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Lanco Infratech Buy
Stock price weakness looks unjustified; reiterate Buy
Lanco's stock was down ~8% yesterday, following the press reports that
PFC/REC - the two lenders would convert their debt in the most profitable
SPV - Lanco Amarkantak (2x300MW) into equity. This weakness was also
exacerbated by concerns on impact of high coal prices on coal availability
for Lanco. To recap, Lanco Amarkantak is the most profitable SPV for Lanco
and generates 35-40% of their annual cash flows and a lower economic
interest in this project raises concern.
However, we find these concerns unjustified as - (1) Firstly conversion of
debt to equity are part of standard loan covenants and is undertaken by
financial institutions during default or some crisis. Considering cash flow
generated in the first quarter is good enough for meeting debt obligations
for FY11, looks unlikely that there has been any default. (2) Secondly at
coupon rate of 13% v/s 11.5% -the loan is extremely profitable for PFC/
REC 3) Thirdly, a significant portion of the loan of this project has been refinanced (more than 50%). 4) Lastly even if the mezzanine loan does get
converted into equity at project level- the dilution would be less than 2%.
In addition, based on our earnings model and project monitoring database,
we find that the projects of Lanco along with Adani Power are the ones in
the private sector, which have shown significant progress at the sites. We
believe, the impact of work progress could be monitored in upcoming Q3-
FY11E and Q4FY11E results of Lanco engineering and construction division.
Lastly thanks to demand slump in coal requirement in Q3FY11, Coal India
pushed a lot of coal volumes through e-auction, which saw a e-auction
prices dipping by INR 500/t qoq - which could benefit interims of some of
the power and cement companies. Reiterate buy with a target price of
INR66.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Lanco Infratech Buy
Stock price weakness looks unjustified; reiterate Buy
Lanco's stock was down ~8% yesterday, following the press reports that
PFC/REC - the two lenders would convert their debt in the most profitable
SPV - Lanco Amarkantak (2x300MW) into equity. This weakness was also
exacerbated by concerns on impact of high coal prices on coal availability
for Lanco. To recap, Lanco Amarkantak is the most profitable SPV for Lanco
and generates 35-40% of their annual cash flows and a lower economic
interest in this project raises concern.
However, we find these concerns unjustified as - (1) Firstly conversion of
debt to equity are part of standard loan covenants and is undertaken by
financial institutions during default or some crisis. Considering cash flow
generated in the first quarter is good enough for meeting debt obligations
for FY11, looks unlikely that there has been any default. (2) Secondly at
coupon rate of 13% v/s 11.5% -the loan is extremely profitable for PFC/
REC 3) Thirdly, a significant portion of the loan of this project has been refinanced (more than 50%). 4) Lastly even if the mezzanine loan does get
converted into equity at project level- the dilution would be less than 2%.
In addition, based on our earnings model and project monitoring database,
we find that the projects of Lanco along with Adani Power are the ones in
the private sector, which have shown significant progress at the sites. We
believe, the impact of work progress could be monitored in upcoming Q3-
FY11E and Q4FY11E results of Lanco engineering and construction division.
Lastly thanks to demand slump in coal requirement in Q3FY11, Coal India
pushed a lot of coal volumes through e-auction, which saw a e-auction
prices dipping by INR 500/t qoq - which could benefit interims of some of
the power and cement companies. Reiterate buy with a target price of
INR66.
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