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Lanco Infratech (LANCI)
Utilities
3QFY11—Distorted by depreciation. Lanco Infratech’s (LITL) reported net income of
Rs1.6 bn is distorted by (1) change in depreciation policy which contributed Rs1.3 bn,
and (2) unallocated losses of Rs0.8 bn. Non-inclusion of Udupi for the purpose of
consolidation compounded the shortfall vis-à-vis estimates, although earnings from
generation and construction business remained stable.
Reported profits distorted by change in depreciation policy
LITL reported consolidated revenues of Rs15.4 bn (-4% yoy, -24% qoq), operating profit of Rs4.7
bn (57% yoy, 12% qoq) and net income of Rs1.6 bn (73% yoy, 133% qoq) against our estimate
of Rs22.9 bn, Rs6.2 bn and Rs1.5 bn, respectively.
Lower-than-estimated revenues were on account of (1) lower contribution from power trading
revenues, (2) revenue contribution from Udupi not consolidated pending commercialization of
Unit 2 (our estimate factored Rs478 mn from Udupi) and (3) higher contribution from execution
from internal projects.
LITL’s EBITDA of Rs4.7 bn was 24% lower than our estimates, primarily on account of (1) unallocated
loss of Rs764 mn, (2) non-inclusion of Udupi for the purpose of consolidation (~Rs200
mn), and (3) lower-than-estimated revenues merchant realizations—Rs3.77/kwh versus our
estimate of Rs3.95/kwh, albeit offset by higher merchant sale of 1,098 MU (estimated 969 MU).
Reported PAT was distorted by change in depreciation policy resulting in depreciation write
backs and corresponding tax effects. LITL retrospectively changed its depreciation policy to SLM
for all thermal projects commissioned post FY2010 (previously WDV method). This resulted in a
write back of Rs3 bn of prior-period depreciation while the depreciation for the quarter was
lower by Rs882 mn. The corresponding tax impact of the same was Rs2.5 bn which included
deferred tax of Rs1.7 bn.
Maintain estimates and target price—to be reviewed after the post-results conference call
We maintain our rating and target price and will review our earnings and valuation estimates post
the earnings call. Our SOTP-based target price comprises—(1) DCF-equity of power project
portfolio at Rs64/share, (2) construction business valued at Rs15/share at EV/EBITDA of 6X on
FY2012E, (3) real estate project at 50% of NAV ~Rs3/share, (4) DCF equity of BOT road projects at
Rs1/share and (5) value from sale of carbon credits of Rs1/share and (6) net debt of Rs1/share.
Power – stable after adjusting for change in depreciation
Power revenues declined from Rs13.4 bn in 2QFY11 to Rs8.5 bn in 3QFY11 primarily due to
a sharp drop in power trading revenues—Rs1.1 bn in 3QFY11 versus Rs5.8 bn in 2QFY11.
Adjusted for change in depreciation policy (Rs2.4 bn)—EBIT at Rs1.6 bn was lower by 10%
qoq largely explained by 8% qoq drop in merchant realizations. We discuss in detail some of
the key highlights of the results of the power segment.
Change in depreciation policy: In our view, the change in depreciation policy from
WDV to SLM, will likely lead to value erosion on account of higher tax depreciation (on
book profits), though it may increase reported earnings.
Consolidation of Udupi: We note that during the quarter the first unit of Udupi
commenced commercial operations, though earnings were not consolidated as Udupi
continues to be classified as an associate, and will be converted into a subsidiary upon
commercialization of the second unit (expected over the next quarter).
Merchant sale: We note that the decline in merchant tariffs—Rs3.77/kwh in 3QFY11
versus Rs.408/kwh in 2QFY11 was offset by higher quantum of sales in the merchant
market of 1098 MU in 3QFY11 (927 MU in 2QFY11). Kondapalli sold 613 MU and
Amarkantak 485 MU at average realizations of Rs3.5/kwh and Rs4.1/kwh respectively in
the short-term market.
Construction – execution of internal projects gathers momentum
LITL reported construction revenues of Rs20.2 bn. A sharp sequential jump of 86% in
construction revenues was driven by pick up in execution activities especially at Kondapalli
and Amarkantak expansion projects. EBIT margins improved from 12% in 2QFY11 to 18%
in 2QFY11. However, inter-segment revenue elimination increased to 67% of total
construction revenues (against average elimination of 40% in previous two quarters)
reflecting that bulk of construction revenue is driven by in-house projects while execution at
Udupi and Anpara (classified as associates) is nearing completion.
Project execution remains strong, first unit of Udupi commences commercial
generation
LITL continues its impressive execution track record having commenced commercial
operations of first unit of Udupi project (600 MW) and targeting to commission the second
unit in FY2011E as well. LITL has an operational capacity of 2,082 MW which would likely
go up to 3,944 MW by end FY2012E with the commissioning of 1200 MW Anpara and
second unit of Udupi. Further, visibility on future projects continues to improve with LITL
achieving financial closure of its 1,320 MW Vidarbha and 742 MW Kondapalli Expansion
projects during the quarter. We note that LITL had already announced financial closure of its
Babandh project in 2QFY11.
We do not ascribe value to Vidarbha and Kondapalli III as the projects are yet to tie up
necessary inputs (key being fuel for Kondapalli and land and MOEF clearance for Vidarbha).
We however highlight that visibility on these projects could be a near-term catalyst for the
stock. These projects could add another Rs9/share to our 12-month forward fair value of
LITL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lanco Infratech (LANCI)
Utilities
3QFY11—Distorted by depreciation. Lanco Infratech’s (LITL) reported net income of
Rs1.6 bn is distorted by (1) change in depreciation policy which contributed Rs1.3 bn,
and (2) unallocated losses of Rs0.8 bn. Non-inclusion of Udupi for the purpose of
consolidation compounded the shortfall vis-à-vis estimates, although earnings from
generation and construction business remained stable.
Reported profits distorted by change in depreciation policy
LITL reported consolidated revenues of Rs15.4 bn (-4% yoy, -24% qoq), operating profit of Rs4.7
bn (57% yoy, 12% qoq) and net income of Rs1.6 bn (73% yoy, 133% qoq) against our estimate
of Rs22.9 bn, Rs6.2 bn and Rs1.5 bn, respectively.
Lower-than-estimated revenues were on account of (1) lower contribution from power trading
revenues, (2) revenue contribution from Udupi not consolidated pending commercialization of
Unit 2 (our estimate factored Rs478 mn from Udupi) and (3) higher contribution from execution
from internal projects.
LITL’s EBITDA of Rs4.7 bn was 24% lower than our estimates, primarily on account of (1) unallocated
loss of Rs764 mn, (2) non-inclusion of Udupi for the purpose of consolidation (~Rs200
mn), and (3) lower-than-estimated revenues merchant realizations—Rs3.77/kwh versus our
estimate of Rs3.95/kwh, albeit offset by higher merchant sale of 1,098 MU (estimated 969 MU).
Reported PAT was distorted by change in depreciation policy resulting in depreciation write
backs and corresponding tax effects. LITL retrospectively changed its depreciation policy to SLM
for all thermal projects commissioned post FY2010 (previously WDV method). This resulted in a
write back of Rs3 bn of prior-period depreciation while the depreciation for the quarter was
lower by Rs882 mn. The corresponding tax impact of the same was Rs2.5 bn which included
deferred tax of Rs1.7 bn.
Maintain estimates and target price—to be reviewed after the post-results conference call
We maintain our rating and target price and will review our earnings and valuation estimates post
the earnings call. Our SOTP-based target price comprises—(1) DCF-equity of power project
portfolio at Rs64/share, (2) construction business valued at Rs15/share at EV/EBITDA of 6X on
FY2012E, (3) real estate project at 50% of NAV ~Rs3/share, (4) DCF equity of BOT road projects at
Rs1/share and (5) value from sale of carbon credits of Rs1/share and (6) net debt of Rs1/share.
Power – stable after adjusting for change in depreciation
Power revenues declined from Rs13.4 bn in 2QFY11 to Rs8.5 bn in 3QFY11 primarily due to
a sharp drop in power trading revenues—Rs1.1 bn in 3QFY11 versus Rs5.8 bn in 2QFY11.
Adjusted for change in depreciation policy (Rs2.4 bn)—EBIT at Rs1.6 bn was lower by 10%
qoq largely explained by 8% qoq drop in merchant realizations. We discuss in detail some of
the key highlights of the results of the power segment.
Change in depreciation policy: In our view, the change in depreciation policy from
WDV to SLM, will likely lead to value erosion on account of higher tax depreciation (on
book profits), though it may increase reported earnings.
Consolidation of Udupi: We note that during the quarter the first unit of Udupi
commenced commercial operations, though earnings were not consolidated as Udupi
continues to be classified as an associate, and will be converted into a subsidiary upon
commercialization of the second unit (expected over the next quarter).
Merchant sale: We note that the decline in merchant tariffs—Rs3.77/kwh in 3QFY11
versus Rs.408/kwh in 2QFY11 was offset by higher quantum of sales in the merchant
market of 1098 MU in 3QFY11 (927 MU in 2QFY11). Kondapalli sold 613 MU and
Amarkantak 485 MU at average realizations of Rs3.5/kwh and Rs4.1/kwh respectively in
the short-term market.
Construction – execution of internal projects gathers momentum
LITL reported construction revenues of Rs20.2 bn. A sharp sequential jump of 86% in
construction revenues was driven by pick up in execution activities especially at Kondapalli
and Amarkantak expansion projects. EBIT margins improved from 12% in 2QFY11 to 18%
in 2QFY11. However, inter-segment revenue elimination increased to 67% of total
construction revenues (against average elimination of 40% in previous two quarters)
reflecting that bulk of construction revenue is driven by in-house projects while execution at
Udupi and Anpara (classified as associates) is nearing completion.
Project execution remains strong, first unit of Udupi commences commercial
generation
LITL continues its impressive execution track record having commenced commercial
operations of first unit of Udupi project (600 MW) and targeting to commission the second
unit in FY2011E as well. LITL has an operational capacity of 2,082 MW which would likely
go up to 3,944 MW by end FY2012E with the commissioning of 1200 MW Anpara and
second unit of Udupi. Further, visibility on future projects continues to improve with LITL
achieving financial closure of its 1,320 MW Vidarbha and 742 MW Kondapalli Expansion
projects during the quarter. We note that LITL had already announced financial closure of its
Babandh project in 2QFY11.
We do not ascribe value to Vidarbha and Kondapalli III as the projects are yet to tie up
necessary inputs (key being fuel for Kondapalli and land and MOEF clearance for Vidarbha).
We however highlight that visibility on these projects could be a near-term catalyst for the
stock. These projects could add another Rs9/share to our 12-month forward fair value of
LITL.
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