Private sector power generator Lanco Infratech Ltd (LIL) is set to acquire Australian Griffin Coal Mining Co. Pty Ltd. Given the anticipated shortage in domestic coal linkages over the next five years, and the rising demand for coal in international markets, the move evidently aims to ensure fuel security for LIL’s power projects.
Industry reports suggest that Griffin Coal is Western Australia’s second largest coal mine, but mounting debt led to the firm seeking bankruptcy protection. However, the Lanco management indicates that there will be no debt on Griffin’s books post-acquisition. The deal, which analysts peg at around $800 million (Rs 3,632 crore), will be funded through a mix of internal accruals and debt, through LIL’s Australian subsidiary. The holding firm had cash of around Rs 2,555 crore (as on 30 September), which could be partly used to fund the acquisition. Its debt-equity ratio, too, stands at a comfortable 0.3.
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Among power utility peers, LIL’s strong in-house engineering procurement construction (EPC) division has put most projects on track. The firm has nearly 7 gigawatts (GW) of projects on the anvil, with current generation capacity at 2,082 megawatts (MW). But the need to tie-up a consistent source of fuel was clear. Nearly 1,200MW of existing power projects and about 4,000MW of forthcoming ones are coal-based. “At present, we meet our coal needs through domestic linkages, imports and e-auctions,” said Suresh Kumar, chief financial officer, LIL. However, the company may also trade in international markets, as Griffin has a potential reserve of 1.1 billion tonnes per annum (tpa), though only around 4 million tpa is operational at present.
So far, the firm’s power division has done well. For instance, in the six months ended September, Lanco’s power business, which comprises little more than half the firm’s revenue, registered a 60% year-on-year (y-o-y) growth to Rs 2,762.4 crore. The profit (before tax and interest) rose about three times y-o-y to about Rs 493.6 crore. However, revenue contracted in both the EPC and property segments and both divisions scored poorly on profitability, too. The power segment, therefore, shored up operating profit margin to 35% from 22% a year ago.
The company’s shares have outperformed the Sensex since April. The current market price of about Rs 63 and the appreciation in the share price from April to date is around 15%. With the commissioning of additional power capacity in the next 15-18 months, the stock should see earnings expansion, as it has secured 70-80% of its revenue under power purchase agreements (PPAs). Merchant tariffs are expected to remain subdued in the near term as relatively cheaper hydro-generated power offers stiffer competition to thermal and gas-based plants. On the long-term power tariffs, a Citigroup reports says, “We are factoring in Rs 0.5/kWh lower merchant prices over FY11E-14 (expected), while maintaining long-term merchant price estimate of Rs 3.5/kwh from FY15 (expected) onwards.” The stable power business which accounts for nearly two-thirds of its consolidated earnings, should ensure a return on equity of around 17-18% per annum for the next two to three years.
Meanwhile, the ramp up in EPC execution would aid earnings growth and valuation. While details are not yet known, given the buoyant coal trade in international markets, Griffin’s acquisition can be earnings accretive on the consolidated basis, besides ensuring high-calorific thermal coal supply for its power units.
Graphics by Yogesh Kumar/Mint
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