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UBS Investment Research
Key Call: Lanco Infratech
Maintain Buy
Lanco’s recent stock price performance has been highly volatile
Lanco’s stock price has seen high volatility in the last one month (the stock price
had a range of 20% and the intra-day swings have been even sharper). Some of this
could be attributed to fluctuations in the broader market; however, the impact has
been significantly higher on infrastructure companies. Thus Lanco’s stock price
has also witnessed these sharp changes. However, we maintain that the company
fundamentals remain strong and we view the recent volatility as an attractive
buying opportunity.
Funding is available for the entire portfolio of 9,300MW
Lanco has achieved lenders’ sanction/financial closure for ~4,700MW recently.
These projects include the 732MW gas-based Kondapalli project, Amarkantak
expansion, and Babandh and Vidarbha (1,320MW each). We believe this is a
positive and, to a large extent, addresses the near-term concerns on funding. Please
refer to ‘Underperformance = buying opportunity’, dated 15 October 2010.
Strong execution and judicious mix of long-term and merchant is the key
We believe the key differentiators among the Independent Power Producers (IPP)
are strong execution, near-term capacity addition, and a judicious mix of long-term
and merchant power. We think Lanco is well placed on all these. Please refer to
our note ‘Key play on execution and merchant power,’ dated 20 August 2010.
Valuation: Buy (UBS Key Call) rating with a price target of Rs105
We base our price target on our sum-of-the-parts valuation. We value Lanco as a
conglomerate with power contributing 66% of its valuation and EPC 28%. We
continue to prefer Lanco as our top pick in the power utilities space.
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