infrastructure sector stocks lanco infratech share

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Lanco Infratech has little downside risk at this price

Little downward risk
The shares of Lanco Infratech are being traded in the stock markets for around Rs.18. The company is an integrated infrastructure development company with presence in power, engineering, procurement & construction, roads and highways and property development. Weekly high price was Rs.19.30. Monthly high price was Rs.25.20. Yearly high price was Rs.74.70. The face value of the company’s shares is Rs.1. At this price of Rs.18, there is very little downward risk. Investors can buy the shares of Lanco Infratech at this price for medium term holding. The share price will rise even in the short term when the stock markets recover from the present shock. In one to two years time, investors can easily double their money.

Successful bidder
The company has emerged successful bidder for coal block in Chhattisgarh. The company will invest over Rs.13000 crore for the Gare Pelma II coal block of Maha Tamil Collieries to set up a 2000 MW power plant and for developing the coal block at Raigarh in the State of Chhattisgarh. It will take four years for the projects to take off. The company won this bid against competition from established players like GMR, GVK, L&T, Jindal Power, Reliance Coal and Sterlite. The company has coal assets in Griffin in Australia and Rampia block in India. Lanco Infratech’s presence in the resource sector has increased to over 2 billion tonnes. 30% of the power generated will go to Chhattisgarh, 50% will go to Tamil Nadu and the balance 20% will be sold on commercial basis. Maha Tamil Collieries is a joint venture between TNEB and MSMC. Maharashtra, instead of getting power, will get 23% of the coal mined in the mines. The mine has a reserve of 768 million tonnes of coal.

Negative bid as a clever strategy
Lanco Infratech submitted a negative bid of Rs.112 per tonne for getting the contract. In effect, it will pay Rs.112 for every tonne of coal mined. The other competitors sought payment for mining operations. For example, Sterlite sought Rs.175 per tonne. There is a view in industry circles that Lanco Infratech had overstretched itself in this competition. But Lanco Infratech says that it has worked out the cost factor after a thorough analysis and made the offer. Power producers today get half their supply of coal through linkages at Rs.1000 a tonne and the remaining through e-auctions at Rs.2500 per tonne. Thus the average cost works out to Rs.1750 per tonne. Lanco Infratech can obtain coal at a cheap rate of Rs.650 per tonne. This should have weighed its calculations while offering a negative bid.

Lawsuit in Australia
Lanco Infratech is facing a lawsuit in Australia. Australia’s Perdaman Industries filed a $3.5 billion lawsuit against Lanco Infratech, seeking a restraint on the Indian company from mortgaging of Griffin coal in future. Perdaman alleged in its lawsuit that Lanco Infratech was guilty of non compliance with coal supply pact for its upcoming urea plant in Western Australia. Lanco Infratech acquired Griffin mines for A$730 million in March against competition from 16 companies including Chinese companies. It has coal resources of 1 billion tonnes. Lanco Infratech’s contract with Perdaman is for supply of 2.75 million tonnes of coal per year. Lanco Infratech is contesting the suit. It has appointed the high profile law firm Clifford Chance to fight the case The company’s export of coal from Griffin mines to India is also under review. The review came out because Lanco Infratech announced its intention to raise the coal prices. Also it hinted suspension of supplies to Griffin Energy owned Bluewaters Power Station, which supplies 10% of the power to Western Australia. Lanco also has plans to supply this superior quality Griffin coal to India for its power projects as Indian coal has high ash content and inferior calorific value. If the review goes against the company, the company’s very purpose of acquiring Griffin will be defeated. It has to tread on cautious path and settle this dispute with Bluewaters Power Station amicably.

Largest private power company in India
Lanco Infratech was evaluated as the front runner for undertaking the UCG (Underground Coal Gasification) project at Thesgora near Nagpur. It has reserves of 187 million tonnes. Lanco Infratech bagged an engineering, procurement and construction (EPC) project valued at $81.3 million in Iraq for setting up a power plant in Al Anbar province. It is scheduled to be completed in 16 months. Lanco Infratech is India’s largest private electricity generator. It has overtaken Tata Power to achieve this honour. The company has set a target of achieving 15000 MW capacity in 2015 at an investment cost of Rs.35000 crore. At present the company has an installed capacity of 3300 MW. The company is also looking for acquiring more coal mines in Australia, India, Indonesia and South Africa.

Business restructuring plans
Lanco Infratech has business restructuring plans. It wants to hive off its core businesses namely power generation into a separate company. It may come about in two years time. Later on, engineering procurement and construction, solar, natural resources and infrastructure will be hived off. The company has submitted bids for gas, coal and hydro power projects in Indonesia, Middle East and Bangladesh. The company is looking forward to power equipment manufacturing business.

Rising interest rates, a concern
The rising interest rates will affect Lanco Infratech as its debt equity ratio of 3.8 is above industry average. For the March quarter, interest expenses increased by 41% over the previous quarter. Because of this, the March quarter profit dropped by 85% to Rs.17 crore compared to the corresponding period of the previous year at a plant utilisation of 65%. When the company borrows more amounting to $5.6 billion to finance its expansion, plans, the debt equity ratio will rise further. It may depress its profitability further. This is the reason for the depression in the share price of Lanco Infratech. Stock market has shunned the company’s shares for the last one year. The cost of rupee funds has become expensive. However, Lanco Infratech plans to raise $2.2 billion debt overseas at cheap rates. A rising rupee value against the dollar will be an advantage for the company in debt servicing. Difference between rupee and dollar loans for five year benchmark rupee rates for top companies is around 4.5%. Already Lanco Infratech has a debt of $1.8 billion. Its profit has more than doubled in three years. For raising further loans, Lanco Infratech needs to expand its equity also. The company also has sufficient cash flows to fund its growth.

Property Development
4mm sq ft under development in Hyderabad, India Developing Lanco Hills, mixed used space of high rise residential structures, IT SEZ office space, shopping malls and hotels

Some updates
Current government is putting lot of emphasis on infrastructure spending and growth.
Government is targeting investment greater then US$400 billion during 2007-2012.
Power is likely to be the fastest growth sector in the foreseeable future in Infrastructure.
Positive regulatory reforms remain a key driver of growth.
In the XI th five year plan (2007-2012), the Government targets to add 78,700 MW of generating capacity.

Conclusion
The company Lanco Infratech is having good growth prospects in future and investing at current levels will provide excellent returns in next two to five years
Current price - Rs 20
Company website - www.lancogroup.com
Expected returns - 70% to 80%
Holding period - 2 years