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Lanco Infratech (LANCI)
Utilities
Acquisition of Griffin Coal. Lanco Infratech (LITL) has acquired the coal assets of
Griffin Coal for a consideration of AU$750 mn, enhancing its fuel security in the face of
increasing uncertainties on the availability and pricing of coal. At AU$0.6/ton of
resources and AU$2.4/ton of recoverable reserves, prima facie the transaction appears
to be reasonable, though acquisition of such a magnitude could strain funding ability.
We maintain our BUY rating and target price of Rs80/share.
Acquisition price of AU$0.6/ton of resource, reasonable in our view
LITL has acquired the coal assets of Griffin Coal for a consideration of AU$750 mn, structured as
an upfront payment along with two deferred installments over the next four years. The acquisition
gives LITL access to 310 mn tons of proven reserves out of total resources of 1.1 bn tons.
Assuming a profitability of AU$16/ton and production of 5.5 mn tons, the transaction implies an
EV/EBITDA multiple of 8.5X on CY2012E EBITDA—at a premium to listed peers, though
incremental export potential could substantially improve blended profitability in the medium term.
At AU$0.6/ton of resource and AU$2.4/ton of reserves, the acquisition appears reasonable
although at a premium to Adani Enterprises’ consideration of AU$3 bn (~AU$0.40/ton of
resource) for the mines of Linc Energy. We believe that the premium over AEL’s acquisition is
justified on account of (1) operational asset with extant production of 5 mtpa, (2) strategic
location on western coast of Australia (closer to India), and (3) proximity of coal mines to extant
port and rail infrastructure, thereby limiting development and inland transportation costs.
Acquisition could further strain balance sheet
LITL had a consolidated net debt of Rs74 bn (excluding associates) as of March 2010 implying a
net debt to equity of 2.2X. We estimate LITL’s net debt to rise to Rs144 bn by end-FY2011E
(including Anpara and Udupi debt) implying a net debt to equity of 3.4X. With an incremental
capex requirement of Rs229 bn over the next four years (see Exhibit 2), we believe that the
acquisition would further strain the balance sheet as it would involve an additional debt of ~Rs24
bn (assuming a 70:30 debt equity) and a capex of ~Rs40 bn for ramping up the production of coal
mines. LITL would, however, see a significant step-up in operational cashflow driven by
commissioning of incremental 2,400 MW of capacity in the near term (Udupi and Anpara).
Maintain BUY with a target price of Rs80/share
We retain our BUY rating with a target price of Rs80/share. Upside risk to our target price could
come from improved visibility on planned projects that could add another Rs9/share to our TP.
Our SOTP-based target price comprises—(1) DCF-equity of power project portfolio at
Rs64/share, (2) construction business valued at Rs15/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, (5) value from sale of carbon credits of Re1/share, and (6) net debt of Re1/share.
Key highlights of the transaction
LITL has entered into a binding agreement with Griffin Energy Group and Carpenter Mine
Management Holdings to purchase 100% shares of Griffin Coal. The acquisition will give
LTIL access to thermal coal mine in Western Australia with current production of 4.5 mtpa
(could be ramped up to 15 mtpa). The mine has a resource base of 1.1 bn tons (as per JORC
code) and an extractable reserves of 310 mn tons. The mine is located on Western coast of
Australia with the nearest port being 85 km from the mine.
We highlight below some salient features of the acquisition and the acquired mine.
` A debt-free acquisition – the acquisition is completely debt-free and LITL will not take
over the debt on books of Griffin coal.
` Funding – management has indicated that the acquisition will be funded through a mix of
debt and equity in a likely ratio of 70:30. While the debt portion will be financed by a
bridge loan from ICICI Bank (with option on choice of currency), equity component would
be funded through internal accruals.
` Operations – the mine has an extant production of 4.5 mtpa at a mining cost of
~AU$31/ton. Griffin Coal is committed to 3 mtpa of coal in domestic market (2 mtpa for
group power plant and 1 mtpa for other domestic consumers) through a long-term coal
supply agreement at a base rate of AU$40/ton (escalable at CPI). Balance 1.5 mtpa is
exported primarily to Asian markets. Management has indicated that LITL is targeting to
reach a cash cost of AU$25-26/ton (though operational efficiencies) and capex on
improved mining equipment. The average GCV of coal from the mine is 4,800 kcal/kg.
` Development plans – LITL plans to ramp up the production to 15-16 mtpa by CY2015-
16E which would involve a capex of AU$900 mn primarily for scaling up the rail and port
infrastructure. Immediate plan is to ramp up the production to 6 mtpa by CY2012E.
Griffin Coal – debt strain and history of missed payments and operational
inefficiencies
Griffin Coal is the coal mining subsidiary of Griffin group and is Western Australia’s second
largest miner. However, the company had been plagued with mounting debts (amounting
to ~AU$700 mn as of end-CY2009) and has a history of missed payments when it missed
AU$25 mn payment to its bond investors in December 2009. Sale of coal mining is part of
the restructuring process that was undertaken post the default. We, however, note that LITL
management has indicated that it is a debt-free acquisition by LITL.
We also highlight that media reports indicate a history of operational inefficiency making
Griffin Coal relatively less competitive that its regional peers. Griffin lost a contract of state
government supplies in 2005 on account of high tender prices stemming from inherent
operational inefficiencies. LITL management has indicated that rising cost was primarily due
to inability of previous management to invest in operational improvements owing to capital
constraints.
Acquisition to supplement supply from domestic linkage coal
LITL’s strategy of acquiring overseas coal assets lends control on pricing and availability of
coal in the face of increasing uncertainties on the availability and pricing of coal from Coal
India. We note that ~51% of LITL’s current portfolio of operational and planned projects is
based on domestic coal linkages. Current portfolio comprises only one project (1,200 MW at
Udupi) which is based on imported coal and that has already secured coal through a firm
fuel supply agreement with PT Adaro of Indonesia.
Given the recent trend of CIL falling short on supply of linked coal, we believe that overseas
acquisition of coal assets is a step in the right direction as it enhances the developer’s control
over pricing and availability of coal. Management has indicated that apart from firing its
power plants, the coal could also be used to enter into coal trading business.
Project execution continues to be strong as Vidarbha achieves financial closure
LITL announced financial closure of its 1,320 MW power project at Vidarbha in Maharashtra
at an appraised project cost of Rs69 bn to be financed by debt of Rs55 bn (80% debt
financing) through a consortium of sixteen banks led by Punjab National Bank. We currently
do not ascribe any value to the Vidarbha project, which is still to complete land acquisition,
secure environmental clearance and secure entire fuel linkage (660 MW linkage allotted).
We note that inclusion of the project in our valuation could add Rs5/share to our target price
of Rs80/share.
EPC division bags external order of Rs41 bn
LITL has been awarded the EPC contract worth Rs41 bn for setting up 1,320 MW (2X660
MW) power plant by a subsidiary of Moser Baer Projects Pvt. Ltd. The scope of contract
includes complete main plant and BOP package including civil and structural works on
engineering, procurement and construction basis. We note that this contract comes on back
of Rs11.9 bn Mahagenco contract (BOP for 1,980 MW plant) in July 2010 and allays
concerns over sustainability of revenue flows from LITL’s EPC division as LITL continues to
build a healthy order book of third-party contracts.
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