Buy Lanco Infratech : Nomura Research

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At Rs206mn, normalized net loss was lower than our forecast net loss of Rs303mn (consensus forecasted PAT of Rs476mn), while revenues and EBITDA were marginally ahead of our forecast (7-9% below consensus); however, earnings were buoyed by converting Vidhraba SPV from a subsidiary to an Associate. Reported net loss was Rs2.6bn, largely due to notional f/x loss of Rs2.9bn. While power business financials were lackluster and Griffin Coal remains in the red, EPC business surprised positively as solar EPC execution kicked-in. Await mgmt commentary at its earnings call tomorrow; maintain BUY.

[1] Normalized net loss of Rs206mn; revenue/EBITDA came in marginally above forecast…

At Rs206mn, Lanco’s normalized net loss (consolidated) was lower than our forecast net loss of Rs303mn (consensus had forecast a net profit of Rs476mn); consolidated revenues and EBITDA were marginally ahead of our forecast (7-9% below consensus). Reported net loss of Rs2.6bn (vs. a reported PAT of Rs138mn in 1QFY12 and Rs705mn in 2QFY11) was largely on account of the notional exchange fluctuation loss of Rs2.9bn (non-cash items).

[2] …however, earnings were buoyed by converting Vidhraba SPV from a subsidiary to an Associate

During the quarter, Lanco converted its SPV, housing the under-construction 1320MW Vidharba project, from a wholly-owned subsidiary to an ‘associate’, thus enabling it to retain 100% of revenues & EBTIDA and 26% of net profit (as opposed to fully eliminate) earned by its parent entity (EPC business) in the consolidated P&L. As per the reduction in the order book for Vidharba, potential revenue addition from this restructuring could be up to Rs2.4bn (12.7% of net consolidated revenues). Lanco’s reported loss does include a non-cash one-off gain of Rs489mn on account of a balance sheet adjustment following this restructuring.

[3] Notional f/x loss is a concern for cash flows, debt repayment timeline becomes critical

Lanco’s net-debt to equity for consolidated/group rose to 3.4x and 5.4x as of September 2011, up from 2.8x and 4.3x respectively as of March 2011. As of March 2011, 25% of Lanco’s consolidated secured debt was denominated in foreign currency (which may not include buyers’ credit). While the non-cash exchange fluctuation loss of Rs2.8bn is currently notional, as the Rupee has not appreciated since end-September, near term foreign currency denominated debt repayment timeline becomes critical to assess the potential impact on cash flows.

[4] Power business – Profitability below expectation as merchant realization disappoints

Although 2QFY12 utilization level (PLF) for its 1454MW commercial capacity (excluding Udupi and Vamshi units) was at 65% (2% higher than our forecast), at Rs3.6/kWh, blended merchant realization was 10% below our forecast of Rs4/kWh.

[5] Udupi facility remains in the red, but PLF improves significantly

Generation at Udupi power plant rose sharply QoQ (PLF up from 42% in 1QFY12 to 61% or 80%; magnitude appears different based on reported PLF and reported generation), leading to a 7% QoQ rise in EBITDA. However, as fixed charges are not being fully recovered, the facility remains unprofitable – 2QFY12 net loss was Rs383mn, albeit 4% lower than the loss in 1QFY12.

[6] EPC business – EBITDA margin surprises, solar EPC execution boost revenues

Although standalone (largely all ex-solar EPC) revenues came in 3% below our forecast at Rs17.6bn, EBITDA margin at 13.9% was 190bps ahead of our expectation, resulting in standalone net profit (normalized for notional exchange fluctuation loss of Rs937mn) of Rs804mn, 55% above our forecast. At the consolidated level, EPC revenues were boosted with the execution of solar EPC execution kicking-in (a quarter earlier than our expectation), resulting in an overall EPC EBITDA margin at ~19%, as per our calculations. EPC order book stood at Rs292bn as of 2QFY12.

[7] Griffin Coal remains in the red in 2QFY12

By our calculations, Griffin Coal’s revenues were 40-50% lower QoQ, potentially due to a seasonally weak quarter wherein export sales are minimal. Together, the subsidiaries relating to Lanco’s Australian operations posted a net loss of Rs0.7bn in 2QFY12, after adjusting for the exchange fluctuation loss of Rs1.7bn,

What next – earnings call on Monday at 0945hrs IST

We particularly look forward to management’s commentary on 1) capacity commissioning timeline, 2) debt repayment timelines, 3) update on Griffin Coal production / capex and 4) outlook for merchant realizations / capacity tie-ups.