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Lanco Infratech (LAIN.BO, Buy, add to CL, 12-m TP: Rs54)
Source of opportunity
We upgrade Lanco to Buy from Neutral and add it to the Conviction
List with a 12-m target price of Rs54, implying potential upside of 40%.
Lanco’s stock price has corrected by 40% over the past three
months, and we believe most of the near-term risks in terms of
decline in merchant rates and increase in fuel and interest expenses
are already reflected in the share price. The stock is now trading
below its four-year historical P/B and is at a 22% discount to its
peers on FY12E P/E.
Though Lanco is one of the most highly leveraged companies in our
coverage group, our calculations indicate that operating cash flows
are sufficient to meet their debt commitments. Further, we believe
the internal accruals are sufficient to fund the remaining 4000MW of
projects under construction that are scheduled to come on-stream
during FY14E.
We believe the current market price is not factoring in upcoming
projects mainly on concerns relating to funding despite high
visibility of project execution. Lanco has already achieved financial
closure on Amarkantak-III, Babandh and Vidharbha, and has
acquired the required land on two of the projects and sufficient
equity has already been invested in these projects.
We believe Lanco is relatively less impacted by the increase in the
fuel costs over the medium term as: (1) about 60% of its FY12E
capacity will operate under fuel cost pass-through mechanism, and
(2) backward integration through acquisition of Griffin’s assets.
With the average realization of Lanco as a group in the range of
Rs3/kwh, we believe the risk to Lanco’s utilization levels from weak
finances of SEBs is relatively low in the long-term as compared with
peers.
Catalyst
We believe the key catalysts for a stock re-rating are: (1) commissioning
of 1800MW of capacities over the next two quarters; and (2) near-term
strength in short-term rates on account of seasonally strong summer
season.
Valuation
Our revised 12-month SOTP-based target price of Rs54 (down from
Rs71) implies 40% potential upside. We value the construction division
at 6X FY12E EV/EBITDA and the power division at 1.7X FY12E P/B. Lanco
is currently trading at a 22% discount on FY12E P/E vs peers. We also
reflect the revised depreciation policy of the company leading to
increase in EPS for FY12E by 10%.
Key risks
(1) Higher-than-estimated decline in short-term rates; and (2) delays in
capacity addition.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lanco Infratech (LAIN.BO, Buy, add to CL, 12-m TP: Rs54)
Source of opportunity
We upgrade Lanco to Buy from Neutral and add it to the Conviction
List with a 12-m target price of Rs54, implying potential upside of 40%.
Lanco’s stock price has corrected by 40% over the past three
months, and we believe most of the near-term risks in terms of
decline in merchant rates and increase in fuel and interest expenses
are already reflected in the share price. The stock is now trading
below its four-year historical P/B and is at a 22% discount to its
peers on FY12E P/E.
Though Lanco is one of the most highly leveraged companies in our
coverage group, our calculations indicate that operating cash flows
are sufficient to meet their debt commitments. Further, we believe
the internal accruals are sufficient to fund the remaining 4000MW of
projects under construction that are scheduled to come on-stream
during FY14E.
We believe the current market price is not factoring in upcoming
projects mainly on concerns relating to funding despite high
visibility of project execution. Lanco has already achieved financial
closure on Amarkantak-III, Babandh and Vidharbha, and has
acquired the required land on two of the projects and sufficient
equity has already been invested in these projects.
We believe Lanco is relatively less impacted by the increase in the
fuel costs over the medium term as: (1) about 60% of its FY12E
capacity will operate under fuel cost pass-through mechanism, and
(2) backward integration through acquisition of Griffin’s assets.
With the average realization of Lanco as a group in the range of
Rs3/kwh, we believe the risk to Lanco’s utilization levels from weak
finances of SEBs is relatively low in the long-term as compared with
peers.
Catalyst
We believe the key catalysts for a stock re-rating are: (1) commissioning
of 1800MW of capacities over the next two quarters; and (2) near-term
strength in short-term rates on account of seasonally strong summer
season.
Valuation
Our revised 12-month SOTP-based target price of Rs54 (down from
Rs71) implies 40% potential upside. We value the construction division
at 6X FY12E EV/EBITDA and the power division at 1.7X FY12E P/B. Lanco
is currently trading at a 22% discount on FY12E P/E vs peers. We also
reflect the revised depreciation policy of the company leading to
increase in EPS for FY12E by 10%.
Key risks
(1) Higher-than-estimated decline in short-term rates; and (2) delays in
capacity addition.
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