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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

Target Price: Rs73 CMP: 38* Upside: 92%
*as on 8 February 2011

Results below estimates; Maintain buy

Lanco Infratech Ltds (LITL) Q3FY11 results were below our estimates. Revenue was 41% lower than our estimate at Rs15.6bn, due to under-performance by the power segment. This trend in the power segment is expected to continue in FY11E but reverse in FY12-13E, as the regions where LITLs power plants are located have state assembly elections during the period. Factoring in the overall sluggishness in the EPC space, we have revised our FY13E target P/E multiple to 8x, and thus value the E&C segment at Rs22/share. The power segment is valued at Rs47/share. Overall, we arrive at SOTP value of Rs73/share, which holds a 92% upside from the CMP. We recommend Buy on the stock. Results below estimates: Revenues during the quarter degrew 3% YoY to Rs15.6bn, against our estimate of Rs24.5bn. The deviation was due to lower power revenues, which declined 36% QoQ to Rs8.5bn. Adj. PAT for Q3FY11 stood at Rs1.1, vis-a-vis our estimate of Rs1.5bn. Lower margins for E&C segment: We believe the margins of E&C segment will come down to ~14%. Change in Estimates: Assuming lower power realizations, FY11E & FY12E revised revenue estimates now stand at Rs103bn (-12%) and Rs162.5bn (-4%). However, due to the change in depreciation policy and assuming lower E&C margins, the revised PAT estimates are Rs7.4bn (18%) and Rs18.7bn (36%) in FY11E and FY12E, respectively. Valuation: The stock is currently trading at 4.8xFY13E P/E and 1.7xFY13E P/B, which we believe is at a significant discount to its fair value. We thus recommend Buy.
Y/E Mar (Rsmn) Total Income Raw Material Purchase of Power Employee Cost Other Exp Operating Expenditure EBIDTA EBIDTA Margin (%) Depreciation Interest Operating EBT Other Income Foreign Exch.Fluctuations Elimination of profit on trnsctins with Associates PBT Tax Effective Tax Rate (%) PAT PAT After Extra-Ordinary Less: Minority Interest Add: Share of Associates Net Profit Net Profit after MI NPM (%) Source: Company, Centrum Research Q3FY11 15,615 7,819 1,127 1,232 636 10,815 4,800 30.74 (765.4) 1,890 3,675 1,842 0 107 5,410 3,369 62.3 2,041 963 362 (38.9) 1,640 1,107 7.08 Q3FY10 % Chg(YoY) 16,128 9,743 2,488 626 219 13,077 3,050 18.91 378 569 2,104 272 205 (3.2)

One year Indexed Stock Performance

180 160 140 120 100 80 60 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11



Price Performance (%)

1M Lanco NIFTY (36.0) (9.7) 6M (44.4) (2.8) 1Yr (22.8) 10.8

Deepali Gautam deepali.gautam@centrum.co.in +91 22 4215 9194

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


74.7 577.6


19,306 7,189 27.13 2,504 2,310 2,376 500

(44.0) (33.2)

54.7 268.5

2,171 859 39.6 1,312 1,482 245 2 1,068 1,068 6.62

149.2 292.0 55.6



2,876 978 34.0 1,898 1,221 380 1,518 1,518 5.73



53.5 3.7


8.0 (27.1)

Y/E Mar (Rsmn) FY09 FY10 FY11E FY12E FY13E

Rev 60,710 81,076 103,046 162,490 187,009

YoY (%) 87.3 33.5 27.1 57.7 15.1

EBITDA 8,884 15,270 24,130 48,902 57,617

EBITDA (%) 14.6 18.8 23.4 30.1 30.8

Adj PAT 2,804 4,586 7,427 18,676 23,200

YoY (%) (20.8 ) 63.6 62.0 151.5 24.2

Fully DEPS 1.9 2.1 3.1 6.6 7.8

RoE (%) 14.3 16.9 20.0 37.2 32.6

RoCE (%) 8.7 8.3 8.2 12.1 11.2

P/E (x) 20.2 18.3 12.2 5.7 4.8

EV/EBITDA (x) 15.3 11.2 12.1 6.68 5.92

P/B (X) 4.4 3.9 3.2 2.3 1.7

Source: Company, Centrum Research Estimate

Please refer to important disclosures/disclaimers in Appendix A

Q3FY11 results below estimates

Q3FY11 results of LITL were below estimates. Revenues for Q3FY11 were Rs15.6bn, down 3% YoY and 27% QoQ. Revenues for the quarter were 41% lower than our quarterly estimate of Rs26.5bn. The decline in revenue was primarily on account of lower than expected power revenues, which declined 36% QoQ to Rs8.5bn (we estimated power revenues for the quarter at Rs13.1bn). The company attributed the poor performance of the power segment to lower power demand from SEBs, that were more inclined to buy power from the UI market rather than through bilateral contracts. During the quarter, the company traded 42% of gross generation, and the average realisations were Rs3.76/unit. Lower demand from SEBs also resulted in lower than expected PLFs and a 38% decline in the volumes of LITLs trading arm. Exhibit 1: Segmental Performance
Segmental Revenue EPC & Construction Power Property Development Unallocated Total Q3FY11 20,223 8,521 370 38 29,152 Q3FY10 13,180 5,128 9 25 18,342 Change (%) 53 66 3,831 52 59 Q2FY11 10,883 13,373 308 31 24,594 Change (%) 86 (36) 20 23 19 Q3FY10E 18,194 13,112 308 31 31,644 Variance (%) 11 (35) 20 23 (8)

Source: Company, Centrum Research

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

Source: Company, Centrum Research

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.

Lanco Infra

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)

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


1.74 1.22





Lanco Infra

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.

Lanco Infra

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

Exhibit 8: Cash flow

Y/E March (Rsmn) Cash flow from operating Profit before tax Depreciation & Amortisation Interest Expense Other Non operating (income)/exp. Extra-ordinary Items Op. profit before WC change Working capital adjustment Gross cash from operations Direct taxes paid Cash from operations Cash flow from investing Capex Investment - Cash equivalents Investment - Subsidiary / Strategic Other Income Cash from investment Cash flow from financing Procds from sh. capital & premium Borrowings/ (Repayments) Interest paid Cash from financing Net cash increase/ (decrease) 383 22,527 (5,791) 17,119 2,054 6,909 28,534 (8,484) 26,959 6,771 (1,389) 111,765 (8,518) 101,859 (9,003) 736 31,809 (16,117) 16,428 14 2,046 63,022 (18,180) 46,889 51,840 (16,723) (1,174) 450 (21,408) (164,608) (1,477) 378 761 907 1,064 1,202 16,495 (62,638) 1,000 (72,117) 5,530 1,073 2,635 665 9,904 (5,849) 4,055 (1,672) 2,383 9,322 3,479 4,673 (226) 17,247 (12,544) 4,703 (3,145) 1,558 14,874 1,645 8,518 (907) 24,130 17,465 41,595 (5,250) 36,345 26,769 7,081 16,117 (1,064) 48,902 1,438 50,340 (6,180) 44,159 32,295 8,345 18,180 (1,202) 57,617 26,023 83,640 (7,774) 75,866 FY09 FY10 FY11E FY12E FY13E

(17,447) (21,746) (147,207) (60,573) (70,915)

Source: Company, Centrum Research Estimates

Exhibit 9: Key Ratios

Y/E March Margin ratios (%) Core EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth ratios (%) Revenues EBITDA Adjusted PAT Return ratios (%) ROCE ROIC ROE Turnover ratios (x) Asset turnover ratio (x) Inventroy (days) Average Collection period (days) Average payment period (days) Per share ratios (Rs) EPS (Reported) Adjusted EPS CEPS Adjusted Book Value* *Adj. for revaluation reserve in the book Solvency ratios Debt/ Equity Interest coverage Valuation parameters (x) P/E (Reported EPS) P/E (Adj. EPS) P/ABV EV/ EBITDA EV/ Sales FY09 FY10 FY11E FY12E FY13E

Source: Company, Centrum Research Estimates

Exhibit 7: Balance Sheet

Y/E March (Rsmn) Share Capital Reserves & Surplus Share Holders' Fund Debt Deferred Revenue Minority Interest Total Capital Employed Gross Block Accumulated Depreciation Net Block Capital Work in Progress Total Fixed Assets Investments Inventories Debtors Other Current Assets Cash & Bank Balance Total Current Assets Loans & Advances Less: Current Liabilities Net Current Assets Total Assets FY09 2,406 18,570 20,976 55,970 175 7,033 23,867 7,615 16,252 37,887 54,139 9,837 13,223 11,943 53 9,905 35,124 16,386 31,331 20,178 FY10 3,131 30,316 33,448 1,003 7,108 61,644 10,867 50,777 19,237 20,229 16,267 22,270 74 9,628 48,239 21,800 35,110 34,929 FY11E 3,131 37,743 40,874 1,003 7,917 136,791 12,511 124,280 108,698 3,734 22,124 20,260 498 624 43,506 22,413 57,458 8,461 FY12E 3,131 56,418 59,550 1,003 10,565 184,114 19,592 164,522 124,012 2,734 39,136 26,711 644 638 67,130 25,487 85,579 7,037 FY13E 3,131 79,619 82,750 1,003 13,933 210,591 27,937 182,654 169,653 2,734 18,708 25,618 1,234 52,479 98,038 28,035 93,219 32,855

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

83,614 195,379 227,188 290,210

84,153 125,173 245,173 298,306 387,896

70,015 232,978 288,535 352,307

2.00 2.78 20.16 20.16 4.41 15 2.24

2.06 2.45 18.30 18.30 3.88 11.2 2.11

4.00 1.78 12.23 12.23 3.17 12.1 2.84

3.24 2.05 5.72 5.72 2.34 6.7 2.01

3.00 2.11 4.80 4.80 1.65 5.9 1.83

84,154 125,173 245,173 298,306 387,896

Source: Company, Centrum Research Estimates

Source: Company, Centrum Research Estimates

Lanco Infra

Appendix A
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As per the declaration given by her Ms Deepali Gautam analyst and the author of this report and/or any of his/her family members do not serve as an officer, director or are any way connected to the company/companies mentioned in this report. Further, as declared by them, they have not received any compensation from the above companies in the preceding twelve months. Our entire research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst knows of has reason to know at the time of publication of the research report or at the time of the public appearance. While we would endeavor to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and employees are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other circumstances Key to Centrum Investment Rankings Buy: Expected outperform Nifty by>15%, Accumulate: Expected to outperform Nifty by +5 to 15%, Hold: Expected to outperform Nifty by -5% to +5%, Reduce: Expected to underperform Nifty by 5 to 15%, Sell: Expected to underperform Nifty by>15%

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Centrum Broking Private Limited

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