| Lanco Infratech, which is making aggressive moves in the power, construction and real estate space, has reached a stage where it can now start to reap the benefits. The company has envisaged over 21-fold phased increase in power generation capacity to 11,000 mw by 2013, as against the current capacity of 518 mw. Of this, 1,020 mw is slated to be commissioned in the first 3-9 months of 2008-09.
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| Beyond that, steady progress has been made with regards 6,175 mw of power projects, which are at various stages of development. Also, significant revenue will come from its ongoing real estate projects (spread over 170 acres).
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| Additional gains also accrue from the construction business, which mainly caters to the needs of the power and real-estate divisions. Its construction division's order book at Rs 11,400 crore, which is over 20 times the division's revenue in FY07, is thus a little surprising. Notably, since most of these projects are long-gestation in nature, the benefits will accrue over the next few years and provide significant revenue growth.
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| Power
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| Lanco Infratech generates a majority (51 per cent in FY07) of its revenue from the power sector. Despite having lost the 4,000 mw Sasan power project, Lanco still has a strong pipeline. Its current portfolio of 518 mw of generation capacity (largely gas based) will stand increased to 620 mw by December 2008, 1,085 mw by 2009-10 and 1,850 mw by 2010-11. Notably, it will help diversify the mix, both in terms of fuel (coal, gas and hydro) and geography.
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| That apart, projects equivalent to 3,640 mw are under development (estimated to go on stream by 2010-11) with 75 per cent of them being on fixed-return basis and balance 25 per cent on merchant power basis. In the case of latter, the returns are based on a company's cost competitiveness, hence potential of larger upside.
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For Lanco, these projects can generate RoE (return on equity) of about 22-30 per cent depending on the fuel linkages, plant load factor, share of merchant power sales, incentive structure and availability of the plant"�hence, estimated net profit of Rs 1,100-1,500 crore per year.
| LANCO'S FUTURE: LOOKS POWER-PACKED | New
capacities
(mw) | Cost
(Rs cr) | Equity @20%
of cost
(Rs cr) | Lanco's
stake (%) | Lanco's
contribution
(Rs cr) | Annual cash generation (Rs crore) | | ROE @20% | ROE @22% | ROE @25% | ROE @28% | | 500 | 2,150.00 | 430.00 | 76.00 | 326.80 | 65.36 | 71.90 | 81.70 | 91.50 | | 20 | 86.00 | 17.20 | 91.00 | 5.65 | 3.13 | 3.44 | 3.91 | 4.38 | | 70 | 301.00 | 60.20 | 90.00 | 54.18 | 10.84 | 11.92 | 13.55 | 15.17 | | 150 | 645.00 | 129.00 | 90.00 | 116.10 | 23.22 | 25.54 | 29.03 | 32.51 | | 1,015 | 4,364.50 | 872.90 | 74.00 | 645.95 | 129.19 | 142.11 | 161.49 | 180.86 | | 600 | 2,580.00 | 516.00 | 76.00 | 392.16 | 78.43 | 86.28 | 98.04 | 109.80 | | 1,200 | 5,160.00 | 1,032.00 | 100.00 | 1,032.00 | 206.40 | 227.04 | 258.00 | 288.96 | | 2,640 | 11,352.00 | 2,270.40 | 100.00 | 2,270.40 | 454.08 | 499.49 | 567.60 | 635.71 | | 600 | 2,580.00 | 516.00 | 76.00 | 392.16 | 78.43 | 86.28 | 98.04 | 109.80 | | 400 | 1,720.00 | 344.00 | 59.00 | 202.96 | 40.59 | 44.65 | 50.74 | 56.83 | | 7,195 | 30,938.50 | | Total Cash per | year"�Rs cr
"�> | 1,109.67 | 1,220.64 | 1,387.09 | 1,553.54 |
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| Going by Lanco's track record, it's already generating a RoE of 28-30 per cent, sustaining the same should not be a difficult task. To some extent, this is helped by Lanco's arrangement with Dongfang of China, for sourcing power equipments from the latter.
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| Since the company has bid for other power projects as well (about 7,840 mw) including the 4,000 mw ultra-mega projects, there could be more surprises. However, there are execution challenges as well. Lanco claims to have completed power projects on time.
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| But, these were relatively very small (total 518 mw) as compared with the projects now under various stages of development. Hence, Lanco's ability to maintain its track-record with regards timely execution will play an important role towards meeting the targeted revenue and profit growth.
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| In-house advantage
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Lanco though is working towards meeting these challenges. The company has its own EPC (engineering, procurement and construction) division, which caters to the requirements of its ongoing power projects and hence, reduces its dependence on third parties for execution. Its in-house EPC work as well as secured supply of equipment not only help in faster execution, but also help in cost reduction "� about 10-15 per cent of the project cost.
| EMERGING POWER | | Rs crore | FY07 | FY08E | FY09E | | Revenue | 1,647.00 | 3,200.00 | 7,600.00 | | EBIDTA (%) | 28.00 | 20.00 | 21.00 | | Net profit | 187.00 | 304.00 | 760.00 | | EPS (Rs) | 8.41 | 13.68 | 34.19 | | PE (x) | 56.70 | 33.11 | 13.95 |
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| Construction and real estate
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| The construction business also includes a marginal but growing contribution from road, irrigation, ports and airport projects, which account for about 5 per cent of the total order book. Since most of the projects are to be executed over the next three years, expect a strong contribution from this business.
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| Within construction, Lanco is also actively bidding for the different projects such as buildings, roads, airports and transmission of the gas pipelines. It has already made progress executing an EPC contract for building the Varanasi airport in Uttar Pradesh worth Rs 90 crore and has bid for several port projects, estimated to cost Rs 5,000-6,000 crore. Besides, the company will also execute two BOT road projects worth Rs 1,300 crore, post signing of the agreement.
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| In real-estate, the company is executing several big size projects (land already acquired) including townships (commercial, residential and high-rise buildings) spread over 170 acre in Chennai and Hyderabad over the next five years.
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| Investment rationale
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| Given the different businesses, the ideal way to value Lanco is to use the sum of parts method, wherein analysts have assigned a value of Rs 800 per share considering the future cash flows from the power generation business and order book of the construction business.
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| Also, the value of the real estate business is pegged at Rs 150 per share. While one will need to keep an eye on the execution side, considering the company's growth plans and the benefits that are expected to accrue over the next 3-4 years, Lanco's prospects are good. At Rs 453, investors can expect Lanco to deliver good returns over the long term. |
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