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Lanco Infratech (LAIN.BO): Down to Neutral on lack of +ve catalysts
What's changed
We downgrade Lanco Infratech to Neutral from Buy and cut our 12-
month SOTP-based target price to Rs21 from Rs43, implying potential
upside of 12%. Since we added Lanco on our Buy list on February 22,
2011, the stock has declined by 51.4% while BSE Sensex slid 6.2%. Over
the past 12 months, the stock has fallen 72.7% vs. the index’s decline of
8.0%. We attribute the stock’s underperformance to high debt,
magnifying the concerns on the sector and declining short-term rates.
We downgrade our rating for the following reasons.
1. High beta to positive news flows on the sector, but none in the
medium term: Although the stock price correction (77% YTD) reflects
downside risks, in our view, we believe data points on: 1) continued
softening of merchant rates, 2) declining supplies of domestic coal and
gas, 3) delays in reforms required for improvement in finances of state
electricity boards, and 4) consensus downgrades of earnings estimates
(we are 43-52% below consensus on FY12-14), may likely limit stock
performance. Moreover, we believe high debt is likely to magnify the risks
of any negative news flows on the sector and the stock may under
perform its peers.
2. Uncertainty in recognition of income from construction division: In
line with IFRS accounting policy, Lanco eliminates income (at PAT level)
earned from construction related services to its subsidiaries, however, still
pays taxes on such income. With almost 60% of its order-book from
projects which are internal in nature, we believe earnings will continue to
be a function of the quantum of elimination of construction income. We
reduce our earnings estimates by 28%-51% over FY12E-14E primarily to
reflect eliminations and have now valued the construction order book on
cash methodology (DCF vs. EV/EBITDA earlier)
3. Valuations look inexpensive, but clarity on pipeline key for rerating:
We believe the current market price reflects value of existing
projects but not reflect of the pipeline. We, however, believe the Street will
start assigning full value to the pipeline on higher visibility of ‘profitability’
of the projects which is contingent on: 1) assurance of domestic coal
supplies; and 2) terms of PPA (critical for utilization rates). With no
visibility on production growth of Coal India limited from FY13E onwards,
we believe profitability of pipeline continue to remain uncertain.
Valuation
We reduce our SOTP-based target price to Rs21 from Rs43 primarily on
account of: 1) Assigning negative value to construction division due to
increase in debt on its parent balance sheet; 2) Valuing pipeline only on
equity invested so far, pending visibility on coal supplies; 3) Lower value
to Udupi project due to delay in the pipeline; 4) Reflected negative value
to Griffen asset to reflect the downside risks of their dispute with
Perdaman lower valuation of construction business
Key risks
Further delay in commissioning of Udupi/Anpara projects is the key
downside risk and visibility on fuel supplies to the pipeline is the key
upside risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lanco Infratech (LAIN.BO): Down to Neutral on lack of +ve catalysts
What's changed
We downgrade Lanco Infratech to Neutral from Buy and cut our 12-
month SOTP-based target price to Rs21 from Rs43, implying potential
upside of 12%. Since we added Lanco on our Buy list on February 22,
2011, the stock has declined by 51.4% while BSE Sensex slid 6.2%. Over
the past 12 months, the stock has fallen 72.7% vs. the index’s decline of
8.0%. We attribute the stock’s underperformance to high debt,
magnifying the concerns on the sector and declining short-term rates.
We downgrade our rating for the following reasons.
1. High beta to positive news flows on the sector, but none in the
medium term: Although the stock price correction (77% YTD) reflects
downside risks, in our view, we believe data points on: 1) continued
softening of merchant rates, 2) declining supplies of domestic coal and
gas, 3) delays in reforms required for improvement in finances of state
electricity boards, and 4) consensus downgrades of earnings estimates
(we are 43-52% below consensus on FY12-14), may likely limit stock
performance. Moreover, we believe high debt is likely to magnify the risks
of any negative news flows on the sector and the stock may under
perform its peers.
2. Uncertainty in recognition of income from construction division: In
line with IFRS accounting policy, Lanco eliminates income (at PAT level)
earned from construction related services to its subsidiaries, however, still
pays taxes on such income. With almost 60% of its order-book from
projects which are internal in nature, we believe earnings will continue to
be a function of the quantum of elimination of construction income. We
reduce our earnings estimates by 28%-51% over FY12E-14E primarily to
reflect eliminations and have now valued the construction order book on
cash methodology (DCF vs. EV/EBITDA earlier)
3. Valuations look inexpensive, but clarity on pipeline key for rerating:
We believe the current market price reflects value of existing
projects but not reflect of the pipeline. We, however, believe the Street will
start assigning full value to the pipeline on higher visibility of ‘profitability’
of the projects which is contingent on: 1) assurance of domestic coal
supplies; and 2) terms of PPA (critical for utilization rates). With no
visibility on production growth of Coal India limited from FY13E onwards,
we believe profitability of pipeline continue to remain uncertain.
Valuation
We reduce our SOTP-based target price to Rs21 from Rs43 primarily on
account of: 1) Assigning negative value to construction division due to
increase in debt on its parent balance sheet; 2) Valuing pipeline only on
equity invested so far, pending visibility on coal supplies; 3) Lower value
to Udupi project due to delay in the pipeline; 4) Reflected negative value
to Griffen asset to reflect the downside risks of their dispute with
Perdaman lower valuation of construction business
Key risks
Further delay in commissioning of Udupi/Anpara projects is the key
downside risk and visibility on fuel supplies to the pipeline is the key
upside risk.
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