UBS Key Call: Lanco Infratech- Significant positives in recent month

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UBS Investment Research
Key Call: Lanco Infratech 
Significant positives in recent month 
 
„ New company developments are significantly positive
There have been key positive developments for Lanco Infratech (Lanco) in the past
month, including: 1) its engineering, procurement and construction (EPC) division
being awarded a contract by Moser Baer, for a 2x600 MW coal-based power
project; 2) the infrastructure division’s successful bidding for a National Highways
Authority of India (NHAI)-awarded road project with a cost of Rs10bn; and 3) the
1,320 MW (2 x 660MW) Vidarbha thermal power project in Maharashtra, which
has achieved financial closure.

„ 1,200MW project won through international competitive bidding (ICB)
In December 2010, Lanco won an EPC contract by Moser Baer, for a 2x600 MW
coal-based power project. The scope of the contract includes a main plant and
balance of plant (BOP) package including civil and structural works. With a value
of Rs41bn, it contributes around 15% to the current order book. This development
is in line with our expectation and supports our faith in the capability of its EPC
division. Please refer to our note  Management Road show: Key takeaways
published on 29 November 2010.
„ Lanco will construct the Aligarh-Kanpur section of National Highway
Lanco has won a Rs10bn project to construct the Aligarh-Kanpur section of the
National Highway in Uttar Pradesh. The project’s funding is likely to be 50% debt,
25% equity from Lanco and the remainder in a grant from the NHAI. Although the
impact on our price target from this project is only around 1%, we like Lanco’s
selective approach in targeting infrastructure projects.
„ Valuation: Buy rating (UBS Key Call) with a price target of Rs105.00
We base our price target on a sum-of-the-parts valuation. We value Lanco as a
conglomerate with power contributing 66% of its valuation and EPC 28%.


1,200MW coal-based power project win by EPC
Q Lanco’s EPC division was awarded the EPC contract by a Moser Baer group
company, for its 2 x 600 MW coal-based thermal power project. Lanco won
the project through the ICB route.
Q The scope of the contract includes a complete main plant and a BOP package
including civil and structural works on an EPC basis. However, it excludes
non-EPC works taken up by the developer.
Q The value of the contract is Rs41bn. This is the first contract for the EPC
division that involves a full scope of EPC works including the main plant for
an external client. The order contributes around 15% to its current order book.
Q The construction and EPC order book position is around Rs300bn and the
company is aiming for 30% external orders in its order book by FY13. For
FY11, the company has set a target of US$1bn in new external orders. For
FY12, the target is US$2bn.
Q This development is in line with our expectation and confirms our faith in the
capability of its EPC division. Please refer to our note Management Road
show: Key takeaways dated 29 November 2010.
Lanco will construct NH (Aligarh-Kanpur
section)
Q Lanco will build a Rs10bn project to construct a portion of the Aligarh to
Kanpur section of the National Highway in Uttar Pradesh.
Q The company also emerged as a successful bidder for 2-Laning of Aligarh to
Kanpur Section of NH-91 in Uttar Pradesh.  The scope of the work for 2-
Laning involves existing roads, repairs, the widening and reconstruction of
three major and 29 minor bridges, the construction of five new rail-overbridges, four toll plazas and other wayside amenities.
Q The project’s funding is likely to be 50% debt, 25% equity from Lanco and
the remainder in grant from the NHAI. The grant from the NHAI will likely
be Rs2.5-3bn.
Q If we assume a 2x P/BV for infrastructure projects, the project’s impact on
our price target is only around 1%.
Q We like Lanco’s selective approach in targeting infrastructure projects.