ICICIdirect_LancoInfratech_Q2FY11

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					     Result Update
                                                                                                                                                                                        November 16, 2010
Rating matrix
Rating                                           :        Buy                                                                                      Lanco Infratech (LANINF)
Target                                           :        | 73
Target Period                                    :        12 months                                                                                                                                            | 63
Potential Upside                                 :        16%
                                                                                                      WHAT’S CHANGED…
Key Financials
                                                                                                      PRICE TARGET ......................................................................Changed from | 76 to | 73
(| Crore)                       FY09                  FY10                FY11E            FY12E
Net Sales                    6070.9                  8107.5               8739.6          12891.3     EPS (FY11E) ........................................................................Changed from | 3.1 to | 2.7
EBITDA                         823.6                 1451.5               2538.7           3966.6     EPS (FY12E) ........................................................................Changed from | 5.6 to | 4.0
Net Profit                     280.4                  458.5                652.9            956.2     RATING................................................................................... Changed from Add to Buy
Valuation summary                                                                                     Results disappointing, long-term story intact…
                                 FY09                 FY10                FY11E             FY12E
                                                                                                      Lanco Infratech’s Q2FY11 sales stood at | 2041.7 crore, up 6% YoY on
PE (x)                               60.4               36.9                25.9              17.7    account of higher revenues from the power business (increase of 87%
Target PE (x)                        62.1               38.0                26.7              18.2    YoY). EBITDA stood at | 416.7 crore (32.7% YoY growth). Depreciation
EV/EBITDA (x)                        27.2               15.5                 8.8                5.7   and interest cost increased by 412.5% and 238.0% YoY on account of
P/BV (x)                              8.1                 5.1                4.4                3.6   commissioning of the power project and change in depreciation
RoNW (%)                             14.3               16.9                18.1              22.2    methodology (additional depreciation of | 137 crore on account of
                                                                                                      WDV). PAT stood at | 194.7 crore (de-growth of 42.5% YoY).
RoCE (%)                              6.2                 6.4                9.0              11.9
Stock data                                                                                            Capacity addition of 1870 MW in H2FY11
Market Capitalisation                                                             | 15028 Crore       The total operating capacity of the company stands at ~2082 MW. We
Debt (FY10)                                                                           | 8361 Crore    expect total generation capacity to reach 3,957 MW in FY11E and 4,699
Cash (FY10)                                                                            | 963 Crore    MW in FY12. During the quarter, total generation stood at 2,382 MUs
EV                                                                                | 22427 Crore       (21% growth QoQ). Amarkantak (Unit I) was under planned maintenance
52 week H/L                                                                                 74/41     shutdown in August for around 18 days. Hence, it had only very short-
Equity capital                                                                         | 239 Crore    term PPA resulting in lower realisation. Udupi unit II (600 MW) is ready for
Face value                                                                                      |1    synchronisation but commissioning was delayed on account of a delay in
MF Holding (%)                                                                                  2.4   transmission lines. The company has indicated that it will get charges
FII Holding (%)                                                                              20.2     during this period, thereby protecting the RoEs of the project.
Price movement                                                                                        EPC and construction disappoints
     80                                                                                               In Q2 FY11, EPC revenues and PBIT declined by 26% and 46% on YoY
                                                                                         6300
                                                                                         5400         basis. The current order book of the company stands at | 2,54,254 crore.
     60                                                                                               We expect ~10% growth in this segment in FY11E and FY12E. Out of the
                                                                                         4500
     40                                                                                  3600         current order book, the external order book stands at around ~12%.
                                                                                         2700
                                                                                         1800
                                                                                                      Due to less-than-expected growth in the EPC segment and a slight delay
     20
                                                                                         900          in commissioning of power plants (capacity slippage of 600 MW cannot
      0                                                                                  0            be ruled out), we have revised our FY11E and FY12E earnings (PAT)
                                                                                                      downwards by 11% and 28%, respectively.
                                        Apr-10
          Nov-09

                   Jan-10

                            Mar-10




                                                      Jun-10

                                                                 Aug-10

                                                                             Oct-10




                              Lanco                    Nifty(R.H.S.)
                                                                                                      Valuation
                                                                                                      With capacity addition of 1870 MW in H2FY11 from the power vertical,
Analyst’s name
                                                                                                      and pick-up in the EPC vertical, we foresee limited equity dilution and
 Chirag Shah                                                                                          steady profitability, going forward. At the CMP of | 63, the stock is trading
 shah.chirag@icicisecurities.com
                                                                                                      at P/E of 25.9x (FY11E) and 17.0x (FY12E) and P/BV of 4.4x (FY11E) and
 Sanjay Manyal
                                                                                                      3.6x (FY12E). We reiterate our positive stance on the stock with a price
 sanjay.manyal@icicisecurities.com
                                                                                                      target of |73 and BUY rating.
 Darshan Dodhia
 darshan.dodhia@icicisecurities.com                                                                   Exhibit 1: Performance highlights (Consolidated)
                                                                                                      (| Crore)                Q2FY11        Q2FY10                    Q1FY11         QoQ (Chg %)           YoY (Chg %)
                                                                                                      Net Sales                 2,041.7      1,926.6                   2,125.6                -3.9                   6.0
                                                                                                      EBITDA                      416.7        314.1                     595.4               -30.0                  32.7
                                                                                                      EBITDA Margin (%)            20.4          16.3                     28.0           -760 bps               411 bps
                                                                                                      Depreciation                170.3          33.2                    155.1                 9.8                412.5
                                                                                                      Interest                    175.4          51.9                    156.7                11.9                238.0
                                                                                                      Reported PAT                 70.5        122.6                     194.7               -63.8                 -42.5
                                                                                                      EPS (|)                      0.30           0.5                      0.8               -63.8                 -42.5
                                                                                                      Source: Company, CEA, ICICIdirect.com Research

     ICICIdirect.com | Equity Research
  Lanco Infratech (LANINF)




                                                                Exhibit 2: Power division contributes ~ 55% to sales and 69% of EBIT

                                                                                       Contribution to sales                                 Contribution to EBIT

                                                                      100%
                                                                                                                                 100%
                                                                       50%                                                        50%

                                                                         0%                                                        0%




                                                                              Q2FY09


                                                                                         Q4FY09


                                                                                                   Q2FY10


                                                                                                            Q4FY10


                                                                                                                      Q2FY11




                                                                                                                                        Q1FY09

                                                                                                                                                       Q3FY09

                                                                                                                                                                Q1FY10

                                                                                                                                                                         Q3FY10

                                                                                                                                                                                   Q1FY11
                                                                      -50%                                                       -50%

                                                                    Construction       Power       Property Development         Construction          Power        Property Development


                                                                Source: Company, ICICIdirect.com Research




Exhibit 3: Power operating metrics


                                        Kondapalli I              Kondapalli II               Amarkantak               Aban         Vamshi Industrial                    Vamshi Hydro
Projects                                 (366 MW)                  (233 MW)                    (600 MW)              (120 MW)          (10 MW)                             (10 MW)


Units Generated (Mus)                       654                        516                        964                    230                      3                               15
Net sales (| cr)                            187.7                     221.9                       280.7                 67.7                     0.8                              4.4


EBITDA (| cr)                                          126.60                                     164.5                 28.8                 0.33                                 3.8
EBITDA Margin (%)                                      30.91                                      58.6                  42.5                 41.3                                 86.4
PAT (| cr)                                              56.1                                       33                   14.8                     -0.9                             1.6
PAT Margin (%)                                          8.6                                       11.8                  21.9               -112.5                                 36.4
Average Realisation (|/ unit)               2.87                      4.30                        2.91                  2.94                 2.67                                 2.93
Source: Company, ICICIdirect.com Research


                                                                Earnings revision
                                                                Exhibit 4: Revised earnings (PAT) by 11.4 % and 28 % for FY11E and FY12E
                                                                                        Revised Earnings                   Revised Earnings
                                                                          Previous           FY11E       % change Previous      FY12E       % change
                                                                Sales       9531.9                8739.6      -8.3 16491.1          12891.3     -21.8
                                                                EBITDA      2718.5                2538.7      -6.6  4523.6           3966.6     -12.3
                                                                PAT         736.58                652.87     -11.4 1326.25           956.18     -27.9
                                                                Source: ICICIdirect.com Research




                                                                Outlook and valuation
                                                                With significant visibility from the power vertical, several projects near
                                                                their commissioning schedule and steady cash flow generation on
                                                                account of the company’s existing operational projects we see limited
                                                                dilution and steady profitability, going forward. We expect the immediate
                                                                operating profitability to be driven by the power vertical.

                                                                However, we have revised our earnings estimates downwards for FY11E
                                                                and FY12E primarily on account of the slow growth rate in the EPC
                                                                vertical.




     ICICIdirect.com | Equity Research
                                                                                                                                                                                   Page 2
  Lanco Infratech (LANINF)



                                                          At the CMP of | 63, the stock is trading at P/E of 25.9x (FY11E) and 17.0x
                                                          (FY12E) and P/BV of 4.4x (FY11E) and 3.6x (FY12E). We reiterate our
                                                          positive stance on the stock with a price target of | 73 (SOTP valuation).
                                                          The primary value driver for Lanco Infratech is the power segment, which
                                                          is valued at | 45 per share (62% of valuation) followed by EPC and others
                                                          that includes real estate.

                                                          Exhibit 5: Project wise valuation of power vertical

                                                                                                 Udipi Power plant
                                                                                                                            Anpara
                                                                               Amarkantak III & IV


                                                                          Amarkantak II                                             Babandh

                                                                                                                                        Vamshi Hydro

                                                                           Amarkantak I                                                Vamshi Industrial
                                                                                                                                          Lanco Green Budhil
                                                                                                                            Lanco Hydro
                                                                            Citradurga                                       Uttranchal
                                                                                          Aban             Kondapalli II              Lanco Energy
                                                                    Tamil Nadu Wind                                Kondapalli - I        Teesta
                                                                                            Kondapalli III




                                                          Source: Company, ICICIdirect.com Research




Exhibit 6: Valuation of power vertical
                                            Capacity                Valuation Equity Value LITL Capacity M Cap / MW Per share                           Project cost
                                              (MW) LITL share (%)       (| Cr)       - LITL       (MW)         (| Cr) valuation                 Fuel          (| Cr)
Kondapalli - I                                  368            59       1,185          699          217           3.2       2.9                 Gas           1,097
Kondapalli II                                   360            59       1,037          612          212           2.9       2.6                 Gas           1,190
Kondapalli III                                  732            59       1,666          983          432           2.3       4.1                 Gas           2,452
Aban                                            120            51         518          264           61           4.3       1.1                 Gas             414
Tamil Nadu Wind                                    9         100           12            12            9          1.3       0.1                Wind              48
Citradurga                                         3         100            4             4            3          1.2       0.0                Wind              14
Amarkantak I                                    300            91       2,236        2,044          274           7.5       8.6                 Coal          1,350
Amarkantak II                                   300            91         534          488          274           1.8       2.0                 Coal          1,350
Amarkantak III & IV                           1,320            91         779          712        1,206           0.6       3.0                 Coal          6,600
Udipi Power plant                             1,200          100        1,307        1,307        1,200           1.1       5.5                 Coal          5,880
Anpara                                        1,860          100        1,043        1,043        1,860           0.6       4.4                 Coal          8,016
Babandh                                       2,640          100        1,629        1,629        2,640           0.6       6.8                 Coal         15,180
Vamshi Hydro                                     10            91          50            46            9          5.0       0.2                Hydro             80
Vamshi Industrial                                10            91          11            10            9          1.1       0.0                Hydro             80
Lanco Green Budhil                               70            90         131          118           63           1.9       0.5                Hydro            420
Lanco Hydro Uttranchal                          150            90         473          426          135           3.2       1.8                Hydro            912
Lanco Energy Teesta                             500            74         464          343          370           0.9       1.4                Hydro          3,000
Lanco Electric Utility - Trading arm                         100          103          103                                  0.4
Total                                         9,952                   13,182       10,739         8,976                      45                                48,083
Source: Company, ICICIdirect.com Research




     ICICIdirect.com | Equity Research
                                                                                                                                                               Page 3
  Lanco Infratech (LANINF)




ICICIdirect.com Coverage universe (Power)

NTPC                                                          Sales (| cr)   EPS (|)   PE (x)   EV/E (x)   PB (x) RoNW (%)   RoCE (%)
Idirect Code      NTPC             CMP        190     FY10       48,256.4       10.7    17.7       13.9      2.6      14.9       13.0
                                   Target     226     FY11E      52,107.9       10.6    18.0       16.0      2.4      13.7       11.6
Mcap(| cr)        164,084.7        % Upside   18.9    FY12E      61,952.0       10.9    17.4       10.4      2.2      13.1       11.1
                                                                                                                                RoCE
Lanco Infratech                                               Sales (| cr)   EPS (|)   PE (x)   EV/E (x)   PB (x) RoNW (%)        (%)
Idirect Code      LANINF           CMP          63    FY10        8,107.5        1.9    32.8       15.5      5.1      16.9        6.4
                                   Target       73    FY11E       8,739.6        2.7    23.0         8.8     4.4      18.1        9.0
Mcap(| cr)        3,175.8          % Upside   15.9    FY12E      12,891.3        4.0    15.7         5.7     3.6      22.2       11.9
                                                                                                                                RoCE
Neyveli Lignite                                               Sales (| cr)   EPS (|)   PE (x)   EV/E (x)   PB (x) RoNW (%)       (%)
Idirect Code      NEYLIG           CMP        154     FY10        4,121.0        7.4    20.7       20.6      2.6      12.6        7.4
                                   Target     151     FY11E       4,441.3        7.4    20.9       15.7      2.4      11.1        7.4
Mcap(| cr)        26,340.0         % Upside   (2.1)   FY12E       5,194.6        8.3    18.5       12.4      2.2      11.8        7.9
                                                                                                                                RoCE
PTC                                                           Sales (| cr)   EPS (|)   PE (x)   EV/E (x)   PB (x) RoNW (%)       (%)
Idirect Code      POWTRA           CMP        137     FY10        7,770.3        3.2    25.6       14.5      1.6       5.1        7.2
                                   Target      UR     FY11E       9,976.3        4.4    18.7         9.4     1.5       6.0        8.3
Mcap(| cr)        3,293.8          % Upside       -   FY12E      10,701.4        7.1    11.6         4.2     1.4       9.3       12.9
                                                                                                                                RoCE
NHPC                                                          Sales (| cr)   EPS (|)   PE (x)   EV/E (x)   PB (x) RoNW (%)        (%)
Idirect Code      NHPC             CMP        30.5    FY10        5,227.3     102.0       0.3      11.8      1.5       9.3        8.7
                                   Target       33    FY11E       4,297.1     102.0       0.3      15.2      1.5       4.8        5.3
Mcap(| cr)        36,902.2         % Upside    8.2    FY12E       5,969.9     245.0       0.1      10.9      1.5       6.4        6.3
                                                                                                                                RoCE
JP Power                                                      Sales (| cr)   EPS (|)   PE (x)   EV/E (x)   PB (x) RoNW (%)       (%)
Idirect Code      JAIHYD           CMP          62    FY10          676.7        1.2    51.6       30.7      4.3       6.7       10.7
                                   Target       71    FY11E         724.0        1.3    48.0       27.5      4.0       7.5        5.5
Mcap(| cr)        15403.2          % Upside   14.5    FY12E       2,405.2        4.1    15.1         8.7     3.4      15.1       12.0
Source: Company, ICICIdirect.com Research




      ICICIdirect.com | Equity Research
                                                                                                                               Page 4
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;
Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

                                  Pankaj Pandey                                          Head – Research                                       pankaj.pandey@icicisecurities.com

                                                                        ICICIdirect.com Research Desk,
                                                                        ICICI Securities Limited,
                                                                        7th Floor, Akruti Centre Point,
                                                                        MIDC Main Road, Marol Naka,
                                                                        Andheri (East)
                                                                        Mumbai – 400 093

                                                                         research@icicidirect.com

ANALYST CERTIFICATION
We /I, Chirag Shah CA Sanjay Manyal PGDBM Darshan Dodhia MBA-CM research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research
report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the
specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.


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