Australian Mine Acquisitions Put Indian Cos on Debt Row; GVK Power, Lanco Infratech and Adani Enterprises facing rising of debt

The acquisition of coal assets by Indian companies such as GVK Power, Lanco Infratech and Adani Enterprises last fiscal is now starting to bite with rising debt, inadequate cash flows and a sharp slide in their market capitalisation. Given the concerns over their rising debt and weak performance of their existing business, the market capitalisation of these companies has fallen by 60-80% in the last two years. The biggest challenge that these companies face now is the ability to achieve financial closure on their Australian projects, especially when their cash flows from existing businesses are insufficient and with the high debt to equity. In addition, low stock valuations render additional equity infusion imprudent. Selling stakes in coal mine will not be viable either since coal prices have corrected by close to 30% from their peak, thereby reducing the mark-tomarket worth of these assets. “When these companies acquired these assets, they expected coal demand to continue and did not foresee the various regulatory and economic risks involved. Now the coal prices have corrected and are on the downward trend. These companies will have to see one entire downcycle before these acquired assets are valued like earlier,” said a fund manager who spoke on the condition of anonymity. GVK Power has a stake of close to 10% in Hancock, its Australian mine, while 90% of the equity is controlled by a private company owned by the promoter. Together, they will need to invest around Rs 55,000 crore to develop the coal mine and related infrastructure. Its debt-equity ratio has hit an alarming level of 4 with a debt of around Rs 14,300 crore. Its cash flows have been weak due to the poor performance of its power business because of the lack of gas availability and cost overruns in its airport business. The company’s stock price has plunged 70% in the last two years. According to Deepika Mundra of JP Morgan, the company’s return-on-equity will remain negative due to near doubling of interest costs. Also its interest coverage, or EBIDTA relative to interest outgo, is low at 1.3 and may worsen if operating performance deteriorates further.

“We are considering raising funds through a stake sale and debt. However, we cannot reveal the exact structure,” said Isaac George, CFO of GVK Power. At about seven times, Lanco’s debt to equity is the highest among the three companies. It has a debt of . 32,000 crore and needs an investment of nearly . 25,000 crore to develop the mines. However, the company has already defaulted twice in the current year as it is facing huge losses in its power business which has resulted in an operating loss. The company is not earning enough to cover interest costs, leave alone repaying the loan. Improvement in the near term appears difficult considering falling commodity prices and the bleak demand scenario. Lanco’s officials were not available for comment.
jwalit.vyas@timesgroup.com

 

Source: Economic Times