LANCO INFRATECH- Plant shutdown and lower EPC margins hit earnings: Edelweiss

Visit http://indiaer.blogspot.com/ for complete details �� ��


LANCO INFRATECH
Plant shutdown and lower EPC margins hit earnings



􀂃 Plant shutdown and lower EPC margins dent earnings
• Lanco Infratech (Lanco) reported PAT of INR 704 mn against our estimate of
INR 2,467 mn in Q2FY11. The reported PAT included forex gain of INR 299
mn and hence adjusted PAT would be INR 406 mn.
• Power earnings were subdued since the entire merchant capacity (666 MW)
had lower generation in the quarter due to maintenance shutdown at
Amarkantak I (300 MW) and partial operations of Kondapalli II 366 MW
which was commissioned during the quarter. Moreover, the company has
sold sizable power on exchanges in the INR 2.8-3.6/kWh range, bringing
down weighted average realisations to INR 4.03/kWh for the quarter.
• EPC margins were hit due to postponement of revenue booking which is
done on the basis of milestones achieved in project execution. Since most
execution milestones of the Udipi project were concluded in Q3FY11, the
revenue and profit booking will accordingly move forward to the third
quarter, which is likely to post higher numbers. Although margins are
volatile Q-o-Q, they are expected to be stable at 15-16% on annual basis.


􀂃 EPC order book at INR 245 bn; traction expected from Harbin tie up
EPC order book of INR 245 bn would expand further as equipment orders have
been placed with Harbin of China with which it has a tie up for ~10 GW.
Management guided that a project will be considered in its EPC order book only if
environment clearance and 100% land, water and fuel linkages are received.

􀂄 Outlook and valuations: Growth momentum key; upgrade to ‘BUY’
We have revised down FY11E earnings by ~25% to reflect Q2FY11 impact. The
traction in power projects is robust, especially post the recent financial closure
announcements of four projects aggregating ~4.6 GW, taking Lanco’s total
pipeline and operational capacity to ~ 9 GW. The ~ INR 250 bn order book is
expected to expand further due to Harbin tie up. While the outlook is bright,
risks in the form of EPC margins, timely execution, and operational efficiency
which impacts power profits are key issues which could dent earnings. With
recent correction in stock price and traction expected from financial closure of
new projects, we expect limited downside from these levels. Hence, we are
upgrading our recommendation on the stock to ‘BUY from ‘HOLD’. On relative
return basis we rate the stock ‘Sector Outperformer’.