>LANCO INFRATECH (EDELWEISS)

ON TRACK

We recently met Lanco Infratech’s (LITL) management and visited its Kondapalli power plant, to get the latest business update. Following are key takeaways:

■ Existing 368 MW plant running at full capacity
Post commercialisation of RIL’s KG gas basin, LITL has been receiving 1.6–1.65 mmscmd of gas, enabling Kondapalli stage 1 to operate at 94% PLF.

■ 366 MW Kondapalli stage II plant expected to be operational in Sept/Oct
Work on Kondapalli plant phase II is in final stages of completion with management confident of commissioning the gas turbine (233 MW) by end of Sept/early Oct. This plant will be initially run on open cycle; with commissioning of the steam turbine (133 MW) by Q4FY10, it will be a combined cycle plant.

■ Output will be sold on merchant basis
Management has indicated that the entire capacity will be merchant based, while our interactions with state energy department officials indicate that only a portion is based on merchant. Government officials further stated they are only processing requests for regulated/competitive bid projects. However, with respect to fuel linkage, both the government officials and the company management indicated that in principle allocation of natural gas to the requisite level has been done.

■ Further expansions planned
Management indicated that it will finalise plans to expand the capacity by ~750 MW (phase III & IV) at the same location. It also said that the proximity to Krishna river and anticipated higher KG basin output will alleviate water and gas issues.

■ Potential upsides to our forecasts
We have assumed earnings of INR 717 mn from this plant in our FY10 estimates assuming merchant tariff and sale of ~610 mn units. If LITL is able to operationalise the plant, source fuel, and execute merchant sales for the entire capacity, then there could be upside risks to our earnings forecasts.

■ Outlook and valuations: Back-ended growth; maintain ‘HOLD’
At CMP of INR 420, the stock is trading at 2.8x FY10E and 2.2x FY11E book value. We have a ‘HOLD’ recommendation on the stock. On a relative return basis, the stock is rated ‘Sector Outperformer’.

To see full report: LANCO INFRATECH