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Lanco Infratech:: Results below estimates; Maintain buy
Lanco Infratech Ltd’s (LITL) Q3FY11 results were below our
estimates. Revenue was 41% lower than our estimate at
Rs15.6bn, due to under-performance by the power segment.
This trend in the power segment is expected to continue in
FY11E but reverse in FY12-13E, as the regions where LITL’s
power plants are located have state assembly elections
during the period. Factoring in the overall sluggishness in the
EPC space, we have revised our FY13E target P/E multiple to
8x, and thus value the E&C segment at Rs22/share. The power
segment is valued at Rs47/share. Overall, we arrive at SOTP
value of Rs73/share, which holds a 92% upside from the CMP.
We recommend Buy on the stock.
Results below estimates: Revenues during the quarter degrew
3% YoY to Rs15.6bn, against our estimate of Rs24.5bn.
The deviation was due to lower power revenues, which
declined 36% QoQ to Rs8.5bn. Adj. PAT for Q3FY11 stood at
Rs1.1, vis-a-vis our estimate of Rs1.5bn.
Lower margins for E&C segment: We believe the margins of
E&C segment will come down to ~14%.
Change in Estimates: Assuming lower power realizations,
FY11E & FY12E revised revenue estimates now stand at
Rs103bn (-12%) and Rs162.5bn (-4%). However, due to the
change in depreciation policy and assuming lower E&C
margins, the revised PAT estimates are Rs7.4bn (18%) and
Rs18.7bn (36%) in FY11E and FY12E, respectively.
Valuation: The stock is currently trading at 4.8xFY13E P/E
and 1.7xFY13E P/B, which we believe is at a significant
discount to its fair value. We thus recommend Buy.
Q3FY11 results below estimates
Q3FY11 results of LITL were below estimates. Revenues for Q3FY11 were Rs15.6bn, down 3% YoY
and 27% QoQ. Revenues for the quarter were 41% lower than our quarterly estimate of Rs26.5bn.
The decline in revenue was primarily on account of lower than expected power revenues, which
declined 36% QoQ to Rs8.5bn (we estimated power revenues for the quarter at Rs13.1bn). The
company attributed the poor performance of the power segment to lower power demand from
SEBs, that were more inclined to buy power from the UI market rather than through bilateral
contracts. During the quarter, the company traded 42% of gross generation, and the average
realisations were Rs3.76/unit. Lower demand from SEBs also resulted in lower than expected PLFs
and a 38% decline in the volumes of LITL’s trading arm.
This is the second consecutive quarter where the company has continued to sell a part of
Kondapalli II’s gross generation in the UI market. UI sale from Unit 2 of Amarkatak was expected.
SEBs backing down and resorting to UI power is a phenomenon observed across the country, and
this has affected the PLF and realizations of all major IPPs.
The company changed the depreciation policy of Amarkatak and Kondapalli II to SLM form WDV
with retrospective effect and thus there was a depreciation write-back of Rs4bn and a consequent
increase in tax expense of Rs2.5bn. Overall Q3FY11 PAT was reported at Rs1.64bn. Adjusted PAT
for the quarter was Rs1.1bn, against our estimate of Rs1.5bn.
Changes in Estimates
In view of the developments in the power sector and the change in depreciation policy adotpted
by the company, the following are the changes made to our estimates:
The share of outside EPC order in total power EPC order-book has increased from 5.2% at the
end of Q2FY11 to 21% at the end of Q3FY11. Also, the company has bagged a NHAI project
between Aligarh and Kanpur. Thus, we believe the margins of the segment will come down
to ~14% going forward.
The transmission line for Udupi TPP is not ready yet and thus the PLF of the plant will get
impacted once Unit 2 gets operational. The management has indicated that the line will not
be ready before July 2011. Incorporating a further delay from management’s guidance, we
have assumed that for a large part of FY12E the plant will be recovering only its normative
PAF under the PPA.
Extrapolating the trend of last two quarters, we believe that LITL will continue to sell a
portion of the Kondapalli II power on UI, and will thus report suppressed realisations during
FY11E. We have thus, revised our FY11E realization from Rs4.5/unit to Rs4/unit and FY12E
realisation form Rs4/unit to Rs3.5/unit. However, there is a strong possibility that FY12E
realisation will surpass our estimate as Tamil Nadu assembly elections are due in 2011-12.
Similarly, we expect realisations from Amarkantak, also to remain suppressed at Rs2.8/unit
during the current year as it will continue to sell ~50% of gross generation on UI. We have
assumed that since Uttar Pradesh too will be facing elections in FY12-13E, the realisations will
improve to Rs3/unit in FY12E and Rs2.6/unit in FY13E.
Overall, we revise out revenue estimates downwards to Rs103bn (-11.7%) and 162.5bn (-4%) for
FY11E & FY12E. However, due to the change in depreciation policy our revised PAT estimates are
higher by 18% and 36% at Rs7.4bn & Rs18.6bn for FY11E & FY12E.
Valuation
LITL has corrected sharply by over 40% in the last three months, primarily due to a) concerns on
the financial health of SEBs and particularly its impact on merchant power players, b) highly
leveraged balance sheet of LITL and c) dependence of E&C segment on internal orders. We
concede that LITL has a relatively high leverage when compared to utilities like NTPC and PGCIL.
However, LITL’s leverage is relatively higher as it has under-taken a capacity expansion of over 4x
its existing scale. Going forward, as under-construction capacity gets operational leverage will
reduce.
Deteriorating financial condition of SEBs is a cause for concern and more of a systemic issue. The
current practice of SEBs backing down can only be a temporary measure, and by no means a
solution. A sustainable solution to the existing scenario is reforms in the T&D sector that helps to
de-politicise the power sector.
In the near term, we see this trend reversing in regions of operation of LITL. Both Tamil Nadu and
Uttar Pradesh will have assembly elections in 2011-12 (LILT has Amarkantak in Uttar Pradesh,
which is practically selling the entire power in the short-term market, and Kondapalli in Andhra
Pradesh).
We believe that concerns over the dependence of the EPC segment on internal orders has been
to some extent addressed as the company has already bagged two big outside power EPC orders.
The outside power EPC orders now constitute 21% of its overall power EPC order-book. However,
due to lesser proportion of outside orders in comparison to other EPC players, we continue to
value the EPC segment at a 20% discount to its construction peers, i.e. 8x FY13E P/E.
Due to a downward revision in EPC & the construction segment’s margins and P/E multiple, the
revised FY13E fair value of the segment is Rs22/share, against earlier fair value of Rs34/share. The
change in depreciation policy has also brought down plant-wise DCF based value to Rs47/share,
from Rs53/share. Therefore, the revised SOTP fair value now stands at Rs73/share, i.e. 19.5%
downward revision from our earlier target price. At 4.8xFY13E P/E and 1.7xFY13E P/B, the stock is
trading at a significant discount to its fair value, we therefore maintain Buy on the stock. Our
target price implies a FY13E P/B multiple of 2.7x, and holds a 92% upside from the CMP.
Projects update
Udupi Power Plant (1200MW) started commercial operations in Dec 2010. The plant operated
at a PLF of 90% in the month of Dec 2010.
Anpara TPP is expected to get operational in FY12E.
LITL bagged a turn-key thermal power EPC contract for a 1200MW from Moser Baer during
the quarter. The project is worth Rs 40bn.
The company has also won a NHAI project, between Aligarh and Kanpur. The order is of
~Rs10bn, of which Rs2.9bn will be received as grant from NHAI.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lanco Infratech:: Results below estimates; Maintain buy
Lanco Infratech Ltd’s (LITL) Q3FY11 results were below our
estimates. Revenue was 41% lower than our estimate at
Rs15.6bn, due to under-performance by the power segment.
This trend in the power segment is expected to continue in
FY11E but reverse in FY12-13E, as the regions where LITL’s
power plants are located have state assembly elections
during the period. Factoring in the overall sluggishness in the
EPC space, we have revised our FY13E target P/E multiple to
8x, and thus value the E&C segment at Rs22/share. The power
segment is valued at Rs47/share. Overall, we arrive at SOTP
value of Rs73/share, which holds a 92% upside from the CMP.
We recommend Buy on the stock.
Results below estimates: Revenues during the quarter degrew
3% YoY to Rs15.6bn, against our estimate of Rs24.5bn.
The deviation was due to lower power revenues, which
declined 36% QoQ to Rs8.5bn. Adj. PAT for Q3FY11 stood at
Rs1.1, vis-a-vis our estimate of Rs1.5bn.
Lower margins for E&C segment: We believe the margins of
E&C segment will come down to ~14%.
Change in Estimates: Assuming lower power realizations,
FY11E & FY12E revised revenue estimates now stand at
Rs103bn (-12%) and Rs162.5bn (-4%). However, due to the
change in depreciation policy and assuming lower E&C
margins, the revised PAT estimates are Rs7.4bn (18%) and
Rs18.7bn (36%) in FY11E and FY12E, respectively.
Valuation: The stock is currently trading at 4.8xFY13E P/E
and 1.7xFY13E P/B, which we believe is at a significant
discount to its fair value. We thus recommend Buy.
Q3FY11 results below estimates
Q3FY11 results of LITL were below estimates. Revenues for Q3FY11 were Rs15.6bn, down 3% YoY
and 27% QoQ. Revenues for the quarter were 41% lower than our quarterly estimate of Rs26.5bn.
The decline in revenue was primarily on account of lower than expected power revenues, which
declined 36% QoQ to Rs8.5bn (we estimated power revenues for the quarter at Rs13.1bn). The
company attributed the poor performance of the power segment to lower power demand from
SEBs, that were more inclined to buy power from the UI market rather than through bilateral
contracts. During the quarter, the company traded 42% of gross generation, and the average
realisations were Rs3.76/unit. Lower demand from SEBs also resulted in lower than expected PLFs
and a 38% decline in the volumes of LITL’s trading arm.
This is the second consecutive quarter where the company has continued to sell a part of
Kondapalli II’s gross generation in the UI market. UI sale from Unit 2 of Amarkatak was expected.
SEBs backing down and resorting to UI power is a phenomenon observed across the country, and
this has affected the PLF and realizations of all major IPPs.
The company changed the depreciation policy of Amarkatak and Kondapalli II to SLM form WDV
with retrospective effect and thus there was a depreciation write-back of Rs4bn and a consequent
increase in tax expense of Rs2.5bn. Overall Q3FY11 PAT was reported at Rs1.64bn. Adjusted PAT
for the quarter was Rs1.1bn, against our estimate of Rs1.5bn.
Changes in Estimates
In view of the developments in the power sector and the change in depreciation policy adotpted
by the company, the following are the changes made to our estimates:
The share of outside EPC order in total power EPC order-book has increased from 5.2% at the
end of Q2FY11 to 21% at the end of Q3FY11. Also, the company has bagged a NHAI project
between Aligarh and Kanpur. Thus, we believe the margins of the segment will come down
to ~14% going forward.
The transmission line for Udupi TPP is not ready yet and thus the PLF of the plant will get
impacted once Unit 2 gets operational. The management has indicated that the line will not
be ready before July 2011. Incorporating a further delay from management’s guidance, we
have assumed that for a large part of FY12E the plant will be recovering only its normative
PAF under the PPA.
Extrapolating the trend of last two quarters, we believe that LITL will continue to sell a
portion of the Kondapalli II power on UI, and will thus report suppressed realisations during
FY11E. We have thus, revised our FY11E realization from Rs4.5/unit to Rs4/unit and FY12E
realisation form Rs4/unit to Rs3.5/unit. However, there is a strong possibility that FY12E
realisation will surpass our estimate as Tamil Nadu assembly elections are due in 2011-12.
Similarly, we expect realisations from Amarkantak, also to remain suppressed at Rs2.8/unit
during the current year as it will continue to sell ~50% of gross generation on UI. We have
assumed that since Uttar Pradesh too will be facing elections in FY12-13E, the realisations will
improve to Rs3/unit in FY12E and Rs2.6/unit in FY13E.
Overall, we revise out revenue estimates downwards to Rs103bn (-11.7%) and 162.5bn (-4%) for
FY11E & FY12E. However, due to the change in depreciation policy our revised PAT estimates are
higher by 18% and 36% at Rs7.4bn & Rs18.6bn for FY11E & FY12E.
Valuation
LITL has corrected sharply by over 40% in the last three months, primarily due to a) concerns on
the financial health of SEBs and particularly its impact on merchant power players, b) highly
leveraged balance sheet of LITL and c) dependence of E&C segment on internal orders. We
concede that LITL has a relatively high leverage when compared to utilities like NTPC and PGCIL.
However, LITL’s leverage is relatively higher as it has under-taken a capacity expansion of over 4x
its existing scale. Going forward, as under-construction capacity gets operational leverage will
reduce.
Deteriorating financial condition of SEBs is a cause for concern and more of a systemic issue. The
current practice of SEBs backing down can only be a temporary measure, and by no means a
solution. A sustainable solution to the existing scenario is reforms in the T&D sector that helps to
de-politicise the power sector.
In the near term, we see this trend reversing in regions of operation of LITL. Both Tamil Nadu and
Uttar Pradesh will have assembly elections in 2011-12 (LILT has Amarkantak in Uttar Pradesh,
which is practically selling the entire power in the short-term market, and Kondapalli in Andhra
Pradesh).
We believe that concerns over the dependence of the EPC segment on internal orders has been
to some extent addressed as the company has already bagged two big outside power EPC orders.
The outside power EPC orders now constitute 21% of its overall power EPC order-book. However,
due to lesser proportion of outside orders in comparison to other EPC players, we continue to
value the EPC segment at a 20% discount to its construction peers, i.e. 8x FY13E P/E.
Due to a downward revision in EPC & the construction segment’s margins and P/E multiple, the
revised FY13E fair value of the segment is Rs22/share, against earlier fair value of Rs34/share. The
change in depreciation policy has also brought down plant-wise DCF based value to Rs47/share,
from Rs53/share. Therefore, the revised SOTP fair value now stands at Rs73/share, i.e. 19.5%
downward revision from our earlier target price. At 4.8xFY13E P/E and 1.7xFY13E P/B, the stock is
trading at a significant discount to its fair value, we therefore maintain Buy on the stock. Our
target price implies a FY13E P/B multiple of 2.7x, and holds a 92% upside from the CMP.
Projects update
Udupi Power Plant (1200MW) started commercial operations in Dec 2010. The plant operated
at a PLF of 90% in the month of Dec 2010.
Anpara TPP is expected to get operational in FY12E.
LITL bagged a turn-key thermal power EPC contract for a 1200MW from Moser Baer during
the quarter. The project is worth Rs 40bn.
The company has also won a NHAI project, between Aligarh and Kanpur. The order is of
~Rs10bn, of which Rs2.9bn will be received as grant from NHAI.
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