in the markets, unfortunately it is not just the single player of Lanco where the stock is down in some form but the fact is the entire infrastructure sector has all stocks down to the extent of 50-60%. It is not a good time to be in considering the fact that most of the important factors affecting the sector are more to do with interest rates and some fuel related issues.
Q - With regards to raising that USD 600 million, there are reports indicating that it could be either by private equity or even public listing of the power business. Going forward, which would be a more feasible option for you and have you already seen some amount of concrete interest coming in from the private equities side?
A - If the markets were to be reasonably good with the macro economic scenario being favourable, political scenario being neutral, probably an IPO market or market would have helped. However, the fact is given the uncertainty in the sector, the amount of disinterest shown by small institutional investors and impact of these on the dollar; we would rather go with some long term player on PE side for time being.
If the markets look up for the next few months, we can revisit that but there is keen interest from private equity players because we are one of the largest player on the power side with 4300 MW, in terms of having commissioned projects and almost 6000 MW under construction at various stage. Macro issues are affecting India for the time being is only temporary and certain PE investors will understand that much better than short term investors.
Q - Did you get some relief in the appeal before the Supreme Court for your Amarkantak unit? Could you tell us the progress on that and what kind of tariffs might now be set?
A - As far as some of the agreements are concerned, in India developers like us have bid for a certain tariff based on the assumptions that Coal India is going to give us coal and if Coal India’s price is X, but if it does not give coal we need to import the same coal at 3X.
On one hand, Coal India is unable to give coal for various reasons but on other hand the tariff remains fixed. Hence, for no fault, the developer can neither get coal nor he can supply the power of tariff which is unreasonably fixed. So, the government of India is not able to stand by its agreement of giving coal at a certain price. And, this is one important factor affecting many of the developers.
Secondly, coming to the Supreme Court case specifically, we are supplying coal to Haryana through Power Trading Corporation as a power trading company in between. SC has said Haryana Electricity Regulator Commission need not look into the factor of termination of PPA, it can look outside the HERC because now we are planning to go ahead with the arbitration process between PTC and ourselves and it will work out in such a manner that we will have past through tariffs in Amarkantak 200-300 MW and that is what our expectation is.
Nothing of extraordinary return, just a base return of 16% plus but that will take care of the basic comfort from both Haryana and Lanco side, so that we get a neutrality in the whole thing.
Q - Give us an update on what exactly is happening with Perdaman? We understand that the legislative process will possibly begin by April 2012. Give us a sense of what the update is on that as well as apparently that Griffin stocks with Bluewater Power, how exactly is that progressing?
A - We are supplying coal to Bluewater, we are required to supply 2 million tones out of our current mining of 4 million tones in Australia and as Bluewater Power are concerned and the stock is positioned very well. The Australian administrative has come out and said that they will be able to conclude something very soon which is win-win for both the parties and we are very happy with how it is moving on. Secondly, as far as Perdaman is concerned, surely it will take some time and in terms of going through the court process but we are discussing with the lawyers and a lot of points have come across. Sometime in February you will be able to get more outline as to how Lanco is proceeding on this and we are in a very good wicket as far as the overall case is concerned. From the general points, basic premises Perdaman needs financial closure of USD 3.5 billion project which it has not achieved till date and as Lanco is willing to give additional time to achieve financial closure so that we can supply coal.
Hence, the offer is on the developer, if they are really interested in putting up a project thy can take it up. Also, now due to the rupee-dollar affect and since this is a dollar acquisition, we see a good upside from the increase in dollar value over the period of time.
Q - Could you give us a sense why Suresh Kumar resigned because he was the CFO just last month? Was there any internal strife or anything like that?
A - He has been a very good CFO and has been with us for 5-6 years. So after 5-6 years if someone wants to take up some new assignment we do not complaint. We have many leaders who come to a certain stage. We have had 4-5 leaders who have been with us for 5-10 years and left at a point of time and we don’t see it as negative. He has been a pillar of strength for us, and we would still look forward to doing something with him in Renuka, the new group he has joined.
(Sourced from Source - CNBC-TV18)
