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Acquisition of Griffin Coal in Australia:
Long-term value accretive…
Lanco Infratech (LITL) has entered into a binding agreement to acquire
Griffin Coal’s assets in Indonesia. The company has a resource of 1.1
billion tonnes of coal (JORC estimates) and an extractable reserve of
310 million tonnes (MT). The acquired company has an operational
asset with annual production of 4 MT. The management has indicated
that production can be ramped up to ~5.5 - 6 MT by de-bottlenecking.
The deal size is AU$750 million. The company intends to finance the
acquisition with a debt-equity mix of 70:30. LITL will make a payment in
three instalments over the next four years for the acquisition. The deal
implies a valuation of AU$ 0.6/tonne of resources and AU$2.6/ tonne of
reserves. The company intends to do a capex of AU$900 million to ramp
up the production from the existing 4.5 MT to 15-16 MT by CY15/16.
We believe the acquisition will mitigate long-term fuel risks, going
forward, as the company intends to increase its operational capacity
from ~ 2682 MW to 15,000 MW by FY15. The debt-equity pre-Griffin
transaction for FY12E is 2.9x.
Rationale for acquisition – fuel security
By 2015, the company intends to have 15000 MW. Assuming 30% of the
coal requirement is met through imports LITL would require 15-20 MTPA
(assuming kcal of 4,800 kcal). The long-term sourcing from Griffin would
ensure the profitability of the power business and thereby justifying the
acquisition. In the conference call, the management has indicated that
more acquisitions for thermal coal assets cannot be ruled out.
Valuation and View
With the acquisition of Griffin Coal, the company has mitigated fuel risks
to a certain extent.
The company’s capacity addition of 1870 MW in H2FY11 is on track (600
MW already commissioned). We expect a pick-up in the EPC vertical in
H2FY11. With capacity ramp up in the power vertical, several projects
nearing their commissioning schedule and steady cash flow generation
on account of the company’s existing operational projects, we see limited
dilution and steady profitability, going forward.
At the CMP of | 63, the stock is trading at a P/E of 25.9x (FY11E) and 17.0x
(FY12E) and P/BV of 4.4x (FY11E) and 3.6x (FY12E). We reiterate our
positive stance on the stock with a price target of | 73 (SOTP valuation).
The primary value driver for Lanco Infratech is the power segment, which
is valued at | 45 per share (62% of valuation) followed by EPC and others
that includes real estate.
Key highlights of the transaction
• Deal size and funding
The deal size is AU$~750 million payable in three instalments.
The company intends to fund this through a debt-equity mix of
70:30. The deal is at a valuation of AU$0.6/tonne of resources and
AU$2.6/tonne of reserves.
• Access to debt free, operational asset
The company has a history of missed payments as it missed an
AU$25 million payment to its bond investors in December 2009.
However, the management has indicated that in the acquisition
LITL would not take on debt of Griffin.
• Strategic location
The mine, which is just 85 km away from the nearest port in
Western Australia, is currently producing four million tonnes per
annum (MTPA). The Griffin mine has a calorific value of 4700-4800
kcal. The moisture content is 21-24%, ash content is 8-13% and
sulphur content is 0.5-0.75%. The mine is connected to the port
through a rail line. The management expects the landed price In
India to be $68/tonne (4800 kcal). The current market price of
6700 kcal value is ruling at $115/tonne.
• Capacity ramp up to 15-16 MT by CY15
The company will incur a capex of AU$900 million to ramp up the
capacity from the current 4 MT to 15-16 MT by CY15/16. The
capex would be mainly required for scaling up rail and road
infrastructure.
About Griffin Coal mines
Griffin Coal is privately held by businessman Rick Stowe through
Devereaux Holdings. GCMC owns coal mining assets in Australia and
employs the staff while Carpenter Mine Management has the contract
from GCMC to carry out mining operations. Griffin, in December 2009,
had defaulted on debt servicing obligations and was subsequently placed
under administration. The administrators invited global bids for the sale of
Griffin’s coal mining assets. LITL, after emerging as the highest bidder,
has agreed to acquire it as indicated by media reports.
Other key developments
EPC order of | 4100 crore from Moser Baer projects; moving from in-house
EPC player to a complete EPC player
LITL has been awarded an EPC contract worth | 4100 crore for setting up
a 1,320 MW (2X660 MW) power plant by a subsidiary of Moser Baer
Projects Pvt Ltd. The scope of the contract includes complete main plant
and BOP package including civil and structural works on an engineering,
procurement and construction basis. Earlier, during FY11, the company
bagged orders worth | 1190 crore from Mahagenco – a BOP contract for
1980 MW. The current order book post the Moser Baer order stands at |
29,525 crore.
Emerges successful bidder for road project
LITL has emerged as a successful bidder for two-laning with paved
shoulders of Aligarh to Kanpur Section of NH-91 from 140 km to 418.162
km in Uttar Pradesh on design, build, finance, operate and transfer
(DBFOT) on toll basis of National Highways Authority of India (NHAI).
The scope of work involves two laning with paved shoulders of existing
road, repair, widening and reconstruction of three major and 29 minor
bridges, construction of five new rail over-bridges, four toll plazas and
other wayside amenities.
The project involves an investment of around | 1,000 crore. The grant
from NHAI would be | 287.91 crore. The concession period for the project
is 12 years including a construction period of 18 months. The
concessionaire will have the right to collect toll over the entire concession
period starting from the commercial operations date of the project
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