Tuesday, January 4, 2011

Lanco Infra

A key coal asset acquisition is likely to help alleviate fuel requirement concerns over power projects.


A large engineering, procurement and construction (EPC) contract, acquisition of high-quality mines and improvement in business prospects are positives for Lanco Infratech, believe analysts.

The Rs 4,100-crore EPC contract for setting up a 1,320-Mw power plant for a Moser Baer subsidiary and the A$750-million (Rs 3,375 crore) acquisition of coal assets of Australian company Griffin Coal provide revenue visibility and secure supply of coal requirements for Lanco’s power plants. Post the two events, analysts have turned bullish on the stock and expect decent returns from the current levels.

IMPROVING PROFITABILITY

In Rs crore FY10 FY11E FY12E

Revenue 8,032 11,255 17,357

Interest 355.41 815 1,684.60

PAT 450 671 646

RoNW (%) 13.50 12.40 9.70

NPM (%) 5.60 6.00 3.70

Ebitda (%) 17.00 27.30 30.70

RoCE (%) 12.70 8.50 10.90

PE (X) 33.30 22.40 23.20

Debt/equity 2.50 3.70 3.70

Ebit/Interest 3.10 2.40 1.80

E: Estimates Source: Analyst report

Fuel needs secured

The Australian mines have proven reserves of 310 million tonnes and total estimated resources of 1.1 billion tonnes. The new mines will reduce dependence on external sellers, which at times could be very costly due to the vagaries of international coal prices. The company currently has an operational power generation capacity of 2,700 Mw, which it wants to take to 15,000 Mw by 2015.

POWER DOMINANT

Sum of parts

valuation In % Rs/share

Power 77.11 64

Construction 18.07 15

Real estate 3.61 3

Road projects 1.20 1

Total 100 83


If it is assumed that the company will need 30 per cent of imported coal, the new mines could easily meet those requirements. Along with the ramp-up in the domestic power generation capacity, the company will enhance the output from its Australian mining to 20 million tonnes over the next five-six years from the current output of four million tonnes annually. This will secure the long-term supply of coal needed for its power generation capacity in India. Also, analysts believe at a landed cost of $85 per tonne, the landed cost of coal will be very competitive compared with the $120 a tonne from non-captive sources.

In-house orders

The company has an integrated business model with interests in power, construction and real estate. The EPC division hitherto used to get a large chunk of its order book from internal projects. Apart from power projects, the EPC segment also caters to internal and external infrastructure projects in real estate and roads.

More importantly, the trend is changing as the company has bagged a few large external client projects in the power EPC, including the EPC contract worth Rs 4,100 crore. The increasing proportion of external clients has shown the company’s ability and competitiveness, which is good considering there are large opportunities in the power EPC business itself.

Meanwhile, the company has a strong order book of Rs 25,000 crore (including Rs 5,000 crore of orders coming from external clients), which is almost three times its 2009-10 revenue and provides very good visibility. On the back of this, analysts expect the EPC revenue could grow 20-22 per cent annually over the next two years.

Valuations

On a sum-of-parts basis, analysts value the company at Rs 80 a share (at a current market price of Rs 62.3), which also includes the valuations of its real estate project and two BoT road projects. The power generation and EPC businesses — both major revenue contributors —are the key growth drivers. This is also a reason that these two segments form 80 per cent of the company’s valuations. In the realty segment, the company plans to develop 4.5 million square feet of commercial and residential space on its 100-acre real estate project, Lanco Hill.

However, in terms of valuations, the project is valued at just Rs 3 a share (of the total Rs 80 for the company), which is largely due to the analysts’ concern over the clarity of its development plans.
 
Courtesy: http://www.business-standard.com/india/news/strong-order-book-boosts-lanco/s-prospects/419893/

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