Stock Review: Lanco Infratech

 

Wth new capacities going on stream and flow of orders rising, Lanco's performance is expected to improve substantially over the next two years

After the acquisition of large coal mines in Australia in February this year, Lanco Infratech is now in the news as it emerges as the largest independent power producer in India. It recently commissioned a 1,045 mw power project, which led to its power generation capacity rising to 3,292 mw. Recently Norway's central bank picked up 7.19 per cent stake in Lanco from the open market. A couple of days back, the company emerged as the lowest bidder for a 1,980 mw power project (Maha Tamil). All these developments put together have helped Lanco's stock recover from a low of Rs 31 in February to Rs 37 currently. Given the stock's underperformance in 2011, valuations have become reasonable. Most analysts have 'buy' rating on the stock from along term perspective, with one-year target price (based on sum of the part valuations) ranging Rs 43-52.

Cash flow boost

After the synchronisation of 600 MW (Unit-I of Lanco Anpara Power, a wholly owned subsidiary) recently, Lanco's total operational power generation capacity has more than doubled to 3,292 mw compared to last year. The impact of these new capacities is expected to be huge on the company's cash flows and financials. For instance, its revenues and net profits are expected to grow at an average 40 per cent and 55 per cent, respectively during FY12-13. Importantly, analysts estimate the company to generate cash flows of about Rs 5,000-5,500 crore (equivalent to 60 per cent of its current market value) during FY11-13, which the company could utilise to fund the equity portion of its future power projects.

Strong pipeline

The company has big plans in the power business with an aim to set up capacity worth 15,000 mw by end-2015. The pipeline is good with projects of about 5,953 mw under various stages of construction. Additionally, the company in consortium with US-based Massey Energy Company has emerged as the lowest bidder for the 1,980 mw power project by Maha Tamil Colleries, for which the final announcement is awaited. The project includes development of coal mines with estimated reserves of 650 million tonnes.

The company not only has a huge project pipeline, but most of its projects have achieved financial closure and have secured fuel, which provides confidence about its plans in the power sector. The company recently acquired coal assets of an Australian company, Griffin Coal. Analysts say, even assuming a 30 per cent requirement for imported coal, the company can feed most of its power projects which are to be commissioned till 2015.

Besides, it can also deal better with volatile coal prices thereby keeping its costs under control.

Related diversifications

Thermal-based power projects apart, the company has also forayed into solar power EPC business and plans to set up solar module manufacturing capacity of 50 mw and wafer capacity of 80 mw per annum by end-FY13. That apart, it will also set up its own solar power projects for which it has already won bids for supplying 141 mw of power to State governments under power purchase agreements stretching 20-25 years at Rs 10-15 per unit.

Notably, the company is restructuring its power business, which includes power generation, power trading, and plans to get into power Transmission &Distribution segments. The company could hive off its power business into a separate entity followed by an IPO, which could not only help in enhancing its funding ability, but also create value for the company's shareholders.

Improving revenue mix

Though a large part or 86 per cent of Lanco's valuations are attributed to its power business, its infrastructure and construction EPC business, which accounts for 62 per cent of consolidated revenue, too has seen traction in terms of order wins from external clients. The company has projects worth Rs 27,500 crore on hand, which is almost 3.7 times its 2010-11 estimated revenue and provides good visibility. Among these include development of national highway road projects of 163 km on build-operate-transfer basis and an airport project at Varanasi.