Stock Review: Lanco Infratech

THE acquisition of coalmines in Australia will help Lanco Infratech reduce its dependence on domestic coal supply, which is suffering a shortfall. It will also decouple Lanco from the impact of volatile global prices of coal, a major energy source for its power plants.

    Better availability of coal augurs well at a time when the company is planning to double its power capacity. The deal would, however, stretch its balance sheet, which may cause some concern in the short term.

    Lanco has a power-generation capacity of 2,000 mw, which is expected to increase to 4,000 mw in the next few quarters. The Australian mines currently extract 5 million tonnes of coal annually. This can be increased three-folds, which is enough to generate 4,000 mw of power. Further, the mines have a total reserve of nearly 1.1 billion tonnes. This means Lanco would be able to increase the extract rate even further in the medium term.

    The fuel security provided by captive sources was much needed especially considering the domestic shortage in coal supplies and fluctuating global prices. Most of the domestic power producers have been scouting for coalmines abroad. Adani Enterprises, for example, secured the largest coal blocks in Australia in August.

    The acquisition is a result of problems faced by Griffin Energy, the existing owner of the coalmines, It failed to pay debt installments and tax liabilities in January 2010. As a result, the mines were placed under administration on behalf of the creditors, who have the option of selling the assets to recover the debt.

    For Lanco, the assets provide an additional advantage since it is located closer to two ports on the western coast of Australia. This takes care of transportation issues of the bulk commodity. In contrast, the mines acquired by Adani Enterprises need significant amount of investment in development of mines and ports, leading to a delay in accrual of cash flows.

    A major concern will be the heavy fund outflow, to the tune of 3,800 crore. This would exert pressure on the already stretched balance sheet with consolidated debt-equity ratio of 2.5. The company, which had been trying to divest some part of its construction division earlier, may have to look at this option more aggressively now.