Saturday, May 30, 2015

Lanco Infratech - Puts hold to Divestment.

Loss-making Lanco Infratech, which has been in the market to sell assets across businesses to reduce debt, has decided to put on hold all divestment plans in India by another two years on hopes of better valuation as it believes the business environment is improving. 

The company has been on the lookout for investors for its roads and power projects and has also been in talks for selling its land bank to raise funds to pare debt. But now, it sees signs of recovery in the economy and hopes that valuations of these assets will improve by 2017, when it can consider divestment. 

"We were looking for divestment opportunities but now we don't want to sell any Indian asset for another two years. We feel that problems in power sector are getting resolved and there would be a pick-up in road toll collection and this will improve valuations of our projects," Chief Operating Officer T Adi Babu, told ET. 

The company will go ahead with its plans to sell stake in its Australian coal asset Griffin. "We are in talks with a strategic partner and would like to sell not more than one-third of our stake. Coal prices have fallen almost 40-50% from their peak levels, so we don't want to divest more at these valuations," he said. 

Lanco has been reeling under huge debts, mounting losses as its power projects were running below full capacity due to lack of fuel, it has huge outstandings with state-owned discoms, and in its road projects too, the company had seen muted toll collection. 

Last month, Lanco Infratech completed the sale of its biggest power plant, Udupi Power Plant, to Adani PowerBSE 0.65 % in a deal which pegs the enterprise value of the Udupi Power plant at Rs 6,300 crore, making it the biggest in the power sector. With the sale of this projects, the company's debt stands at Rs 34,000 crore. 

"We now have gas available to run one unit of our Kondapalli power plant. We are focusing on getting all power projects on stream over the next two years so that we could go for an initial public offer for our power holding company," Adi Babu said. 

Lanco Infratech is one of the companies that have secured gas supply for its stranded 1,108-mw Kondapalli plant under the government's initiative to make cheap imported R-LNG available to gas-based projects so that they can at least run at 35% capacity. 

Adi Babu said that the company hopes to complete the stake sale in Griffin soon so that it has enough liquidity to take forward its plans for the mines. 

In 2011, Lanco Infra acquired the Griffin Coal in Collie, West Australia, for Aus $750 million. Although the mine's operations and financials were in poor shape, Lanco believed that with an investment of Aus $1 billion, it could turn around the business and expand production from the mine which has reserves of 1.1 billion tonnes. 


Sunday, April 12, 2015

GMR Infra - Equity Dilution in Progress.

GMR Infrastructure Ltd is making a considerable progress in shedding debt. As the company completes a series of fund-raising activities, its consolidated gross debt is estimated to fall from Rs.45,800 crore in September last year to less than Rs.40,000 crore in two years.

One is the Rs.1,400 crore rights issue, which is under way right now. The second is conversion of preference shares worth Rs.1,137 crore in September this year. The third is the conversion of 18 million warrants allotted to promoters by February 2016.

The company does not have large capital expenditure plans in the near term. It plans to use most of the new funds to repay debt. If the conversions into equity shares take place as scheduled, there will be a commensurate rise in GMR Infrastructure’s net worth, easing the overall debt to equity ratio, which in September 2014 stood at 3.7. Apart from this, it plans to pursue asset divestment and monetization efforts.

In the first nine months of 2014-15, the company’s finance costs exceeded its operating profit (Ebitda, or earnings before interest, taxes, depreciation and amortization) by Rs.730 crore, resulting in a loss. If these measures actually lead to debt reduction, there is a good chance that financial pressure will ease.

Markets, however, have given a mixed reaction. As GMR Infrastructure announced the rights issue, the stock lost 11% in March. One reason is the 15% discount it offered in the issue.

The other is the fear that power assets will remain a sticky problem. The segment is losing money for some time now. Despite the recent positive developments, it is not yet clear when the troubled assets will turn around.

One-fourth, or 623 megawattS (MW), of its current operating power capacity is idle. If one includes the 768MW GMR Rajahmundry Energy Ltd plant that is waiting for fuel to start operations, the non-operating power capacity can be substantially higher.

The new scheme from the government can light up these plants. It, however, supports only 30% of the capacity and is not a long-term solution. Also, companies are not allowed to provide return on equity, which means value accretion from these plants can be low or limited for now.

The other grey area is the 1,370MW GMR Chhattisgarh Power Project. The project—which has gained coal blocks in the recent auctions—is able to tie up 45% of the capacity through power purchase agreements (PPAs) till now.

Government rules stipulate that a company sell the majority (85%) of the power generated from bagged coalfields through long- or medium-term PPAs. With state electricity boards slow in clinching the pacts, GMR Infrastructure can face a challenge in finding a solution in the medium term. “The only problem with GMR is that it has to quickly hunt for PPAs as only 15% of the coal allotted can be used for merchant capacity and the balance if not used under PPA will have to be sold at a loss to Coal India,” Antique Stock Broking Ltd said in a 17 March note.

Overall, it is good that GMR Infrastructure is deleveraging its balance sheet. But shareholders may see notable value when the power segment stops making losses or is on a definitive revival path.


Sunday, March 22, 2015

Shale Oil - Production Numbers.

The main reason I characterize shale oil production as a Ponzi scheme is because of the fast decay of shale oil wells as compared to virtually all other oil production. One chart is enough to give a good indication of the progress and problems of oil from shale:

Here we have a compilation by the EIA for production of the average well in the Eagle Ford shale, but it serves well as a model for shale oil in general. Two very interesting points should be immediately clear:

1. The rate at which oil comes out of freshly drilled wells has greatly improved in the last five years since 2009.

2. The amount of oil that shale wells deliver is substantially front-loaded. More than 50% of all the oil you will see from a shale well is recovered in the first two years and the greatest proportion of that will appear in the first six months.

Ultimately, and far sooner than most analysts believe, U.S. shale production will consist of ever-less productive wells that cost more to drill, take longer to pay for themselves and generate less oil. The EIA believes that nothing like that will occur for at least the next 25 years. I think that the peak of U.S. shale potential will be reached in the next 10 years, if it hasn't been already -- and that is when the pyramid will begin to fall apart.

Meanwhile, oil companies have to scramble to generate ever more investment to drill ever less productive wells, just to keep up with production targets. That ever ramping chase of capital just to stay even sounds more than a bit familiar. Shale oil does share many of the characteristics of a Ponzi scheme.


Friday, January 23, 2015

Stay away from Suzlon for next 1-1.5 years.

Suzlon, A classic case of why you need to be a Bond Holder.

Due to the the FCCB and loan pressure, Suzlon was forced to sell of Senvion Aquisition that they made. Even after all the goodies being presented in the article below, the Suzlon stock will remain around Rs 15 for around 1-2 year, until all the foreign currency convertible bonds valued at Rs 3,000 crore (Rs 30 billion) is converted into equity next year.

Stay away from Suzlon for next 1-1.5 years.

Suzlon group chairman Tulsi Tanti outlined the company’s plans and debt-reduction strategy in a conference call from Davos.

Edited excerpts:

How will the deal help reduce Suzlon’s debt? When will the company turn profitable?

Suzlon has a total debt of Rs 16,500 crore (Rs 165 billion).

We are raising about Rs 7,200 crore (Rs 72 billion) through sale of Senvion.

About Rs 6,000 crore (Rs 60 billion) will be used to repay loans and Rs 1,200 crore (Rs 12 billion) will go to fund operations.

We have issued foreign currency convertible bonds valued at Rs 3,000 crore (Rs 30 billion) and we hope this will be converted into equity next year.

The balance Rs 7,500 crore (Rs 75 billion) debt includes low interest dollar denominated debt worth Rs 4,000 crore and Rs 3,500-crore (Rs 35-billion) worth working capital loans.

There will be no principal payments till 2019.

By the next financial year, our interest costs will reduce 50 per cent to Rs 800 crore or Rs 8 billion (from Rs 1,600 crore or Rs 16 billion now).

Suzlon will be making profit in the next financial year.

Our interest cost will reduce, sales volume will go up.

Our break-even level has come down and we expect the cost structure to improve further.

The deal valuation is in line with current market estimates.

This is a European asset and I believe we got a reasonable valuation.

We are happy with it. When we acquired Senvion, one Euro was equal to Rs 60; now it is Rs 72.

There is an appreciation of 20 per cent in the exchange rate.

We purchased Senvion for 1.4 billion Euros and now we get about 1.1 billion Euros (1 billion Euro in cash sale, an additional 50 million Euros based on the company meeting certain performance criteria and technology for offshore wind farms valued at about 650 million Euros).

I do not see it as a major loss for the company.

What will be the key focus area of Suzlon now?

Our focus will be on India, the US and other emerging markets including China, Brazil, South Africa, Turkey and Mexico.

We will focus on all high growth markets and there will be no restriction on us to enter any other markets.

The Indian government wants to add 10,000 MW of wind capacity each year.

We have not been able to tap opportunities earlier because of liquidity crunch and now we will be able to address it.

We have 2500 customers in India and abroad and we will address their requirements and grow our market share.

The deal helps us to strengthen our balance sheet. It is a win win for us. We have manufacturing and project execution capabilities and we are confident we will be able to deliver without making much capital expenditure.

Will Suzlon sell its non-core assets. The company also has plans for solar business?

We planning to put plants in Rajasthan, Andhra Pradesh and will sell some of the production capacity which is not very useful.

We have developed competencies in renewable energy and we want to leverage it for solar business.

We will introduce hybrid solar-wind projects.