UBS :: Lanco Infratech - Strong momentum in key segments

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UBS Investment Research
Lanco Infratech
Strong momentum in key segments  
 
„ A strong buying opportunity?
Lanco’s share price has fallen 47% YTD (from Rs63 to Rs34). The key reasons
behind the correction were concern on security of coal linkages, merchant tariff
weakness and change in deprecation policy in Q3 results, in our view. We believe
that at this price, the risk reward is now extremely favourable and that this is a
good opportunity to buy on a 12 month view.
„ FY11 results indicate strong business momentum in Power segment
Power is the core business for Lanco and we think the company has made good
progress in this segment: 1) Merchant realisations were good in FY11 (Kondapalli
II at Rs4.25 and Amarkantak I at Rs4.57 per unit); 2) In FY11, Udupi (1,200 MW),
Anpara (600 MW), and Kondapalli (133 MW, Steam turbine) were synchronised;
3) Lanco purchased Griffin mines in Australia, which provide increased fuel
security; and 4) good progress on 4,700MW of new projects (Rs33bn equity
already invested).
„ Robust outlook for EPC and construction business
Engineering, procurement and construction (EPC) is critical to achieve on-time
completion of power projects and we think the outlook for this business is strong:
1) EBITDA margin of 15% in FY11, which we think is sustainable; 2) Order book
as on 31 March 2011 is Rs302bn (~5x FY11 revenues); 3) Good momentum on
external orders e.g. 1200 MW EPC order from Moser Baer, 1980 MW BoP order
from Mahagenco.
„ Valuation: maintain Buy rating and price target of Rs70
We derive our price target using a sum-of-the-parts methodology. We value Lanco
as a conglomerate, with power contributing 68% of valuation and EPC 23%