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Lanco Infratech
Q3FY11 Result /Estimate change 9 February 2011
Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDbn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs45.3 LANCI IN LAIN.BO 2,407.8 2,407.8 91.5/2 75/37 4,453,374 1
Buy
Target Price: Rs73 CMP: 38* Upside: 92%
*as on 8 February 2011
LANCO INFRATECH
Source: Bloomberg, Centrum Research *as on 8 February 2011 Q3FY11E 26,495 14,403 4,903 Var (%) (41.1)
Q2FY11 % Chg (QoQ) 20,417 9,241 5,673 1,082 255 16,251 4,167 20.41 1,703 1,754 710 725 0 93.9 1,341 378 28.2 963 259 259 1 705 705 3.45 (23.5)
(17.3) 57.3
15.2
74.7 577.6
417.6
(44.0) (33.2)
54.7 268.5
303.5
112.1
88.1
7.6
53.5 3.7
132.8
8.0 (27.1)
This is the second consecutive quarter where the company has continued to sell a part of Kondapalli IIs gross generation in the UI market. UI sale from Unit 2 of Amarkatak was expected. SEBs backing down and resorting to UI power is a phenomenon observed across the country, and this has affected the PLF and realizations of all major IPPs. Exhibit 2: PLF and realizations of LITLs TPP
Q3FY11 Plant Name Kondapalli Amarkantak Aban Udupi PLF 73 75 92 91 Realisations 3.33 2.84 2.76 3.16 Q2FY11 PLF 74 73 88 Not Operational Realisations 3.55 2.84 2.79
The company changed the depreciation policy of Amarkatak and Kondapalli II to SLM form WDV with retrospective effect and thus there was a depreciation write-back of Rs4bn and a consequent increase in tax expense of Rs2.5bn. Overall Q3FY11 PAT was reported at Rs1.64bn. Adjusted PAT for the quarter was Rs1.1bn, against our estimate of Rs1.5bn.
Changes in Estimates
In view of the developments in the power sector and the change in depreciation policy adotpted by the company, the following are the changes made to our estimates: The share of outside EPC order in total power EPC order-book has increased from 5.2% at the end of Q2FY11 to 21% at the end of Q3FY11. Also, the company has bagged a NHAI project between Aligarh and Kanpur. Thus, we believe the margins of the segment will come down to ~14% going forward. The transmission line for Udupi TPP is not ready yet and thus the PLF of the plant will get impacted once Unit 2 gets operational. The management has indicated that the line will not be ready before July 2011. Incorporating a further delay from managements guidance, we have assumed that for a large part of FY12E the plant will be recovering only its normative PAF under the PPA. Extrapolating the trend of last two quarters, we believe that LITL will continue to sell a portion of the Kondapalli II power on UI, and will thus report suppressed realisations during FY11E. We have thus, revised our FY11E realization from Rs4.5/unit to Rs4/unit and FY12E realisation form Rs4/unit to Rs3.5/unit. However, there is a strong possibility that FY12E realisation will surpass our estimate as Tamil Nadu assembly elections are due in 2011-12. Similarly, we expect realisations from Amarkantak, also to remain suppressed at Rs2.8/unit during the current year as it will continue to sell ~50% of gross generation on UI. We have assumed that since Uttar Pradesh too will be facing elections in FY12-13E, the realisations will improve to Rs3/unit in FY12E and Rs2.6/unit in FY13E.
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Overall, we revise out revenue estimates downwards to Rs103bn (-11.7%) and 162.5bn (-4%) for FY11E & FY12E. However, due to the change in depreciation policy our revised PAT estimates are higher by 18% and 36% at Rs7.4bn & Rs18.6bn for FY11E & FY12E. Exhibit 3: Change in Assumption/Estimates
FY10 Old Standalone Reveue (Rs mn) Revised Standalone Reveue (Rs mn) % Change Old Standalone PAT (Rs mn) Revised Standalone PAT (Rs mn) % Change Average Realisations (old) (Rs/unit) Amarkantak Kondapalli II Average Realisations (revised) (Rs/unit) Amarkantak Kondapalli II Udupi Gross Generation (Old), MU Udupi Gross Generation (Revised), MU Overall Change in Estimates Consolidated Revenues (Old), Rs mn Consolidated Revenues (Revised), Rs mn % Change Consolidated PAT (Old), Rs mn Consolidated PAT (Revised), Rs mn % Change Source: Company, Centrum Research Estimates 4,586 4,586 81,076 81,076 116,753 103,046 (11.7) 6,287 7,427 18.1 169,191 162,490 (4.0) 13,713 18,676 36.2 188,752 187,009 (0.9) 16,410 23,200 41.4 5.72 2.77 4.00 1752 986 2.94 3.50 9724 8410 2.53 3.30 9724 9461 5.72 3.21 4.50 2.93 4.00 2.62 3.30 4,864 4,864 58,867 58,867 FY11E 66,159 68,174 3.0 5,178 4,197 (19.0) FY12E 88,822 93,027 4.7 7,464 5,930 (20.5) FY13E 97,704 102,329 4.7 8,192 6,519 (20.4)
Valuation
LITL has corrected sharply by over 40% in the last three months, primarily due to a) concerns on the financial health of SEBs and particularly its impact on merchant power players, b) highly leveraged balance sheet of LITL and c) dependence of E&C segment on internal orders. We concede that LITL has a relatively high leverage when compared to utilities like NTPC and PGCIL. However, LITLs leverage is relatively higher as it has under-taken a capacity expansion of over 4x its existing scale. Going forward, as under-construction capacity gets operational leverage will reduce. Exhibit 4: Improving Debt/Equity and interest coverage Ratios
(%) 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 FY10 FY11E FY12E Int Cov
Source: Company, Centrum Research
4.00 3.24 2.45 3.00 2.45 2.16 2.05 1.78 2.11 2.18 2.34
2.06
1.74 1.22
FY13E
FY14E D/E
FY15E
FY16E
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Deteriorating financial condition of SEBs is a cause for concern and more of a systemic issue. The current practice of SEBs backing down can only be a temporary measure, and by no means a solution. A sustainable solution to the existing scenario is reforms in the T&D sector that helps to de-politicise the power sector. In the near term, we see this trend reversing in regions of operation of LITL. Both Tamil Nadu and Uttar Pradesh will have assembly elections in 2011-12 (LILT has Amarkantak in Uttar Pradesh, which is practically selling the entire power in the short-term market, and Kondapalli in Andhra Pradesh). We believe that concerns over the dependence of the EPC segment on internal orders has been to some extent addressed as the company has already bagged two big outside power EPC orders. The outside power EPC orders now constitute 21% of its overall power EPC order-book. However, due to lesser proportion of outside orders in comparison to other EPC players, we continue to value the EPC segment at a 20% discount to its construction peers, i.e. 8x FY13E P/E. Due to a downward revision in EPC & the construction segments margins and P/E multiple, the revised FY13E fair value of the segment is Rs22/share, against earlier fair value of Rs34/share. The change in depreciation policy has also brought down plant-wise DCF based value to Rs47/share, from Rs53/share. Therefore, the revised SOTP fair value now stands at Rs73/share, i.e. 19.5% downward revision from our earlier target price. At 4.8xFY13E P/E and 1.7xFY13E P/B, the stock is trading at a significant discount to its fair value, we therefore maintain Buy on the stock. Our target price implies a FY13E P/B multiple of 2.7x, and holds a 92% upside from the CMP. Exhibit 5: SOTP Valuation
Vertical Power Generation Power Trading EPC & Construction Realty Investments & Cash Total Value Source: Company, Centrum Research Basis DCF 10xF13 PE 8xFY13PE 0.5xBV Per Share Value (Rs) 47 1 22 2 1 73
Projects update
Udupi Power Plant (1200MW) started commercial operations in Dec 2010. The plant operated at a PLF of 90% in the month of Dec 2010. Anpara TPP is expected to get operational in FY12E. LITL bagged a turn-key thermal power EPC contract for a 1200MW from Moser Baer during the quarter. The project is worth Rs 40bn. The company has also won a NHAI project, between Aligarh and Kanpur. The order is of ~Rs10bn, of which Rs2.9bn will be received as grant from NHAI.
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Financials Consolidated
Exhibit 6: Income Statement
Y/E March (Rsmn) Revenues Growth in Revenues (%) O&M Exp % of Revenue Administrative Exp % of Revenue Total Operating Expenditure Operating Profit Operating Profit Margin (%) Depreciation PBIT Interest Expense PBT before Non-operating Income & Extra-ordinary Items Other Non-Operating Income PBT before Extra-Ordinary items Extra-ordinary Items PBT Tax Effective Tax Rate PAT (Reported) Adjusted PAT Minority Interest (MI) PAT After MI Growth in PAT (%) PAT Margin (%) 6,178 1,690 27.4 4,487 4,487 1684 2,804 (20.8) 7.3 10,077 3,643 36.2 6,434 6,434 1849 4,586 63.6 7.8 14,874 5,250 35.3 9,624 9,624 2197 7,427 62.0 9.3 26,769 6,180 23.1 20,588 20,588 1913 18,676 151.5 12.6 32,295 7,774 24.1 24,521 24,521 1321 23,200 24.2 13.0 FY09 60,710 87.3 49,076 80.8 2,750 4.5 51,826 8,884 14.6 1,073 7,810 2,185 5,625 552 6,178 FY10 FY11E FY12E FY13E 81,076 103,046 162,490 187,009 33.5 61,494 75.8 4,311 5.3 65,805 15,270 18.8 3,479 11,792 3,554 8,237 1,839 10,077 27.1 72,422 70.3 6,493 6.3 78,915 24,130 23.4 1,645 22,485 8,518 13,968 907 14,874 57.7 109,428 67.3 4,161 2.6 113,589 48,902 30.1 7,081 41,821 16,117 25,704 1,064 26,769 15.1 124,107 66.4 5,285 2.8 129,392 57,617 30.8 8,345 49,272 18,180 31,093 1,202 32,295
14.6 13.65 10.08 7.3 87.3 27.0 (20.8) 8.7 9.9 14.3 1.67 79.50 72 296 1.87 1.87 2.31 8.72
18.8 16.44 12.15 7.8 33.5 71.9 63.6 8.3 9.1 16.9 0.95 73.23 100 218 2.05 2.05 3.17 10.68
23.4 22.50 14.31 9.3 27.1 58.0 62.0 8.2 10.0 20.0 0.78 78.37 72 290 3.07 3.07 3.60 13.05
30.1 26.22 16.37 12.6 57.7 102.7 151.5 12.1 13.3 37.2 0.95 87.91 60 325 6.57 6.57 8.84 19.02
30.8 26.82 17.16 13.0 15.1 17.8 24.2 11.2 12.2 32.6 0.87 36.51 50 280 7.83 7.83 10.50 26.43
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Appendix A
Disclaimer
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