>Lanco Infratech (ICICI Securities)

Steadyfast Growth....

As per our recent interaction with the management of Lanco, the execution of its power projects is continuing at a fast pace. We expect the company to start commercial operations of Amarkantak-I (300MW) in the next 1-2 months. Lanco’s operational capacity will rise to 2,000MW from 500MW in the next 15 months. Other projects expected to be commissioned are Kondapalli-II (October ’09; 366MW capacity), Amarkantak-II (November ’09, 300MW capacity), hydro projects (20MW capacity) and Udipi (April ’10; 600MW capacity). Also, the EPC segment will witness growth as power projects worth ~Rs100bn and 4,000MW capacity are expected to achieve financial closure in the next 12 months. The recently won 3,000MW power projects, Rajpura & Dhopave, and the Vizhinjam port project will provide additional impetus to orderflow. Given the visible growth in Lanco’s EPC orderbook, discounted valuations for the power portfolio and healthy execution of its power projects, we maintain BUY on Lanco with revised target price of Rs274/share from Rs206/share.

■ Liquidity concerns overdone. Lanco’s cash & cash equivalent and outstanding debt was at Rs10bn and Rs53bn respectively as of end Q3FY09. We believe this is adequate to fund the company’s capex. Cumulative capex for under-construction power projects of 4,000MW capacity was at Rs168bn, of which ~Rs65bn has already been expended, with an equity contribution of Rs22bn (34% of the total project cost). We expect Rs20-25bn equity requirement for projects under
construction over the next three years; this could be met by annual cashflows from the EPC business (~Rs4bn) and operational power plants (~Rs4-5bn). We believe that current reserves are sufficient to meet equity requirements of planned projects that are yet to achieve financial closure. Lanco’s foreign exchange risk from equipment purchase post the buyer’s credit utilisation breaks even at ~Rs49. The company’s real-estate portfolio is cashflow neutral; its residential segment has
advances of Rs3bn (2.5mn sqft sold of 4mn sqft) and equity contribution of Rs2.6bn, with ~Rs6bn debt outstanding. The company has slowed down the execution of the commercial portfolio and will await better environment to launch its projects.

■ Valuations. We raise our NAV estimates to Rs60bn or Rs274/share from Rs45bn or Rs206/share earlier. Based on FY09E, FY10E & FY11E EPS estimates, the stock is trading at P/E of 14.4x, 12.2x & 8.6x respectively. We expect earnings to remain stable as revenues from EPC division (50% contribution) are dependent on execution of internal power projects and earnings from power plants would steadily increase owing to commissioning of new projects. Lanco is trading at FY11E P/BV of 1.6x. Maintain BUY.

To see full report: LANCO INFRATECH