Lanco to fund equity participation with profit from construction unit

Lanco to fund equity participation with profit from construction unit
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First Published: Mon, Aug 18 2008. 12 10 AM IST

Revenue sources: Lanco Group chairman L.M. Rao. The company hopes its EPC division will earn up to Rs405 crore from the execution of the Rs2,700 crore first phase of the Kerala port project. (Photo: K
Revenue sources: Lanco Group chairman L.M. Rao. The company hopes its EPC division will earn up to Rs405 crore from the execution of the Rs2,700 crore first phase of the Kerala port project. (Photo: K
Updated: Mon, Aug 18 2008. 12 10 AM IST
Hyderabad: In an unusual way to mobilize funds, Lanco Infratech Ltd, or LITL, plans to fund its equity participation for India’s first trans-shipment port in Kerala through profit earned from in-house engineering, procurement and construction,or EPC, operations, said a top official.
Revenue sources: Lanco Group chairman L.M. Rao. The company hopes its EPC division will earn up to Rs405 crore from the execution of the Rs2,700 crore first phase of the Kerala port project. (Photo: K Sudheer / Mint)
The Hyderabad-based construction firm, whose consortium won a contract to develop the Vizhinjam International Container Transshipment Terminal, obtained the defence ministry’s security clearance early this month.
The company, which earned Rs3,337 crore in revenues and Rs354 crore profit in 2007-08, will be implementing the port project in four phases with an initial investment of Rs2,700 crore. The debt-equity ratio for the project will be roughly 70:30.
“Of the equity component of around Rs810 crore, the Kerala government plans to pick up 25%, our international partner Pembinan Radzai Sdn Bhd of Malaysia will hold 24% in the first phase, and we will have majority holding of 51%,” said Sanjay Divakar Joshi, LITL’s director of infrastructure.
By the final phase of the project, the international partner has the option to raise its equity to up to 26%, while Lanco will continue to hold majority stake of 51%, he said.
To maintain majority holding in the first phase, Lanco Infratech needs to pump in around Rs413 crore as its contribution. “We have the advantage of executing the project through our in-house EPC division. We will be mobilizing a large part of the equity through the EPC profit margins we earn while executing the project,” said Joshi.
According to him, the EPC margins in infrastructure projects will typically be in the range of 10-15%. “We will be executing the entire Rs2,700 crore of first phase project though our in-house EPC division, which will enable us to earn a minimum of around Rs270 crore and a maximum of around Rs405 crore,” he said.
For the first quarter of the current fiscal to June, Lanco’s EPC division reported earnings before interest, tax, depreciation and amortization, or Ebitda, margin of 16.79% at Rs87 crore. Compared with a similar period in the previous fiscal, the company suffered a fall of 228 basis points in Ebidta margins in its EPC division, though the division’s revenues improved two-and-a-half times at Rs518 crore from Rs148 crore in the same period of the previous year.
Analysts attribute the squeeze in the company’s EPC margins largely to the rise in steel prices and higher sub-contracting costs on some of the smaller elements of EPC contracts.
By the end of the first quarter, the company’s EPC division had orders on hand worth Rs12,611 crore. Of this, power projects alone contributed Rs10,802 crore of orders.
“We believe that the company is on track to achieve around Rs3,400 crore of EPC revenues during FY09. Post the sharp recovery from the earthquake-related setback by Dongfang, Lanco is confident of getting support from its equipment supplier, which will help it achieve its targets,” said analysts with the Mumbai-based equity research firm Edelweiss Securities Ltd in a report released on 31 July.
Joshi says the company will meet any balance equity contribution through other sources.
Financial closure of the project is expected to happen in the next two years. Meanwhile, it will prepare a detailed project report for environmental clearance, which takes 12-18 months. As of March, the company had reserves of Rs1,614 crore.
The first phase of the port project will have a capacity of 1.3 million twenty-foot equivalent units, or TEUs, to be ready by 2013, which will reach a capacity of 5.4 million TEUs by the end of final phase.
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First Published: Mon, Aug 18 2008. 12 10 AM IST