Stock Views on CASTROL, LANCO INFRATECH

CITIGROUP on LANCO INFRATECH

Citigroup maintains `Buy' rating on Lanco Infratech. Citigroup expects Lanco to increase capacity 4.2x to 8,384 MW by FY15E. This would drive EPS growth of 23% over FY10-13E with average RoE of 19%. Citigroup's EPS cut is driven by a sharp increase of about 100% in depreciation expense over FY11-13E. Lanco will now depreciate all thermal projects commissioned in and after FY10 at about 14% effective WDV (written down value) versus 5.3% straight line earlier. This actually positively impacts cash flows and valuations due to tax savings. Lanco has added Amarkantak 1 (300 MW) in March '10, Udupi 1 (507 MW) in June '10 and Kondapalli (133 MW) in Jul10, taking total capacity to 1,995 MW from 511 MW in less than one year. Lanco has increased employee count from 3,200 in FY08 to 5,500 in FY10, a clear sign of the execution ramp-up. Lanco has tied up coal supply, land for main plant and necessary clearances for 3,960 MW capacity. Construction of Babandh (1,320 MW) and Amarkantak 3&4 (1,320 MW) has started while Vidarbha (1,320 MW) is set to start construction in two-three months. Construction of Kondapalli expansion (742 MW) is in full swing and the company expects the plant to be commissioned in XIth plant itself.

RBS on CASTROL

Castrol's Q2FY10 results show that it is delivering on its promise of both topline and bottomline growth, which should help bridge the valuation gap with its peer group. RBS raises the earnings forecasts 6-18% and assumes a valuation in line with the peer group, thus raising the target price to Rs 525 from Rs 375. With strong earnings growth in Q2FY10 Castrol reported topline and bottomline growth of 17% y-o-y in Q2FY10. This growth was particularly creditable since Q2FY09 showed a record margin due to a sharp drop in base oil prices. Based on company's performance in H1FY10, it is on track to deliver volume growth without sacrificing its margins. RBS has raised the volume growth estimates from 4.4% to 8.5% in FY10 and from 2.5% to 3.1% in FY11/12 and raised the net profit forecast by 6-18% over FY10-12. With the company now poised to deliver on volume growth, it deserves to be valued in line with its FMCG peer group, based on Bloomberg consensus estimates, especially given its higher return profile. Consequently, RBS maintains the `Buy' rating.