>LANCO INFRATECH: Amarkantak: Unit 2 Synchronized, Unit 1 operating at 80% PLF; Buy (GOLDMAN SACHS)

What's changed
Lanco Infratech indicated that they synchronized Unit 2 of Amarkantak power plant and expect it’s commissioning during the next quarter. Also, our analysis of data from western load dispatch centre YTD indicates that Unit 1 is operating at 75-80%. Plant Load Factor (PLF) with an average realization of Rs3/kwh in the Unscheduled Interchange (UI) market, and the company expects it to be fully commissioned over next month. Pending resolution of the court case on sale of output of Unit 1, we assume Lanco will sell the output through the regulated mechanism.

Implications
The synchronization of Unit 2 and consistent PLF for Unit 1 gives us more visibility on commissioning of Amarkantak power project. Further, our calculations indicate the cash inflows of Unit 1 (since synchronization in May 09) have so far resulted in 21% reduction in capital cost.

We expect the stock’s underperformance versus BSE Power index (14% YTD) to narrow in the medium term primarily due to 1) 2x increase in capacity (2300MW from 750MW) by FY11E on commissioning of i) 600MW of Amarkantak; ii) 133 MW of Kondapalli Phase II; and iii) 1,015MW Udupi plant, and consequently Lanco’s earnings profile to improve in FY11E with the power division constituting 72% of FY11E EBITDA; and 2) rising power deficits leading to strength in the merchant rates. We expect the rates in bilateral market to range between Rs5-7/kwh over the next 6 months.

Valuation
We raise our 12-m SOTP-based TP to Rs61 (from Rs59.8) to price in Kondapalli Phase III (742MW). We estimate Lanco will deliver 66% EPS CAGR over FY10EFY12E and is trading at a discount to its peers on FY11E P/E and P/B. We have cut our FY10E/11E/12E EPS ests by 2%/7%/4% primarily due to increase in minimum alternate taxes to 18% from 15%.

Key risks
1) Funding constraints necessitating capital raising; 2) Execution delays.

To read the full report: LANCO INFRATECH