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Removed from Asia Pacific Conviction Buy List
Lanco Infratech (LAIN.BO)
Equity Research
Removing from Conviction List on underperformance; maintain Buy
What happened
We remove Lanco Infratech from the Conviction List following recent
underperformance. Since we added Lanco Infratech to the Conviction List
on February 23, 2011, the stock decreased 26.9% vs. a 3.7% decline in BSE
Sensex. In the past 12 months, Lanco’s stock price has declined 59.5% vs.
a 0.4% decrease in BSE Sensex. We attribute this underperformance
primarily to 1) rate hikes by RBI which magnified the risk of high leverage
(Lanco’s FY11 net debt to equity of about 4:1); 2) Negative news flow on
the availability of domestic coal and gas; 3) Weak 4Q results on account of
higher eliminations of construction revenues.
Current view
We believe the concerns relating to high debt are overdone as 1) almost
40% of the capacity in operation operates under regulated mechanism,
where higher interest costs are a pass through; 2) Lanco already deployed
about 50% of equity commitments for 4,000MW of projects under
development and has already achieved the financial closure for these
projects. The uncertainty on funding for these projects appears to be low,
in our view. Further, with almost 70% of capacity (Udupi and Anpara)
operating under fuel pass through mechanism, we believe Lanco is
relatively less exposed to higher fuel prices, in our view.
We, however, revise down our 12m SOTP-based target price to Rs44 (from
Rs54 earlier) and EPS estimates by 10%/4%/1% for FY12E/13E/14E
primarily by 1) not assigning any value to Babandh power project pending
further clarity on progress for land acquisition for captive coal mines
associated with the project; and 2) lower PLF’s for Kondapalli due to lack of
visibility on gas supplies.
The stock is currently trading at FY12E P/E of 8x and at 1.2x P/B at
38%/45% discount to its peers. We believe the stock is not assigning any
value to the construction division and also for its 1000MW projects under
construction (Kondapalli III and Teesta). Higher than expected decline in
merchant prices and adverse regulatory changes are the key risks.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Cautious
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Removed from Asia Pacific Conviction Buy List
Lanco Infratech (LAIN.BO)
Equity Research
Removing from Conviction List on underperformance; maintain Buy
What happened
We remove Lanco Infratech from the Conviction List following recent
underperformance. Since we added Lanco Infratech to the Conviction List
on February 23, 2011, the stock decreased 26.9% vs. a 3.7% decline in BSE
Sensex. In the past 12 months, Lanco’s stock price has declined 59.5% vs.
a 0.4% decrease in BSE Sensex. We attribute this underperformance
primarily to 1) rate hikes by RBI which magnified the risk of high leverage
(Lanco’s FY11 net debt to equity of about 4:1); 2) Negative news flow on
the availability of domestic coal and gas; 3) Weak 4Q results on account of
higher eliminations of construction revenues.
Current view
We believe the concerns relating to high debt are overdone as 1) almost
40% of the capacity in operation operates under regulated mechanism,
where higher interest costs are a pass through; 2) Lanco already deployed
about 50% of equity commitments for 4,000MW of projects under
development and has already achieved the financial closure for these
projects. The uncertainty on funding for these projects appears to be low,
in our view. Further, with almost 70% of capacity (Udupi and Anpara)
operating under fuel pass through mechanism, we believe Lanco is
relatively less exposed to higher fuel prices, in our view.
We, however, revise down our 12m SOTP-based target price to Rs44 (from
Rs54 earlier) and EPS estimates by 10%/4%/1% for FY12E/13E/14E
primarily by 1) not assigning any value to Babandh power project pending
further clarity on progress for land acquisition for captive coal mines
associated with the project; and 2) lower PLF’s for Kondapalli due to lack of
visibility on gas supplies.
The stock is currently trading at FY12E P/E of 8x and at 1.2x P/B at
38%/45% discount to its peers. We believe the stock is not assigning any
value to the construction division and also for its 1000MW projects under
construction (Kondapalli III and Teesta). Higher than expected decline in
merchant prices and adverse regulatory changes are the key risks.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Cautious
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