Kotak Sec: Buy Lanco Infratech traget 83

Unflagging execution. We reiterate our BUY rating on Lanco Infratech (LITL) as the
financial closure of Babandh and 10.6 GW contract for equipment re-emphasize LITL’s
commitment of achieving stated capacity target of 15 GW by FY2015E. We like
(1) increased traction on development projects, (2) earnings visibility on near-term
projects and (3) balanced mix of long-term and merchant sale. We reiterate our BUY
rating with a revised target price of Rs83/share


Financial closure of Babandh and recent equipment orders strengthen confidence
LITL announced financial closure of the first phase of its Babandh project (1,320 MW) in Orissa,
which was closely followed by Harbin of China having received an order for 10.6 GW (16*660
MW), strengthening our confidence on LITL’s stated goal of achieving 15 GW of installed capacity
by FY2015E. We note that the recent draft proposals incentivize peak-load generation, and LITL
with 854 MW of gas-based capacity (and another 766 MW under construction) is well-positioned
to cater to this demand. We note construction activity has already commenced at the sites of all
the three development projects—Kondapalli III (19.3%), Vidarbha (8.8%) and Babandh (6.2%).
Incremental commissioning of 1.8 GW to propel near-term earnings
LITL’s currently operational capacity stands at 2,082 MW driven by robust execution and
aggressive commissioning in the past 12 months. Along with that, LITL’s near-term projects
(expected to be commissioned in FY2011) are progressing well and are expected to commission as
per the schedule. These projects include the second unit of 600 MW at Udupi and another 1,200
MW at Anpara. We expect LITL’s operational capacity to reach 3,957 MW by end FY2011E.
As highlighted in Exhibit 2, majority of the capex has already been incurred for the projects likely
to commission in FY2011E, posing limited risk to near-term earnings.
Reiterate BUY with a revised target price of Rs83/share
We retain our BUY rating with a revised target price of Rs83/share as we include 1,320 MW at
Babandh into our SOTP. Our SOTP-based target price now comprises—(1) DCF-equity of power
project portfolio at Rs65/share, (2) construction business valued at Rs16/share at EV/EBITDA of 6X
on FY2012E, (3) real estate project at 50% of NAV ~Rs3/share, (4) DCF equity of BOT road
projects at Re1/share and (5) value from sale of carbon credits of Re1/share and (6) net debt of
Re1/share. Upside risk to our target price emanates from improved visibility on planned projects
that could add another Rs9/share to our target price.