Tuesday, October 11, 2011

Buy Lanco Infratech, target Rs 30: Nomura

Pushback in project timelines, materially lower near-term realisations and higher cost of funds largely explain the sharp earnings downgrade.


Nomura has given a buy recommendation on Lanco Infratech with a target price of Rs 30.

"In our view, Lanco's current market price ignores potential value accretion from its project pipeline beyond FY12; instead it partially reflects the risk of a funding gap and overhang from unresolved contractual/legal issues. We expect FY11-13F EBITDA and normalised EPS CAGR at 70 per cent on the back of higher contribution from power generation. At 0.7 times P/B and 4.5 times P/E on FY13F earnings, multiples are arguably ‘distressed’ and at a discount to its peers. We maintain a buy on the stock, but cut the 12-month target price to Rs 30 (from Rs 51) on reduction in value of power business (down from Rs 41 to Rs 22) and higher CoE," the brokerage said.

Pushback in project timelines, materially lower near-term realisations and higher cost of funds largely explain the sharp earnings downgrade.

"In our view, earnings sensitivity to these variables entails a fair risk-reward payoff from our base case; lingering contractual/legal issues remain a risk," the brokerage said.

As much as 82 per cent of equity required for its 5.9GW pipeline (ex-renewables, Udupi) is already invested; while group cash flows would suffice for the balance equity funding and AU$250 million required for Griffin Coal. Loan disbursals are on schedule; AU$483 million loan repayable in FY15/16 will require refinancing.


Commissioning of 1870MW capacity by March 2012 and operating its 3.9GW diversified capacity at healthy utilisation levels would restore execution credibility. Other catalysts include visibility on gas allocation/availability for KP-III and resolution of project-specific contractual/regulatory/legal issues, it added.



Courtesy: http://www.moneyguruindia.com/article.php?cid=2258&id=4

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