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Lower power earnings and higher other expenditure dent PAT
Lanco Infratech (Lanco) reported Q3FY11 PAT of INR 1.6 bn against estimate of
INR 1.87 bn. However, even the reported earning was possible post write back
of excess depreciation of INR 1.3 bn and incurring higher other expenses of
~INR 400 mn.
Depreciation policy changed back to SLM
The company has reverted to SLM depreciation which had been changed to the
WDV method 12 months ago. Management stated that it wanted to align the
company with peers, both in terms of policy and valuations.
Amarkantak 300 MW sold in UI market; spot rates at INR 3.5-4.1/kwh
Power from Amarkantak unit II are still being sold in the UI market due to which
realizations dipped and management expects to conclude an agreement with
Haryana, post which the project will be commercialised. Merchant rates were INR
3.5/kwh at Kondapalli and INR 4.1/kwh at Amarkantak. Management has guided
for annual average of INR 4.0-4.5/kwh due to elections and less intensive
monsoon/winter in FY12.
Gas supplies rationed at ~80% (normal)
Management indicated that it has received gas supplies for 80% of generation
capacity compared to the 90% contracted. This it reasoned was due to RIL’s
stance of supplying its lower gas production on a pro-rata basis.
Outlook and valuations: Limited downside; maintain ‘BUY’
Considering higher business development expenses, upfront payment for coal
mine acquisition and greater proportion of inter-segmental elimination which
management is not confident of retaining under IFRS, we have reduced EPC
value and are not considering surplus cash. The ~4.6 GW under-construction
projects provide strong growth visibility. However, concern on EPC margins, coal
supplies/acquisition, merchant rates and frequent changes in accounting policies
are key risks. Incorporating higher Ke and rolling over to FY13 (in line with our
house view), we revise our SOTP down to INR 64 (INR 79 earlier). With recent
correction in the stock price and traction in power and EPC, we expect limited
downside from current levels. We maintain ‘BUY’ recommendation. However, we
revise down relative rating on the stock to ‘Sector Underperformer’ from
‘Sector Outperformer’ due to the above-mentioned risks.
SOTP valuation:
We have reduced EPC valuations to factor in only external orders as the company is not
confident of getting benefits of internal group EPC business even after graduating to
IFRS. Considering the guidance given by the management with respect to recurring
nature of ‘other expenditure’ and equity contribution required for the Griffin coal asset,
we are not considering the same in SOTP.
Based on preliminary estimates and information provided by management we do not
foresee the Griffin coal asset to be value accretive due to the following:
• Initial spend of USD ~700 mn for acquisition of the company and a further USD 900
mn capex towards scaling the output to ~15 mn tonnes from the existing ~6 mn
tonnes.
• The current cash cost of mining is ~USD 31/tonne and only post rail/ port
infrastructure as well as some rationalization of expenses management is expected to
reduce cost/tonne to USD 25. Costs towards royalty, depreciation, interest (incl for
acquisition), and taxes will have to be additionally incurred .
• The mine has a commitment to sell ~3 mn tonnes at ~USD 40/tonne to a local power
company and similarly a fertilizer company also needs coal starting from FY15.
Table 1: SOTP valuation
EPC P/E multiple 5.8
Power FCFE
Existing 19.8
Under construction 37.3
Road and real estate 1.6
Total 64.4
Source: Edelweiss research
Company Description
Lanco was founded in 1993 as a construction company. In 1997, it entered the power
generation space with the first dual-fire gas plant in Kondapalli in equity partnership with
Globaleq. The group is now a diversified player with presence in roads, airports, and real
estate, apart from power. Lanco is a holding company which still handles the
construction business and invests in all other businesses through SPVs in which it holds a
minimum of 51%. The promoter group led by Mr. L. Madhusudhan Rao owns about 74%
in the company.
Investment Theme
• Lanco currently has ~8,800 MW of new generation capacity under various stages of
execution. Over half of this is already under construction and the balance has
secured off take agreements and/or fuel linkages and is likely to attain financial
closure over the next 12 months.
• The company has an EPC arm that enables speedy execution of power projects. It
also has a strategic tie-up with equipment manufacturer Dongfang, which places it
in a better position to execute its power projects vis-à-vis peers.
Key Risks
• Execution and optimum operationalisation of power plants especially those which are
running on Chinese equipment
• Fuel security for running the additional unit being constructed at the Kondapalli gasfired
plant on merchant basis.
• Adverse real estate market conditions in Hyderabad.
• Sustainability of margins in EPC projects.
• Shareholding structure adopted in the SPV’s : With most of the projects being
executed by SPVs which are subsidiaries, there is an elimination of revenues /
earnings due to consolidation. Since the management has ~ 100% stake in these
SPV’s as compared to ~25% earlier the retained earnings / cash balances available
for future equity investments would be lower.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lower power earnings and higher other expenditure dent PAT
Lanco Infratech (Lanco) reported Q3FY11 PAT of INR 1.6 bn against estimate of
INR 1.87 bn. However, even the reported earning was possible post write back
of excess depreciation of INR 1.3 bn and incurring higher other expenses of
~INR 400 mn.
Depreciation policy changed back to SLM
The company has reverted to SLM depreciation which had been changed to the
WDV method 12 months ago. Management stated that it wanted to align the
company with peers, both in terms of policy and valuations.
Amarkantak 300 MW sold in UI market; spot rates at INR 3.5-4.1/kwh
Power from Amarkantak unit II are still being sold in the UI market due to which
realizations dipped and management expects to conclude an agreement with
Haryana, post which the project will be commercialised. Merchant rates were INR
3.5/kwh at Kondapalli and INR 4.1/kwh at Amarkantak. Management has guided
for annual average of INR 4.0-4.5/kwh due to elections and less intensive
monsoon/winter in FY12.
Gas supplies rationed at ~80% (normal)
Management indicated that it has received gas supplies for 80% of generation
capacity compared to the 90% contracted. This it reasoned was due to RIL’s
stance of supplying its lower gas production on a pro-rata basis.
Outlook and valuations: Limited downside; maintain ‘BUY’
Considering higher business development expenses, upfront payment for coal
mine acquisition and greater proportion of inter-segmental elimination which
management is not confident of retaining under IFRS, we have reduced EPC
value and are not considering surplus cash. The ~4.6 GW under-construction
projects provide strong growth visibility. However, concern on EPC margins, coal
supplies/acquisition, merchant rates and frequent changes in accounting policies
are key risks. Incorporating higher Ke and rolling over to FY13 (in line with our
house view), we revise our SOTP down to INR 64 (INR 79 earlier). With recent
correction in the stock price and traction in power and EPC, we expect limited
downside from current levels. We maintain ‘BUY’ recommendation. However, we
revise down relative rating on the stock to ‘Sector Underperformer’ from
‘Sector Outperformer’ due to the above-mentioned risks.
SOTP valuation:
We have reduced EPC valuations to factor in only external orders as the company is not
confident of getting benefits of internal group EPC business even after graduating to
IFRS. Considering the guidance given by the management with respect to recurring
nature of ‘other expenditure’ and equity contribution required for the Griffin coal asset,
we are not considering the same in SOTP.
Based on preliminary estimates and information provided by management we do not
foresee the Griffin coal asset to be value accretive due to the following:
• Initial spend of USD ~700 mn for acquisition of the company and a further USD 900
mn capex towards scaling the output to ~15 mn tonnes from the existing ~6 mn
tonnes.
• The current cash cost of mining is ~USD 31/tonne and only post rail/ port
infrastructure as well as some rationalization of expenses management is expected to
reduce cost/tonne to USD 25. Costs towards royalty, depreciation, interest (incl for
acquisition), and taxes will have to be additionally incurred .
• The mine has a commitment to sell ~3 mn tonnes at ~USD 40/tonne to a local power
company and similarly a fertilizer company also needs coal starting from FY15.
Table 1: SOTP valuation
EPC P/E multiple 5.8
Power FCFE
Existing 19.8
Under construction 37.3
Road and real estate 1.6
Total 64.4
Source: Edelweiss research
Company Description
Lanco was founded in 1993 as a construction company. In 1997, it entered the power
generation space with the first dual-fire gas plant in Kondapalli in equity partnership with
Globaleq. The group is now a diversified player with presence in roads, airports, and real
estate, apart from power. Lanco is a holding company which still handles the
construction business and invests in all other businesses through SPVs in which it holds a
minimum of 51%. The promoter group led by Mr. L. Madhusudhan Rao owns about 74%
in the company.
Investment Theme
• Lanco currently has ~8,800 MW of new generation capacity under various stages of
execution. Over half of this is already under construction and the balance has
secured off take agreements and/or fuel linkages and is likely to attain financial
closure over the next 12 months.
• The company has an EPC arm that enables speedy execution of power projects. It
also has a strategic tie-up with equipment manufacturer Dongfang, which places it
in a better position to execute its power projects vis-à-vis peers.
Key Risks
• Execution and optimum operationalisation of power plants especially those which are
running on Chinese equipment
• Fuel security for running the additional unit being constructed at the Kondapalli gasfired
plant on merchant basis.
• Adverse real estate market conditions in Hyderabad.
• Sustainability of margins in EPC projects.
• Shareholding structure adopted in the SPV’s : With most of the projects being
executed by SPVs which are subsidiaries, there is an elimination of revenues /
earnings due to consolidation. Since the management has ~ 100% stake in these
SPV’s as compared to ~25% earlier the retained earnings / cash balances available
for future equity investments would be lower.
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