Expectations from infrastructure companies were anyway subdued in the March quarter as higher interest rates had suppressed investment demand. Still, Lanco Infratech Ltd’s earnings disappointed the Street.
The company’s revenue declined 15% from a year ago in the fourth quarter (Q4). That was mainly because of a slowdown in its engineering, procurement and construction (EPC) business. Some revenue could not be booked because Lanco could not complete some projects on time. The management said there were delays in receiving milestone payments.
Earnings in the power segment were marginally better. While merchant power realizations were better because of favourable prices, this segment was affected by the lower plant load factor of 63% during Q4. A jump in staff costs and other expenditure led to a 40% drop in earnings before interest, tax, depreciation and amortization.
Operating margins during the quarter declined 1.4 percentage points from the year-ago period. Besides, interest cost also rose sharply. These factors led to an 85% drop in net profit. Religare Securities Ltd reckons that adjusted for depreciation write-backs and foreign exchange gains, Lanco actually made a loss of Rs120 crore in Q4.
Now, Lanco’s EPC order book of Rs30,160 crore does provide some earnings visibility. It also has some 6,000 megawatts of power plants under various stages of construction. However, translating that into earnings is easier said than done.
The main problem for the power business is the fuel supply, something that affects a lot of thermal power plants in the country, with both coal and gas output under threat because of various reasons. For instance, the company is yet to get assured supply for its new Kondapalli III factory. That, along with grid problems, means that the power business—which accounts for nearly half of Lanco’s revenue—may not be able to operate at the desired capacity in the short run.
The company’s stock has underperformed the BSE-100 Index of the Bombay Stock Exchange by a wide margin since the beginning of this year. It may continue to do so for some more time as many brokerages have cut their earnings estimates.
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