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LANCO INFRATECH
Generating more power
We initiate coverage with an Outperform rating.
We initiate on Lanco Infratech with an Outperform as it expands its power portfolio from 2GW to 9GW by FY14, which should drive a 25% earnings Cagr over FY11-14. After the recent drop in share price, we believe most of the risks facing the power company are factored in. These include high net gearing of 400%, low fuel security in a coal-short environment and use of Chinese power equipment. We have factored in significant use of coal at market price to meet shortages and a 20% discount to NPV due to these risks.
Leapfrogging into the big league. With its 2GW capacity, Lanco Infratech (LANCI IN - Rs38.00 - O-PF) is the second-largest private utility in the country after Tata Power (TPWR IB - Rs1,191.70 - BUY). The company’s overall capacity is likely to exceed 9GW by the end of FY14. Lanco does in-house engineering, procurement and construction (EPC) for its power projects, which in turn improves its cashflow requirements for expansion projects. The EPC division has an order backlog of Rs275bn (70% in-house), however, the Ebidta margins are expected to contract going forward as the company takes up more outside projects.
A 25% earnings Cagr over FY11-14. We expect Lanco to report a 25% earnings Cagr over FY11-14 with a major contribution coming from the expansion of its power business. The company is likely to commission 7GW power generation capacity over this period. We are building in lower utilisation rates for new capacities and part of the coal to be purchased at market value in our earnings estimates. EPC earnings are likely to decline over this period.
High gearing necessitates equity raising in 12-18 months. Lanco’s consolidated net gearing would be more than 400% by FY13 without factoring in the acquisition of Griffin Coal. This is higher the than 70:30 debt/equity norm as the company has used debt raised at the parent company level to fund equity for some of its projects. However, most of the debt is project financed with the underlying asset as collateral. The company has plans to spin-off the power vertical into a separate entity through an IPO. We expect the company to raise US$750m at the power company level which, on our power business valuation, implies post-money 76% holding of Lanco Infratech.
Sharp correction offers value. Lanco’s stock price has corrected by 38% YTD on fears of falling merchant tariffs, coal shortages, high gearing and changing depreciation policy. However, we believe the stock offers value at current valuations and our target price of Rs47/share is based on a 20% discount to fair value. We initiate on the stock with an Outperform rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LANCO INFRATECH
Generating more power
We initiate coverage with an Outperform rating.
We initiate on Lanco Infratech with an Outperform as it expands its power portfolio from 2GW to 9GW by FY14, which should drive a 25% earnings Cagr over FY11-14. After the recent drop in share price, we believe most of the risks facing the power company are factored in. These include high net gearing of 400%, low fuel security in a coal-short environment and use of Chinese power equipment. We have factored in significant use of coal at market price to meet shortages and a 20% discount to NPV due to these risks.
Leapfrogging into the big league. With its 2GW capacity, Lanco Infratech (LANCI IN - Rs38.00 - O-PF) is the second-largest private utility in the country after Tata Power (TPWR IB - Rs1,191.70 - BUY). The company’s overall capacity is likely to exceed 9GW by the end of FY14. Lanco does in-house engineering, procurement and construction (EPC) for its power projects, which in turn improves its cashflow requirements for expansion projects. The EPC division has an order backlog of Rs275bn (70% in-house), however, the Ebidta margins are expected to contract going forward as the company takes up more outside projects.
A 25% earnings Cagr over FY11-14. We expect Lanco to report a 25% earnings Cagr over FY11-14 with a major contribution coming from the expansion of its power business. The company is likely to commission 7GW power generation capacity over this period. We are building in lower utilisation rates for new capacities and part of the coal to be purchased at market value in our earnings estimates. EPC earnings are likely to decline over this period.
High gearing necessitates equity raising in 12-18 months. Lanco’s consolidated net gearing would be more than 400% by FY13 without factoring in the acquisition of Griffin Coal. This is higher the than 70:30 debt/equity norm as the company has used debt raised at the parent company level to fund equity for some of its projects. However, most of the debt is project financed with the underlying asset as collateral. The company has plans to spin-off the power vertical into a separate entity through an IPO. We expect the company to raise US$750m at the power company level which, on our power business valuation, implies post-money 76% holding of Lanco Infratech.
Sharp correction offers value. Lanco’s stock price has corrected by 38% YTD on fears of falling merchant tariffs, coal shortages, high gearing and changing depreciation policy. However, we believe the stock offers value at current valuations and our target price of Rs47/share is based on a 20% discount to fair value. We initiate on the stock with an Outperform rating.
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