Stock Review: Lanco Infratech

All's not well with power producers, even as they add new capacities. Demand isn't keeping pace with capacity additions. This is driving down price realisations. Power consumption in the third quarter of the financial year remained sluggish, as demand grew only 3.8 per cent and power deficit dropped to 7.2 per cent, as against 9.6 per cent in the same period last year. This impacted realisation of most producers, with merchant rates hovering around `4kilowatt hour (kwhr). What has also worked against companies dependent on spot coal is the sharp rise in international coal prices (30 per cent in the past two months).

Lanco Infratech is a victim of all these negatives. The company's third quarter performance has been below the market's expectations. According to Religare, realisations in the power business stood at `2.83 per kwh as compared to `3.18 per kwh in the second quarter. This was mainly due to falling merchant tariffs (CERC, or Central Electricity Regulatory Commission, reported 4.2 per kwh for the third quarter as against `4.8 per kwh in the second quarter).

Net units generated were six per cent lower than analyst expectations. Even as coal prices move up, there is no option of a pass-through in the sector. The company buys only 20-30 per cent of its coal from the spot market and has long-term domestic linkages in place.

Despite these problems, the company has managed to improve its margins. On an adjusted basis, Ebitda (earnings before interest, taxes, depreciation and amortisation) grew 15 per cent quarterly and 61 per cent yearly. After accounting for lower depreciation charge (straight line method implemented by the company recently), adjusted profit before tax stood at `16.1 crore (12 per cent quarterly and 28 per cent yearly).

The company's Kodanpalli and Amarkantak units continued to work on lower plant load factor (PLF) at 72 per cent due to lower realisations. Lanco's overall PLF plunged to 60.4 in January. However, in the face of falling merchant rates, a majority of broking firms believe that Lanco's high margins will enable it to maintain profitability, unlike some other high-cost power producers. This may be the upside, but coal prices, lower PLF and falling merchant rates are big downsides.

High margins likely to help the company make up for falling merchant tariffs