Stock Review: Lanco Infratech

In order to secure fuel to take generation capacity to 15,000 Mw by 2014-15, Lanco Infratech is reported to have paid about `3,800 crore for 100 per cent stake in Griffin Coal, the largest operational thermal coal miner in Western Australia, with estimated reserves of 1.1 billion tonnes.

Analysts are positive on companies (including Lanco) buying coal assets abroad as domestic production of coal is lagging demand. Also, developing domestic captive coal blocks involves operational and regulatory hurdles. Sourcing coal from captive mines abroad guarantees timely supply and protection from volatile prices.

However, analysts are concerned that Indian companies are paying too much for coal assets. Based on the deal amount (in rupee terms), Lanco's acquisition, at around `35 atonne, is estimated to be expensive compared to Adani's (Linc Energy`16 a tonne) and JSW Energy's (CIC Energy

`7a tonne). The three acquisitions are not strictly comparable, considering the location of the mines and the coal quality. But the fact that Lanco's officials are not disclosing the deal amount before completing the formalities highlights the possibility of it being expensive.

However, Lanco will have to spend less on creating infrastructure for evacuation and transport of coal, unlike in the other two cases. The mines are strategically located on Australia's western coast (closer to India) and well connected to two ports through rail and road.

Lanco plans to almost quadruple the mines' current capacity of four million tonnes ayear over the next three-four years. The decision to import captive coal (and the quantity) will depend on the requirements of power plants in India and arbitrage opportunities available to the company in a rising coal price scenario, given its intention to participate in the burgeoning natural resources trading market.

In the medium term, the acquisition will put a strain on the company's already stretched balance sheet (2.5 times consolidated net debt to equity ratio as on September).

Acquiring coal assets abroad is a smart move, but investors need to watch out for the valuation of the asset