The right mix

IPO REVIEW

Lanco Infratech's businesses have the right keywords of power, construction and property development to interest investors.

Lanco Infratech has chalked out ambitious plans as the power, infrastructure and real estate sectors boom. The company is raising between Rs 879 crore and Rs 1,055 crore through a public issue to fund its expansion plans.

While Lanco is a promising story, analysts think that the issue price appears expensive, and only long term investors should take the plunge.

The makeover
Hyderabad-based Lanco group with interest across sectors like power generation, construction, engineering and property development, recently reorganised its business to consolidate its holdings across its 20 entities into Lanco Infratech. It now holds majority stakes in the group's power and property development projects, in addition to its own power and construction portfolio.

At present, construction and power are equal contributors to the company's turnover. But with the upcoming power projects and the foray into property development, the revenue mix will see a gradual change till FY09.

While power segment would continue to contribute 50 per cent of revenues, construction and property segments will chip in 25 per cent each.

Power all the way
At present, Lanco Infratech's power portfolio boasts of two gas-based power plants (total capacity of 488 MW), two biomass power plants (total capacity 18 MW) and a 3 MW wind-based power plant.

Over the next five years, the company will increase its generation capacity from 509 MW to 3,793 MW by FY2011 through greenfield and brownfield expansions and catapult it into the league top five power players in India. Lanco is making conscious moves to diversify into coal and hydro projects, to achieve a balanced energy portfolio.

By FY2011, the company will add three coal-based projects (total capacity of 2615 MW) and four hydro power projects (total capacity of 650 MW). With such a lineup of projects, the power segment promises to bring the bulk of revenues, which are poised to grow at a CAGR of over 45 per cent through FY07 to FY11.

Lanco is also foraying into power trading and carbon credits business, to be well equipped to grab its share of business as and when the power trading market picks up in a big way.

Vertical integration
Being an integrated player, Lanco builds power plants, housing projects, railway stations, bridges, and irrigation projects. The construction segment today holds orders worth Rs 1,600 crore.

Over the past three years, Lanco's construction segment derived about 70 per cent of revenues from external contracts, but for the next three years, more than 85 per cent of this segment's turnover will come from in-house power and real estate projects.

The company is likely to have an edge over other construction peers, as it enjoys more control over project execution and costs. Thanks to a greater proportion of in-house power projects, which will bring more control, margins should be better.

Diversification in real estate
Lanco has entered into the property development business to add fillip to its revenues and is leveraging its construction experience. The company plans to build commercial, housing and retail space across its 19.5 million sq ft saleable area in Hyderabad.

Of the total land bank of 130 acres, it is developing the 100-acre property project in Manikonda, Hyderabad, which will have one of the largest IT parks in the state, along with residential and commercial complexes.

On a 22-acre plot in Hyderabad, Lanco has planned another residential-cum-commercial project, which is to be executed over the next three years. Revenues from property projects are likely to grow at CAGR of over 60 per cent over FY08-10.

The offering
Lanco Infratech is entering the capital markets with a net public offering of 439.7 lakh shares priced between Rs 200 and Rs 240 per share. This construction major plans to raise funds in the range of Rs 879 crore to Rs 1,055 crore, to finance its ongoing power and property development projects over the next five years.

Of the total money raised, around Rs 950 crore will go towards funding ongoing power projects, Rs 174 crore will be paid to acquire controlling stakes in Aban Power and Kondapalli Power projects, while the rest will fund the real estate projects in Hyderabad.

Encouraging forecasts
Over the next five years, Lanco may invest about Rs 17,000 crore in various projects, of which 85 per cent will go to fund greenfield power projects.

According to consensus estimates, Lanco's revenues are expected to grow at CAGR of 47 per cent through FY07-10. Operating profit and net profit will grow at a CAGR of 58 per cent and 65 per cent during the same period.

As most of Lanco's new power projects will be operational from 2010 or 2011, for the near-term, its revenues will come from the gas-based projects in Kondapalli and Tanjore, and the construction and real estate businesses. 
 

POWERFUL FUTURE
(Rs crore)	FY07E	FY08E	FY09E	FY10E
Net Sales	1610.65	3099.73	4988.55	5124.30
Y-o-Y growth (%)	-	92.45	60.94	2.72
Operating Profit	460.73	759.18	1437.53	1818.00
Y-o-Y growth (%)	-	64.78	89.35	26.47
OPM (%)	28.60	24.49	28.82	35.48
Net Profit	154.85	317.85	593.60	698.67
Y-o-Y growth (%)	-	105.26	86.75	17.70
NPM (%)	9.61	10.25	11.90	13.63

Though Lanco's future prospects seem encouraging, it may have to face certain hiccups due to interdependence between its business streams, as slowdown in one segment would cause earning pressure across the company. As diverse power projects are to be commissioned around the same time, execution risks could build up.

Long term bet
At the cap price, the stock is valued at 34.5 times its FY07 consensus earnings estimates and 29 times at its floor price. Analysts feel that the stock is meant for long-term investors and those with short-term horizon could give it a miss.

Says D D Sharma, senior vice president, Anand Rathi Securities, "The stock looks aggressively priced, and unless stock markets are in very optimistic mood, they may not see short term gains. However, one can expect good realisations in the long run."

"Given its presence in high growth sectors like power, construction and property, we are optimistic about the business model and revenue visibility. One can invest in Lanco from a long-term perspective and gain substantial returns," adds Jigar Valia, analyst at Parag Parikh Securities.

Issue opens: November 6
Issue closes: November 10