Lanco Infratech - Outperformer - IDFC Securities

• Lanco Infratech (CMP: Rs70)
• Mkt Cap: Rs169bn; US$3.6bn
• Bloomberg code (LANCI IN)

Highlights of Q1FY11 results

- Lanco Infratech's Q1FY11 recurring PAT (post minorities and share of associates) at Rs2.3bn (+181% yoy) was ahead of estimates (Rs1.05bn) on the back of lower than expected interest and depreciation, even as EBITDA came in-line.

- Net sales fell 3.1% yoy to Rs21.3bn (in line) on the back of lower revenues from the construction business. The company has completed or is in the final stages of completing some large orders while execution is yet to scale up in recent order wins, leading to the yoy decline in construction revenues. Power segment revenues on the other hand increased by 41% yoy, led by commissioning of Kondapalli (Phase 2) and Amarkantak (units 1 and 2) and merchant sales from both the plants. Lanco realized average merchant tariffs of Rs6.15/unit from the 233MW gas-based Kondapalli 2 and Rs5.63/unit from the 600MW coal-based Amarkantak power plants.

- Led by merchant sale of power and improved construction business profitability, EBITDA more than doubled to Rs5.95bn, in line with estimates. Construction EBIT margins increased by 210bps to 16.9%, while EBIT margins of the power segment stood at 22.2% as against 6.3% in Q1FY10.

- Net interest costs and depreciation, although higher on a yoy basis, by 2.6x at Rs1.6bn and by 4.7x at Rs1.6bn respectively, were below estimates. Resultant, PBT jumped by 50% yoy to Rs3.09bn, ahead of estimates.

- The effective tax rate for Q1FY11 was at 11.4%, as Lanco claimed a higher depreciation tax shield, following adoption of the WDV method (higher depreciation in initial years) for Kondapalli 2 and Amarkantak.

Valuations & View

We have upgraded our consolidated earnings estimates for Lanco by 9.8% and 6.5% for FY11 and FY12 respectively, on the back of the lower than expected interest and depreciation during the quarter. Our revised earnings estimates are Rs3.4/share for FY11 and Rs2.8/share for FY12. Our consolidated earnings show a yoy decline in FY12, due to netting off of higher construction business profits on consolidation of accounts.

We continue to like Lanco's business model of reinvesting EPC cash flows and earnings in the infrastructure development business, aiding rapid scale up of its assets portfolio, with limited equity dilutions. Going forward, we see regular triggers for the Lanco stock, led by commissioning of 1,800MW of power capacity over the next 8-10 months and a future pipeline of value accretive assets under development. The strong cash flow generation over the next 2-3 years is expected to lend significant leverage to Lanco in capitalizing on the emerging large opportunities in the power sector in the medium to long term. We maintain our Outperformer rating on Lanco with a revised 12-month price target of Rs86 per share, based on FY12 cash flows of the power and infrastructure projects and FY12 earnings of the construction business.

Source : Equity Bulls

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