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Lanco Infratech
▼ Neutral; Previous: Overweight; LAIN.BO, LANCI IN
Loss of risk appetite may keep leveraged asset plays out of favor: Downgrade to Neutral
• Lanco has witnessed 29% erosion in market value in the past month:
Key concerns include high leverage, visible equity funding gap, supply
squeeze of domestic coal and gas, and sizeable exposure to merchant prices.
These concerns may continue to pose risks to earnings estimates and an
overhang on stock performance, notwithstanding the low valuation (9x
FY12E EV/EBITDA). We downgrade to Neutral with Mar-12 PT of Rs45.
• We cut our FY12 and 13 EBITDA estimates by 13% and 6%, on the
back of a) lower PLF across Lanco’s plants, led by fuel availability
concerns, and b) push-back in execution timelines. The upward revision in
our PAT estimates is just a factor of the recent change in depreciation
method adopted by the company. Our PT gets a more severe haircut of
~45% due to a) reduction in operating cash flows due to lower sustainable
PLF, b) Rs33B knock-off of equity funding gap (which has widened since
our last report due to lower operating cash flows), and c) ~60% reduction in
value of pipeline projects. Additionally, we apply a ~20% discount to our
fair value estimate to reflect execution concerns.
• Lanco’s Dec-q adjusted PAT, at Rs309MM, was sharply below our
estimate of Rs1.7B: Lower merchant realization on Kondapalli (Rs3.5,
compared to our estimate of Rs4) was the key reason for the deviation.
Adjustment to the reported PAT of Rs1.64B was mainly related to the
change in depreciation method to SLM, from WDV earlier, made to align
reported profits with those of its peers.
• What can surprise from these levels? Further downside risks emanate
from a) ~Rs30B of debt resides at the parent level for construction working
capital and may become burdensome in a situation of rising interest rates
and falling merchant prices, and b) 17% of SOP still comes from pipeline
projects that may be vulnerable to execution delays. On the other hand, a
return of risk appetite and an improvement in execution would likely cause a
more constructive view on the stock.
Earnings outlook
Our recent concerns on fuel availability and equity funding gap are now factored into
our estimates and PT. We lower coal PLF to 75% (from 75-85%) across Lanco’s
plants, and also push back Udupi execution by a few months. We lower gas PLF to
70% across the board to account for gas supply concerns.
There is uncertainty around finalization of PPA for Amarkantak-II (300MW). Lanco
is negotiating sale agreement with Haryana and expects to get regulated returns with
complete coal pass thru. Currently the company is selling power on UI basis. Going
by our experience in A-I, we await clarity on the PPA and conservatively assume
sale of UI basis for whole of FY12 at Rs2/unit. In subsequent years we assume sale
of regulated basis with complete coal pass through.
These changes result in us reducing EBITDA by 13% for FY12-14E: not as severe as
might be expected, as Lanco’s regulated / PPA projects would recover full fixed cost
(and RoE) at these PLF levels. We increase PAT by 20-27% despite these EBITDA
cuts as we factor in SLM depreciation. Our new PT of Rs45 factors in these PLF
cuts, and also a Rs33B equity funding gap in FY14 which we have now subtracted
from our PT.
Funding requirement and leverage
For Lanco, the estimated consolidated leverage is high at 4.2x and 4.4x in FY11 and
FY12 respectively, which has been an investor concern despite funding tie-up
secured for the company’s entire 9.3GW pipeline. As of Dec-10, Rs30B of the debt
was at the standalone level, most of which are funded at 4:1 and is non-recourse.
In a situation in which liquidity is tight and risk aversion is high, a slowdown in loan
disbursements to underconstruction non-guaranteed return projects (5.5GW, ~59% of
total) could pose arisk to growth. Particularly funding the Griffin acquistion at the
parent level would be at risk.
Valuation and Price target
We are reducing our Mar-12 PT to Rs45 from Rs82 due to a) reduction in operating
cash flows due to lower sustainable PLF, b) Rs33B knock-off of equity funding gap
(which has widened since our last report due to lower operating cash flows), and c)
~60% reduction in value of pipeline projects. Additionally, we take a ~20% discount
to our fair value estimate of Rs55/share to reflect execution concerns
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lanco Infratech
▼ Neutral; Previous: Overweight; LAIN.BO, LANCI IN
Loss of risk appetite may keep leveraged asset plays out of favor: Downgrade to Neutral
• Lanco has witnessed 29% erosion in market value in the past month:
Key concerns include high leverage, visible equity funding gap, supply
squeeze of domestic coal and gas, and sizeable exposure to merchant prices.
These concerns may continue to pose risks to earnings estimates and an
overhang on stock performance, notwithstanding the low valuation (9x
FY12E EV/EBITDA). We downgrade to Neutral with Mar-12 PT of Rs45.
• We cut our FY12 and 13 EBITDA estimates by 13% and 6%, on the
back of a) lower PLF across Lanco’s plants, led by fuel availability
concerns, and b) push-back in execution timelines. The upward revision in
our PAT estimates is just a factor of the recent change in depreciation
method adopted by the company. Our PT gets a more severe haircut of
~45% due to a) reduction in operating cash flows due to lower sustainable
PLF, b) Rs33B knock-off of equity funding gap (which has widened since
our last report due to lower operating cash flows), and c) ~60% reduction in
value of pipeline projects. Additionally, we apply a ~20% discount to our
fair value estimate to reflect execution concerns.
• Lanco’s Dec-q adjusted PAT, at Rs309MM, was sharply below our
estimate of Rs1.7B: Lower merchant realization on Kondapalli (Rs3.5,
compared to our estimate of Rs4) was the key reason for the deviation.
Adjustment to the reported PAT of Rs1.64B was mainly related to the
change in depreciation method to SLM, from WDV earlier, made to align
reported profits with those of its peers.
• What can surprise from these levels? Further downside risks emanate
from a) ~Rs30B of debt resides at the parent level for construction working
capital and may become burdensome in a situation of rising interest rates
and falling merchant prices, and b) 17% of SOP still comes from pipeline
projects that may be vulnerable to execution delays. On the other hand, a
return of risk appetite and an improvement in execution would likely cause a
more constructive view on the stock.
Earnings outlook
Our recent concerns on fuel availability and equity funding gap are now factored into
our estimates and PT. We lower coal PLF to 75% (from 75-85%) across Lanco’s
plants, and also push back Udupi execution by a few months. We lower gas PLF to
70% across the board to account for gas supply concerns.
There is uncertainty around finalization of PPA for Amarkantak-II (300MW). Lanco
is negotiating sale agreement with Haryana and expects to get regulated returns with
complete coal pass thru. Currently the company is selling power on UI basis. Going
by our experience in A-I, we await clarity on the PPA and conservatively assume
sale of UI basis for whole of FY12 at Rs2/unit. In subsequent years we assume sale
of regulated basis with complete coal pass through.
These changes result in us reducing EBITDA by 13% for FY12-14E: not as severe as
might be expected, as Lanco’s regulated / PPA projects would recover full fixed cost
(and RoE) at these PLF levels. We increase PAT by 20-27% despite these EBITDA
cuts as we factor in SLM depreciation. Our new PT of Rs45 factors in these PLF
cuts, and also a Rs33B equity funding gap in FY14 which we have now subtracted
from our PT.
Funding requirement and leverage
For Lanco, the estimated consolidated leverage is high at 4.2x and 4.4x in FY11 and
FY12 respectively, which has been an investor concern despite funding tie-up
secured for the company’s entire 9.3GW pipeline. As of Dec-10, Rs30B of the debt
was at the standalone level, most of which are funded at 4:1 and is non-recourse.
In a situation in which liquidity is tight and risk aversion is high, a slowdown in loan
disbursements to underconstruction non-guaranteed return projects (5.5GW, ~59% of
total) could pose arisk to growth. Particularly funding the Griffin acquistion at the
parent level would be at risk.
Valuation and Price target
We are reducing our Mar-12 PT to Rs45 from Rs82 due to a) reduction in operating
cash flows due to lower sustainable PLF, b) Rs33B knock-off of equity funding gap
(which has widened since our last report due to lower operating cash flows), and c)
~60% reduction in value of pipeline projects. Additionally, we take a ~20% discount
to our fair value estimate of Rs55/share to reflect execution concerns
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