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Lanco appears to be going through a rough patch, with a long WIP
pipeline putting severe pressure on its balance sheet in times of rising
interest rates. Project delays and fuel constraints have added to the cash
flow pressures, and leverage has risen to 3.9x. While FY13 holds promise
of a turnaround, we believe persistent uncertainties in the medium term
might constrain stock performance. Maintain Neutral, with a Mar-12 PT of
Rs19.
Lanco’s stock price has corrected 75% since its peak. With high
leverage, a visible equity funding gap and its earnings disappointments,
we see limited investor appetite for the stock. We view the company’s
RoE as anemic (despite high gearing), making a weak investment case
even at 0.6x P/B.
FY13 too far to have good visibility about at this stage, and the stock
might go down before going up: A strong improvement in FY13 PAT
is predicated upon the power segment, where we expect a revival of the
Udupi project, commissioning of Anpara, and better profitability of
Amarkantak-II, as the unremunerative PPA is renegotiated by end FY12.
In the interim, we believe there is upward risk to the rate cycle,
which could exert pressure on Lanco’s parent debt and cause project cost
overruns. Further investments in projects could impair cash flow. The
pursuit of growth beyond pre-existing plans could add to its precarious
leverage.
Our earnings cut for FY12/13, to the tune of 80/66%, arises from
expected weaker construction profits, project delays, weaker PLF
and lower merchant prices. As a result of these cuts, coupled with
lower value for pipeline projects, we reduce our SOP value to Rs19.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lanco appears to be going through a rough patch, with a long WIP
pipeline putting severe pressure on its balance sheet in times of rising
interest rates. Project delays and fuel constraints have added to the cash
flow pressures, and leverage has risen to 3.9x. While FY13 holds promise
of a turnaround, we believe persistent uncertainties in the medium term
might constrain stock performance. Maintain Neutral, with a Mar-12 PT of
Rs19.
Lanco’s stock price has corrected 75% since its peak. With high
leverage, a visible equity funding gap and its earnings disappointments,
we see limited investor appetite for the stock. We view the company’s
RoE as anemic (despite high gearing), making a weak investment case
even at 0.6x P/B.
FY13 too far to have good visibility about at this stage, and the stock
might go down before going up: A strong improvement in FY13 PAT
is predicated upon the power segment, where we expect a revival of the
Udupi project, commissioning of Anpara, and better profitability of
Amarkantak-II, as the unremunerative PPA is renegotiated by end FY12.
In the interim, we believe there is upward risk to the rate cycle,
which could exert pressure on Lanco’s parent debt and cause project cost
overruns. Further investments in projects could impair cash flow. The
pursuit of growth beyond pre-existing plans could add to its precarious
leverage.
Our earnings cut for FY12/13, to the tune of 80/66%, arises from
expected weaker construction profits, project delays, weaker PLF
and lower merchant prices. As a result of these cuts, coupled with
lower value for pipeline projects, we reduce our SOP value to Rs19.
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