Lanco Infratech’s share price has appreciated almost 60 per cent in the last one month, partly driven by news that the company was planning to rope in private equity funding.
The move is critical at this juncture, considering Lanco’s huge debt and absence of sufficient operating cash flows. In fact, one of its power ventures, Udupi Power Corporation, reportedly defaulted on a Rs 90-crore quarterly debt repayment due on January 15. Though the company has pending receivables from SEBs (that have been delayed), the default has increased the risk of this project debt being classified as non-performing asset by banks.
Meanwhile, despite the several risks to investments, including its mounting debt, most analysts have a 'buy' rating on the company. This can be attributed to current valuations, earnings growth estimates for the next two-three years and the value of coal mines and other businesses. Analysts expect a Rs 1,000-crore net profit in FY14, which, they say, at a 10 times multiple, translates into market capitalisation of Rs 10,000 crore, against the current Rs 3,500 crore. If the estimated FY14 net debt of Rs 26,000 crore is considered, the enterprise value works out to Rs 36,000, also reasonable at six times estimated operating profit.
| CAPACITY-DRIVEN GROWTH | ||||
| In Rs crore | FY11 | FY12E | FY13E | FY14E |
| Sales | 7,580 | 9,138 | 13,600 | 19,407 |
| Y-o-Y change (%) | 38.0 | 20.6 | 48.8 | 42.7 |
| Ebitda (%) | 22.3 | 23.7 | 25.9 | 30.0 |
| Net profit | 446 | 92 | 248 | 1,070 |
| Y-o-Y change (%) | 21.5 | -79.3 | 168.4 | 331.5 |
| EPS (Rs) | 1.9 | 0.4 | 1.0 | 4.4 |
| PE (x) | 7.9 | 37.4 | 15.0 | 3.4 |
| PBV (x) | 0.8 | 0.7 | 0.7 | 0.6 |
| EV/ Ebitda (x) | 10.5 | 9.4 | 7.1 | 5.1 |
| Ebitda/interest (x) | 2.2 | 1.9 | 1.8 | 2.3 |
| Net debt/equity (x) | 2.6 | 2.9 | 3.5 | 3.4 |
| Consolidated financials Source: BofA Merrill Lynch Global Research | ||||
Hiccups in Udupi project
While high debt is worrisome for Lanco, analysts do not correlate the default (by Udupi) with the pressure on paying capacity. "Despite having consolidated cash of Rs 1,480 crore as on September 2011 (27 per cent of net worth), Lanco has possibly defaulted to step up pressure on Karnataka Power Transmission Corporation to expedite construction of transmission line," says Deepak Agrawala of BofA Merrill Lynch.
Also, at Udupi, the first unit of 600 Mw is already operational. While the second unit of 600 Mw was delayed for about 16 months on account of forest clearance issues, it has now received the clearance. Since it accounts for about 30 per cent of next year's total power generation capacity of 4,000 Mw, analysts have cut their earnings estimates for next year by 18-20 per cent.
Operational leverage
Meanwhile, as of September 2011, Lanco’s debt stood at Rs 18,981 crore, or almost 3.5 times its net worth. This is high in the light of the current operating profits, which are just 1.9 times of its interest cost. In fact, higher interest cost has posed a threat to its earnings in recent quarters, as it has been rising at a fast pace.
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However, things are set to change. A large chunk of the debt has gone mainly into capex and working capital, which are yet to contribute to profits. For instance, in FY11, current assets occupied almost 135 per cent of the turnover. Analysts hope this would come down by half. Likewise, fixed assets have been growing fast, while Lanco has capital work in progress of nearly Rs 6,000 crore. Once these become operational, these would add to revenues and profits.
Even after considering the project delays and other related issues, analysts expect Lanco’s installed power generation capacity to more than double in FY14 to 5,300 Mw and rise further to 7,900 Mw in FY15. During this period (till FY14), power business revenues (65 per cent of total) is expected to almost triple from the current levels. Contribution from solar business, resources and EPC, which has an order book of Rs 29,300 crore (almost five times the FY11 EPC revenues) will also boost the top line. These will bring down working capital requirements, improve cash flows, and lower dependence on borrowed funds over the next two years. At the net level, earnings are thus seen growing 32-35 per cent annually till FY14.