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Lanco Infratech (LITL) has concluded a binding agreement
for acquiring the assets of Griffin Coal thereby enhancing its fuel security in the face of
increasing uncertainties on the availability and pricing of coal. We believe that the
acquisition—assuming reasonable valuations—will plug the missing piece in LITL’s
portfolio of projects versus peers and partially reduce dependence on Coal India Ltd.
We maintain our BUY rating and target price of Rs80/share.
Acquires Australian coal mine with 1.1 bn tons resource base
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, which currently has production of 4 mtpa that
could be ramped up to 15 mtpa. The mine has a resource base of 1.1 bn tons (as per JORC code)
and is located on Western coast of Australia with the nearest port being 85 km from the mine.
Acquisition to supplement supply from domestic linkage coal
Although the exact nature and pricing of transaction has not been disclosed, we like LITL’s strategy
of acquiring overseas coal assets thereby giving itself access to owned coal resources in the face of
increasing uncertainties on the availability and pricing of coal from Coal India Ltd. 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 that has secured coal allocation 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 (provided done at correct valuation) is a step in the right direction as it
enhances the developer’s control over pricing and availability of coal. The management has
indicated that apart from firing its power plants, the coal could also be used to enter into the coal
trading business.
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 target
price. We await more details on the recent transaction before factoring it in our estimates. Our
SOTP-based target price now 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 Rs1/share, (5) value
from sale of carbon credits of Re1/share and (6) net debt of Re1/share.
Griffin Coal—debt strain and history of missed payments
Griffin Coal is the coal mining subsidiary of Griffin group and is Western Australia’s second
largest miner. However, the company has in the past been plagued with mounting debts
(amounting to ~AU$700 mn as of end-CY2009) and has had a history of missed
payments—e.g. 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, take note that the LITL management has indicated that it is a debt-free acquisition
by LITL and it will not take on any debt on Griffin’s book.
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