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US-based financial services firm Morgan Stanley is in talks to acquire a stake in debt-laden Lanco Infratech Ltds thermal power business at a time when Indias electricity producers are struggling with fuel shortages and cost increases.
"Morgan Stanley may pick up a stake in Lancos thermal assets. The two entities have been in talks, said a person aware of the development who spoke on condition of anonymity. A second person aware of the development independently confirmed that the two are in talks.
The potential sale would help the Gurgaon-based infrastructure company, which also has interests in coal, roads, hydropower and wind power, to raise capital and fund its other businesses.
Mint had reported on 14 February that Lanco Infratech had decided to exit the wind power business and mandated Ernst and Young to find a buyer. Lanco has also decided to exit hydropower generation and is in talks with SN Power of Norway.
A Lanco Infratech spokesperson declined to comment on the talks with Morgan Stanley.
Questions emailed to Aluri Rao, a managing director at Morgan Stanley who focuses on private equity transactions in India, and Gautam Bhandari, managing director of Morgan Stanley Infrastructure Partners (MSIP), on Tuesday remained unanswered at the time of going to the press on Thursday.
Lanco has an installed capacity of 4,110 megawatts (MW) across thermal, gas, solar and hydropower projects. An additional 4,968MW of capacity is under construction.
The company has a gross debt of Rs.30,857.6 crore, excluding that arising from the $740 million (Rs.4,070 crore today) acquisition of Australias Griffin Coal Mining Co. Pty. Ltd last year and the working capital loans of its power companies.
Indian power companies are struggling with the countrys worst coal shortage, causing electricity plants to run on minimal supplies of the fuel. Power producers absorb 78% of domestic coal output, and with supplies from state-owned monopoly Coal India Ltd dwindling, they have been forced to burn imported coal, increasing costs.
Overseas utilities have been eyeing potential acquisition targets in the Indian power sector, seeking to derive value from stressed assets, in the belief that the constraints facing electricity producers would have driven down valuations, Mint reported on 2 July.
Morgan Stanley already has a presence in the Indian power business. MSIP led a consortium that in July 2010 invested $425 million in Asian Genco Pte Ltd, making it part of the largest private equity deals in Indias power sector. Its interest in Lanco would appear to be common knowledge in investment banking circles.
"Morgan Stanley is considering investments in thermal projects in south India. It has been looking at Lancos hydro and wind assets; thermal is an additional asset they could consider as Lanco needs capital, said a Mumbai-based investment banker, who did not want to be identified as he is not directly involved in the deal.
A second investment banker, who also spoke on condition of anonymity, said Lanco wants to utilize the proceeds of the sale to fund other projects and has been looking for capital infusion. "It is looking at raising $200-300 million, this person added.
The high fuel costs and low capacity utilization have increased Lancos financial stress. Although income from operations rose by a robust 39.4% in the fiscal year ended 31 March, operating profit contracted 12.3% as fuel and interest costs crimped earnings. Fuel price increases led to a 68% rise in raw material costs. Interest costs rose 39% to Rs.1,053 crore, which dragged the company into losses.
Lanco Infratech reported a loss of Rs.112 crore in the year ended 31 March.
Spark Capital Advisors (India) Pvt. Ltd, in a report dated 31 May, wrote: "On our analysis of operational plants and plants that are to be commissioned in the near future, we view the operational bottlenecks (some beyond the companys control) and financial concerns as key risks. Even though some of these concerns might ease over the next six months, the company is highly dependent on selling off its road assets and on private equity infusion in the power hold(ing) co(mpany).
ICICI Securities Ltd, in a report dated 31 May, wrote: "Divestment of asset (road projects and hydro assets) can lead to a meaningful rerating of the stock as balance sheet stress will decline.
Shares of Lanco Infratech closed 3.02% higher at Rs.16.36 on BSE on Thursday, while the benchmark Sensex rose 0.43% to 17,538.67 points.
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