BTG order with Harbin provides more visibility on growth; Buy
What's changed
Lanco Infratech has placed a 10.5 GW BTG order with Harbin Power (as per
Chinese State Asset Supervision and Administration commission) for
future projects which are yet to be announced. The order is for projects
beyond the current 9.2 GW of capacity in the pipeline and is for the BTG
portion. However, the company declined to comment on its pricing.
Implications
We view this newsflow as positive as we believe Lanco is positioning itself
for the next phase of growth beyond the current 9.2 GW of projects under
operation, construction and development. Although there is little visibility
on pricing of the order, media reports (DNA Money, on September 16)
indicate that the BTG order may have been placed at about Rs6.8 mn/MW
against current market price ranging between Rs25-30 mn/MW. Assuming
Lanco were to procure equipment at around that price, its fixed costs could
potentially reduce to Rs0.37-0.40/kwh vs Rs1.0-1.1/kwh at current market
prices, in our view. We await further clarity on pricing and the projects
before we factor it into our valuation.
Valuation
We maintain Buy on Lanco and raise our 12-month SOTP-based TP to Rs81
(from Rs66 earlier), implying potential upside of 18%. We have now
reflected the improved visibility of 3.96 GW of projects under development
and higher construction margins. Lanco has recently completed financial
closure of its Babandh power project. We reduce our FY11E-13E EPS
estimates by 6%-20% to reflect accelerated depreciation for its newly
commissioned projects. On removing the impact of accelerated
depreciation, Lanco is trading at FY12E P/E of about 10X and P/B of 2.7X
(which is at a 20% discount to its peers) with an ROE of about 28%.
Key risks
1) Delays in projects under construction; 2) More than estimated decline in
short-term rates.
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