Edelweiss: Lanco Infratech - strong project pipeline

Lanco Infratech (LANCI IN, INR 70, Hold)

Debt syndication of 732 MW Kondapalli unit achieved

Lanco Infratech (Lanco) has achieved sanction of debt for 2x366MW gas-based project at Kondapalli from a consortium of banks and FIs led by Axis Bank and formal financial closure is expected by October end. Interestingly, this has been achieved without assured fuel (gas) supplies as well as PPA. Since construction of the project is already underway and equipment orders have also been placed a few months ago, management is confident of commissioning the plant by March 2012 (open cycle) and the combined cycle by Q2FY13. Assuming a selling price of INR 4/kwh and considering generation cost of ~ INR 3.3 - 3.5, the project is expected to add ~ INR 3 to SOTP (adjusting for 59% stake).

Visibility on ~9 GW capacity and plans to scale to 15 GW by 2015

With this project and probably financial closure of Amarkantak 3 & 4 in Q3FY11, Lanco will have a project portfolio of ~8,798 MW including the existing operational ones and those which are under construction / financial closure. Post the recent ~10 GW equipment deal with Harbin (China), management is confident of achieving 15 GW capacity by 2015.

Execution and commercial risks persist

Timely execution within estimated costs, maintaining optimal operational parameters, and ensuring prompt payment / merchant upsides from projects are key for valuations of power projects. Particularly for the Kondapalli 3 & 4 units availability of gas by the time it is commissioned is a key risk. On the EPC front, maintaining superior margins and timely execution are key for valuations.

Outlook and valuations: Fair value at INR 76/share; maintain ‘HOLD’

We have factored in the recent financially closed projects aggregating ~3,200 MW (Babandh, Vidharba and Kondapalli 3 & 4) in our project based valuation based on NPV methodology. As financial closure is awaited for Amarkantak 3 & 4 (1,320 MW) we have not considered INR 3.9 / share in our overall INR 75.8 / share of SOTP which comprises INR 50 / share for power projects and INR 15.8 / share for the EPC business. At CMP of INR 70 / share we maintain our 'HOLD/ Sector Outperformer' recommendation/rating