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UBS Investment Research
Key Call: Lanco Infratech
Buying opportunity post correction
„ Lanco has corrected 12% in last two days
In the last two days, Lanco has corrected 12%. YTD, the stock has underperformed
the BSE Sensex by 34%. We believe the current stock price is implying a lot of
negatives. These include, 1) long-term merchant tariff Rs2.5/unit, 2) EPC business
doesn’t contribute any value, and, 3) 4,700MW (new under construction projects)
may not get completed. We believe such a scenario is highly unlikely that all the
negatives would play out simultaneously.
„ Seasonal improvement in merchant tariffs
As per the data from India Energy Exchange, spot tariffs improved significantly in
4Q FY11. In-line with this trend, the bilateral tariffs (the agreements under which
Lanco sells its merchant power output) have also improved to Rs4.5-5.0/unit from
~Rs4/unit in 3Q FY11. The ~20% increase in average merchant tariff realisations
is a positive in our view. The initial data points for 1Q FY12 are also encouraging
and we expect the realisations to remain firm in the current quarter.
„ 4Q FY11: We expect good operating performance
We expect good operating performance from Lanco in 4Q. In 4Q FY11, we
forecast revenue will grow 67% YoY to Rs40.2bn. We estimate an EBITDA
margin of around 21.9% and EBITDA of Rs8.8bn. We forecast profit after tax will
increase 42% YoY to Rs1.6bn.
„ Valuation: maintain Buy rating and price target of Rs70
We derive our price target from a sum-of-the-parts methodology. We value Lanco
as a conglomerate with power contributing 68% of valuation and EPC 23%
Q Lanco Infratech
Lanco Infratech Limited (Lanco), established in 1993, is an integrated
infrastructure developer with interests in power, infrastructure, construction and
real estate. Lanco is among the leading private sector power generation
companies. It has a captive construction division that directly benefits from the
award of in-house power, real estate and infrastructure projects.
Q Statement of Risk
Risks include: failure to procure coal for existing or future power plants, the
inability to fully recover changes in coal prices, slow or non-collection of
accounts receivables, difficulties in securing bank or other funding for
development projects, lower than expected merchant power prices
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Key Call: Lanco Infratech
Buying opportunity post correction
„ Lanco has corrected 12% in last two days
In the last two days, Lanco has corrected 12%. YTD, the stock has underperformed
the BSE Sensex by 34%. We believe the current stock price is implying a lot of
negatives. These include, 1) long-term merchant tariff Rs2.5/unit, 2) EPC business
doesn’t contribute any value, and, 3) 4,700MW (new under construction projects)
may not get completed. We believe such a scenario is highly unlikely that all the
negatives would play out simultaneously.
„ Seasonal improvement in merchant tariffs
As per the data from India Energy Exchange, spot tariffs improved significantly in
4Q FY11. In-line with this trend, the bilateral tariffs (the agreements under which
Lanco sells its merchant power output) have also improved to Rs4.5-5.0/unit from
~Rs4/unit in 3Q FY11. The ~20% increase in average merchant tariff realisations
is a positive in our view. The initial data points for 1Q FY12 are also encouraging
and we expect the realisations to remain firm in the current quarter.
„ 4Q FY11: We expect good operating performance
We expect good operating performance from Lanco in 4Q. In 4Q FY11, we
forecast revenue will grow 67% YoY to Rs40.2bn. We estimate an EBITDA
margin of around 21.9% and EBITDA of Rs8.8bn. We forecast profit after tax will
increase 42% YoY to Rs1.6bn.
„ Valuation: maintain Buy rating and price target of Rs70
We derive our price target from a sum-of-the-parts methodology. We value Lanco
as a conglomerate with power contributing 68% of valuation and EPC 23%
Q Lanco Infratech
Lanco Infratech Limited (Lanco), established in 1993, is an integrated
infrastructure developer with interests in power, infrastructure, construction and
real estate. Lanco is among the leading private sector power generation
companies. It has a captive construction division that directly benefits from the
award of in-house power, real estate and infrastructure projects.
Q Statement of Risk
Risks include: failure to procure coal for existing or future power plants, the
inability to fully recover changes in coal prices, slow or non-collection of
accounts receivables, difficulties in securing bank or other funding for
development projects, lower than expected merchant power prices
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