‘Greater uncertainties will emerge only after 2015'

Power stocks are under-performing over a protracted period and they continue to languish, thanks to rising interest and fuel costs. We catch up with Mr J. Suresh Kumar, Chief Financial Officer of Lanco Infratech, to find out the outlook of the power sector, in general, and Lanco Infratech, in particular.

Excerpts:

What are the main reasons for power companies' underperformance?

Uncertainties on the supply of coal and merchant pricing; inflation as to the impact it will have on interest rates are the three basic issues concerning investors.

Until there is clarity over the next couple of quarters on how these risks will be tackled by the developers, I don't see confidence coming back. The greater uncertainties will emerge only after 2015.

Aren't execution delays another major concern?

Investors will give greater weight to companies with good execution track record and will be pessimistic about those which are in execution mode.

With coal prices rising, will power companies take a hit on the margins or will they pass it on?

It depends on the portfolio of the project. If larger part of the portfolio (power sales) is structured in such a way that fuel cost is pass-through, power utilities will be able to pass on the cost through tariffs. Wherever there is no pass-through, there is the option of selling through the merchant route. With higher realisations on the merchant side, utilities are able to absorb the rising costs of coal.

But merchant tariffs during the September and December quarters have softened…

Merchant prices prevailing during the September and December quarters were lower on account of the seasonal impact.

Because of unseasonal rains, merchant prices were low in the period. In March and June quarters, tariffs with bilateral forward contracts are firming up.

Will companies try to shift from merchant power to PPAs, given the volatility in merchant power tariffs?

Merchant route continues to look feasible as that is where normal tariffs (PPA tariff) would go, if coal prices continue to go up.

Tariffs would settle on a base case at about Rs 3.75 per unit for merchant power. There is no difficulty in achieving these kind of tariff realisations on the merchant side going forward.

In PPAs also, aren't utilities facing the risk of higher costs than the pass-through component for fuel inflation?

In a market like India, it is reasonable to assume a 6-7 per cent rise in coal prices from the levelised tariffs' point of view.

If the rise is sharper than 6-7 per cent, it could become an issue. However, coal prices in India are normally steady.

Is Lanco looking at more coal asset acquisitions abroad, post-Griffin Coal deal?

After the Griffin acquisition, our strategy will be to look out for green-field mines, where our investments will be spread over a longer period. Since Griffin is already in operation, it will meet our requirements after 2015.

How much time does it take for a power company to develop a captive mine?

That depends on a number of factors. If approvals are obtained in time, it will take about three-four years to start production. But getting approvals, especially environmental clearances, has become difficult these days.

How much of the coal linkages is Coal India ready to provide for your upcoming projects?

Coal India is willing to supply about 70-75 per cent of the requirements now. The future is highly uncertain since it may reduce the supply to 60 odd per cent.

By 2015, there may be some clarity on the issue. Currently, the balance requirement is procured through e-auction which is at a premium to linkage price — between Rs 2,000 and 2,500 per tonne.

How are power companies, coping with rising interest costs?

The current cost of borrowings is around 12-12.5 per cent. Typically, companies such as Lanco, which have certain amount of import component in their capex, are able to access vendor financing products such as buyer's credit.

That keeps interest costs under control. Therefore, the cost of borrowing could be lower on a weighted average basis.

Are you refinancing any of the projects commissioned? Does the company have any intention of raising external commercial borrowings (ECB)?

Refinancing will optimise the cost structure. The cost of borrowing could fall to much lower than 12-12.5 per cent. The savings can be to the extent of 100-150 bps.

Borrowing by way of ECB is in the formative stages. We have applied to Chinese banks to lend to our projects. We hope to get get some clarity by September.

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