Stock Review: LANCO INFRATECH

While the performance of Lanco Infratech power business was strong, the disappointing show by its construction and EPC business resulted in a dismal March 2011 quarter. The March quarter earnings dropped 85% year-onyear to . 17 crore, the lowest in the past eight quarters and net sales declined 17% to . 1,999.2 crore.

As the company has added capacities over the past one year, it would be more appropriate to compare the operational performance on a quarter-on-quarter basis. Despite under-utilisation of most of its power plants, operating profit from power business rose 68% sequentially. For the March quarter, plant utilisation was 65%, down from 73% in December quarter, but the average realisation per unit was surprisingly high at . 4.7 per unit versus . 3 in the December quarter. This was mainly driven by higher merchant realisation per unit. Revenues from the construction business declined 17.5% sequentially and the margins declined to 8.5% from 17.7%. As the construction business mainly generates revenues by servicing its own power businesses, it will not have much cash impact on a consolidated basis. However, it reflects the delays in project executions. Lanco Infratech currently has 2,080 mw capacity with around 5,000 mw under construction. One can expect delays in the upcoming capacity by a few months and plant utilisation would continue to remain low. Key reasons are the fuel deficit the company continues to face – for both coal and gas and unavailability of the transmission lines for a few of its plants. Lanco Infratech would not prefer to increase its capital work in progress for projects which currently don't have a fuel guarantee.

One more concern is its highly leveraged balance sheet. Its current debt to equity ratio is 3.8, which is very high compared to the industry average. The interest outgo in the March quarter increased 41% on sequential basis. With rising interest rates and delay in the cash flows, profitability will remain under pressure. All these concerns have led a sharp correction in the stock. It has corrected by almost 50% in the past six months and now trades at a very low price-to-book value of 1.3. Any improvement in fuel supply and moderation in interest rates can be positive triggers.