Stock Review: Lanco Infratech

Lanco Infratech reported an 85 per cent year-on-year decline in quarterly net profits, on the back of a poor performance of its engineering, procurement and construction (EPC) business and higherthan expected inter-segment eliminations. For the full year ended March, it reported a 2.7 per cent decline in net profit to 458.5 crore, while its revenues were down 3.7 per cent over the previous year.

Analysts have reduced their estimates and remain cautious in the near term. However, over the next two years, the growth in earnings is expected to be strong at about 30 per cent, driven by higher contribution from the power business and strong order book in EPC. Meanwhile, at `34, the stock is trading at reasonable valuations of about 9.5 times estimated earnings and eight times the enterprise value to operating profits of financial year 2012-2013. The markets weren't too enthused with the numbers announced on Sunday, pushing the stock down eight per cent intraday on Monday.

POWER BIZ UP, EPC LAGS

During the year ended March, the power segment, which accounts for about 40 per cent of total revenue, reported a 37 per cent jump in revenue to 4,945 crore, with a significant 140 per cent jump in the earnings before interest and tax, led by a jump in operating profit margins. This was helped by a robust merchant power realisation, of `4.25-4.75 per unit. Overall, this helped the company to compensate for the poor performance of the EPC business.This business, more than the half of consolidated revenue, was up amere 1.8 per cent. Importantly, operating margins in this segment reported a 132basis points decline, leading to the decline in overall earnings. The company says lower EPC revenues and margins were due to shift in some of the milestone payments for projects such as Vidarbha, Udupi and Babandh to the first half of the current financial year.

LARGE ORDERS, LOWER PLF

The current year would be critical in terms of revenue growth and earnings. There are chances that some of the EPC projects which got shifted to the current year could result in better growth in revenues and earnings. Though margins could remain a problem in the near term, the company has good revenue visibility in terms of the order book, now a little over `30,000 crore, almost five times its latest revenue from that segment.

Besides, there are triggers in the power segment. Last year, the company doubled its power generation capacity to 3,292 Mw. However, the full impact is yet to reflect in the current and next financial year numbers, given the low plant load factor (PLF) and availability of fuel. For instance, the Kondapalli unit of 716 Mw posted a lower PLF of 60 per cent due to shortage of gas. The Amarkantak and Udupi plants (600 Mw each) also operated at lower PLF due to transmission bottlenecks. The company is expecting the problem to be rectified this year and, thus, will be able to increase its PLF. That apart, the company is trying to resolve the gas shortage issue, failing which it would look at other alternatives. Thus, the existing power portfolio has some more leeway in terms of contribution to revenues and profits.

ADDING POWER

The company is planning to add another 1,500 Mw capacity by March 2012. By September this year, it will commission the second unit of 600 mw at the Anpara power project in Uttar Pradesh and another 600 Mw at Udupi by December. This is also why most of the growth in this year and the next would come from the power business. However, this will not be as easy, as the company faces challenges on account of gas availability, augmentation of transmission capacities, project delays and litigation on its power purchase agreement with the Haryana government pertaining to Amarkantak Unit2, with capacity 300 Mw. If it can overcome these challenges, the turnover of its power business, on the back of new capacities, could grow 50 per cent this year to `7,7008,000 crore, almost equal to its 2010-11 consolidated revenues.