Lanco Infratech share construction & contracting civil

Lanco Infratech: Powering up execution (updated - 23 July 2010)
Strong execution —critical for earnings visibility for power projects — has been noticed in case of Lanco Infratech. Its systematic and mostly ontrack commissioning of projects has seen the total capacity grow from 511 Mw in FY09 to 1,995 Mw in FY10. The company also increased its employee count from 3,200 in FY08 to 5,500 in FY10. If execution rate remains strong, the company will have a generating capacity of 8,384 Mw by 2015, according to analysts.

The interesting part is that the company has built hedges against fluctuations in input costs. Its revenues will be skewed in favour of the power business. It has focused on projects with complete or partial fuel cost pass-through mechanisms. Analysts estimate such projects will constitute 70-80 per cent of the total capacity from FY11 to FY15. This is expected to support valuations.

The fact that the company has an in-house engineering, procurement and construction division means faster execution, which it has already demonstrated. Moreover, the need for an upfront equity in projects can also be avoided, say analysts at Citi. Overall, other fundamentals, like coal supply and financial closures for four of its projects, remain strong.

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Analysts are confident of the company achieving the said targets, as its execution track record has been good. Recently, it achieved financial closure of Phase-I (1,320 Mw) of its largest project - a 2,640Mw plant in Orissa that accounts for 30 per cent of the total planned power portfolio of over 9,000 Mw by FY15.

Sourcing of coal, which is the single biggest risk factor for most power sector players, has also been sorted for capacities coming onstream till FY15. Lanco’s success in its efforts of scouting for coal mines in Australia, Indonesia and Africa will further ease fuel risk.

The market gave a thumbs-up to the IPO move, with the stock gaining 1.54 per cent to `69.45. Better revenue visibility and in-house construction division, which ensures timely completion of projects, are huge positives. Analysts expect a 20 per cent upside in the stock over the medium term.
Source - Business Standard

Lanco Infratech: Powering up execution (updated - 29 Sept 2010)
An initial public offer (IPO) to form a separate listed power company will unlock huge value for Lanco Infratech. Given the current high leverage of 2.5 times, the move will help the company raise enough funds for its aggressive capacity addition plans.

The power business forms nearly 70 per cent of the estimated average sum-of-theparts valuation at about `83 a share. The company plans to raise power capacity to 9,000 Mw by FY15 and to 15,000 Mw thereafter. In the short term, Lanco will be doubling its current operational capacity of 2,087 Mw by the end of FY11. Another 5,000 Mw is under development, which includes the Vidarbha (1,320 Mw) and Amarkantak PhaseIII & IV (1,320 Mw). The company is also looking for overseas power projects. It has bid for a 600-Mw project in southern Sumatra that involves a capital outlay of $775 million.

Lanco Infratech Ltd (updated - 17 Dec 2010)
In order to secure fuel to take generation capacity to 15,000 Mw by 2014-15, Lanco Infratech is reported to have paid about `3,800 crore for 100 per cent stake in Griffin Coal, the largest operational thermal coal miner in Western Australia, with estimated reserves of 1.1 billion tonnes.

Analysts are positive on companies (including Lanco) buying coal assets abroad as domestic production of coal is lagging demand. Also, developing domestic captive coal blocks involves operational and regulatory hurdles. Sourcing coal from captive mines abroad guarantees timely supply and protection from volatile prices.

However, analysts are concerned that Indian companies are paying too much for coal assets. Based on the deal amount (in rupee terms), Lanco’s acquisition, at around `35 atonne, is estimated to be expensive compared to Adani’s (Linc Energy`16 a tonne) and JSW Energy’s (CIC Energy `7a tonne). The three acquisitions are not strictly comparable, considering the location of the mines and the coal quality. But the fact that Lanco’s officials are not disclosing the deal amount before completing the formalities highlights the possibility of it being expensive.

However, Lanco will have to spend less on creating infrastructure for evacuation and transport of coal, unlike in the other two cases. The mines are strategically located on Australia’s western coast (closer to India) and well connected to two ports through rail and road.

Lanco plans to almost quadruple the mines’ current capacity of four million tonnes ayear over the next three-four years. The decision to import captive coal (and the quantity) will depend on the requirements of power plants in India and arbitrage opportunities available to the company in a rising coal price scenario, given its intention to participate in the burgeoning natural resources trading market.

In the medium term, the acquisition will put a strain on the company’s already stretched balance sheet (2.5 times consolidated net debt to equity ratio as on September).
source - business standard

Interestingly, the company will be changing its method of calculating depreciation to 14 per cent of the effective written down value from the 5.3 per cent straight-line earlier. This could drive down earnings estimates as the depreciation amount is expected to double in the next three financial years. But, tax savings could positively impact free cash flows and result in a reduction of taxation expenses.

More important, analysts are looking at a reduction in the stock’s volatility as the company has witnessed high risk-oriented price movements over the past six months.
Source - Business Standard