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Completes capacity addition of 1045MWs in FY11: Lanco Infratech (Lanco) has
commercially added close to 1045MWs in FY11, thereby, increasing the
operating capacity by 101% YoY. The company also synchronised 600MWs of
Udupi‐2 recently. However, commercial operation is expected to start in
Q2FY12E on account of delay in transmission line set up. For other plants,
Kondapalli continues to face gas supply issues from KG D6 and GAIL. The COD of
Budhil Hydro (70MWs) has been delayed by six months and now expected to
start in Q2FY12.
Satisfactory progress of projects under development: Lanco plans to add close
to 2012MWs in FY12E and has achieved significant milestones in various
projects under construction. The overall funding requirement, according to the
company, would be at Rs23bn for these projects in the next three years.
New Ventures: We believe acquisition of Griffin Coal Mines would be NPV
Positive. However, it will increase the D/E ratio of the parent company. On the
other hand, Solar power venture looks viable only with a high control on initial
costs.
Price correction, improves risk reward ratio: The FCF from power for the next
three years is expected to be in the range of Rs50‐54bn. However, we still
maintain that fund raising is inevitable on account of equity for projects under
development, new ventures and debt servicing. With lesser dependence on
merchant power, increasing EPC opportunities and CODs of roads in FY12E, the
company is not expected to give any major downside jolts. We reiterate
‘Accumulate’ on the stock; however, we lower our target price on the back of
changes in risk premiums, delays in COD’s, decreasing volumes/merchant rates
and no addition in portfolio
FY11 – Volatile on capacity addition and tariffs
Lanco has commercially added close to 1045MWs (against expectations of
1715MWs) in FY11, thereby, increasing the operating capacity by 101% YoY. The
company also synchronised 600MWs of Udupi‐2 recently. However, commercial
operation would start in Q2FY12E as against scheduled COD of January 2011. This is
on account of the pending completion of transmission line by PGCIL. The imported
coal for this plant is sourced at US$120/tonne as against the original contracted rate
of US$56/tonne. With this, the difference in cost of generation will be to the tune of
Rs1.8kwh/hr. However, being a PPA, ROEs won’t get affected. For other plants,
Kondapalli continues to face gas supply issues from KG D6 and GAIL, where we see
Unit‐2 (merchant) getting a hit. Overall realisations have improved for bilateral
contracts (current Rs4.5‐5kw/hr). The COD of Budhil Hydro (70MWs) is delayed by
six months and now expected to start in Q2FY12.
Though the company has aggressive plans of capacity addition, execution has been a
little slow, mostly on account of external issues as well as internal hurdles. Apart
from one of the highest capacity under construction on the street, the company has
big plans ahead. This is evident as Lanco has placed a huge order with Harbin of
China for BTG equipment (ex. BOP) aggregating to 10.6GWs for Rs69bn.
Griffin coal acquisition fits strategically
Lanco has acquired Griffin to secure fuel requirements (6‐8mtpa) of future capacity
addition. Apart from aiding fuel supplies, these mines according to our calculations,
would be NPV positive for Lanco. However, the profitability of the venture will highly
depend upon Griffin’s faster ramp‐up in production (Lanco‘s ability to incur faster
capex), leading to higher export sales.
In the near term, the debt taken for upfront payment to acquire Griffin has increased
the D/E ratio further. The post acquisition capital expenditure of AUS$9000m is
expected to be largely funded through cash flow from coal mines. However, we
don’t rule out a possibility of a stake sale to fund the same.
Exhibit 2. Griffin Valuation
Australian $
Acquisition Cost 750
Debt 480
Opex 900
Debt (E) 675
Total Equity in Mines 495
NPV 95
NPV (Rs) 4,167
Per Share Value (Rs.) 1.7
Source: Company Data, PL Research
Solar power venture…not tried and tested
The company has won bids for 141MWs from various states where the PPAs are
locked for 20‐25 years (at Rs10‐15/per unit). However, viability of the project will
depend on the company’s control on the capex and financing costs in the initial
years. The EPC of the project will be done in‐house where the margins would be in
the range of 8‐15%.
Exhibit 3. Solar Venture Valuations (Rs m)
Capex 37,750
Debt 26,425
Equity In 141MWs 2,475
P/BV (x) 0.25
PSV 0.30
Source: Company Data, PL Research
Outlook
Lanco has underperformed the Sensex by 30% in the last six months, factoring the
worries of lower merchant rates, lower profits and higher funding needs. We have
also factored in these concerns which have led to a downside of 20% from our
previous TP. We feel that an upside potential exists as the company is on track to
deliver as per plans; however, improvement on external environment still remains a
risk to the execution. At a P/Bx of 1.5x FY13E, Lanco is trading at reasonable
valuations as compared to its peers. Maintain ‘Accumulate’.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Completes capacity addition of 1045MWs in FY11: Lanco Infratech (Lanco) has
commercially added close to 1045MWs in FY11, thereby, increasing the
operating capacity by 101% YoY. The company also synchronised 600MWs of
Udupi‐2 recently. However, commercial operation is expected to start in
Q2FY12E on account of delay in transmission line set up. For other plants,
Kondapalli continues to face gas supply issues from KG D6 and GAIL. The COD of
Budhil Hydro (70MWs) has been delayed by six months and now expected to
start in Q2FY12.
Satisfactory progress of projects under development: Lanco plans to add close
to 2012MWs in FY12E and has achieved significant milestones in various
projects under construction. The overall funding requirement, according to the
company, would be at Rs23bn for these projects in the next three years.
New Ventures: We believe acquisition of Griffin Coal Mines would be NPV
Positive. However, it will increase the D/E ratio of the parent company. On the
other hand, Solar power venture looks viable only with a high control on initial
costs.
Price correction, improves risk reward ratio: The FCF from power for the next
three years is expected to be in the range of Rs50‐54bn. However, we still
maintain that fund raising is inevitable on account of equity for projects under
development, new ventures and debt servicing. With lesser dependence on
merchant power, increasing EPC opportunities and CODs of roads in FY12E, the
company is not expected to give any major downside jolts. We reiterate
‘Accumulate’ on the stock; however, we lower our target price on the back of
changes in risk premiums, delays in COD’s, decreasing volumes/merchant rates
and no addition in portfolio
FY11 – Volatile on capacity addition and tariffs
Lanco has commercially added close to 1045MWs (against expectations of
1715MWs) in FY11, thereby, increasing the operating capacity by 101% YoY. The
company also synchronised 600MWs of Udupi‐2 recently. However, commercial
operation would start in Q2FY12E as against scheduled COD of January 2011. This is
on account of the pending completion of transmission line by PGCIL. The imported
coal for this plant is sourced at US$120/tonne as against the original contracted rate
of US$56/tonne. With this, the difference in cost of generation will be to the tune of
Rs1.8kwh/hr. However, being a PPA, ROEs won’t get affected. For other plants,
Kondapalli continues to face gas supply issues from KG D6 and GAIL, where we see
Unit‐2 (merchant) getting a hit. Overall realisations have improved for bilateral
contracts (current Rs4.5‐5kw/hr). The COD of Budhil Hydro (70MWs) is delayed by
six months and now expected to start in Q2FY12.
Though the company has aggressive plans of capacity addition, execution has been a
little slow, mostly on account of external issues as well as internal hurdles. Apart
from one of the highest capacity under construction on the street, the company has
big plans ahead. This is evident as Lanco has placed a huge order with Harbin of
China for BTG equipment (ex. BOP) aggregating to 10.6GWs for Rs69bn.
Griffin coal acquisition fits strategically
Lanco has acquired Griffin to secure fuel requirements (6‐8mtpa) of future capacity
addition. Apart from aiding fuel supplies, these mines according to our calculations,
would be NPV positive for Lanco. However, the profitability of the venture will highly
depend upon Griffin’s faster ramp‐up in production (Lanco‘s ability to incur faster
capex), leading to higher export sales.
In the near term, the debt taken for upfront payment to acquire Griffin has increased
the D/E ratio further. The post acquisition capital expenditure of AUS$9000m is
expected to be largely funded through cash flow from coal mines. However, we
don’t rule out a possibility of a stake sale to fund the same.
Exhibit 2. Griffin Valuation
Australian $
Acquisition Cost 750
Debt 480
Opex 900
Debt (E) 675
Total Equity in Mines 495
NPV 95
NPV (Rs) 4,167
Per Share Value (Rs.) 1.7
Source: Company Data, PL Research
Solar power venture…not tried and tested
The company has won bids for 141MWs from various states where the PPAs are
locked for 20‐25 years (at Rs10‐15/per unit). However, viability of the project will
depend on the company’s control on the capex and financing costs in the initial
years. The EPC of the project will be done in‐house where the margins would be in
the range of 8‐15%.
Exhibit 3. Solar Venture Valuations (Rs m)
Capex 37,750
Debt 26,425
Equity In 141MWs 2,475
P/BV (x) 0.25
PSV 0.30
Source: Company Data, PL Research
Outlook
Lanco has underperformed the Sensex by 30% in the last six months, factoring the
worries of lower merchant rates, lower profits and higher funding needs. We have
also factored in these concerns which have led to a downside of 20% from our
previous TP. We feel that an upside potential exists as the company is on track to
deliver as per plans; however, improvement on external environment still remains a
risk to the execution. At a P/Bx of 1.5x FY13E, Lanco is trading at reasonable
valuations as compared to its peers. Maintain ‘Accumulate’.
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