The decision to hive off the power business will help the company raise funds for its capacity addition plans.
An initial public offer (IPO) to form a separate listed power company will unlock huge value for Lanco Infratech. Given the current high leverage of 2.5 times, the move will help the company raise enough funds for its aggressive capacity addition plans.
The power business forms nearly 70 per cent of the estimated average sum-of-the-parts valuation at about Rs 83 a share. The company plans to raise power capacity to 9,000 Mw by FY15 and to 15,000 Mw thereafter. In the short term, Lanco will be doubling its current operational capacity of 2,087 Mw by the end of FY11. Another 5,000 Mw is under development, which includes the Vidarbha (1,320 Mw) and Amarkantak Phase-III & IV (1,320 Mw). The company is also looking for overseas power projects. It has bid for a 600-Mw project in southern Sumatra that involves a capital outlay of $775 million.
Analysts are confident of the company achieving the said targets, as its execution track record has been good. Recently, it achieved financial closure of Phase-I (1,320 Mw) of its largest project — a 2,640-Mw plant in Orissa that accounts for 30 per cent of the total planned power portfolio of over 9,000 Mw by FY15.
Sourcing of coal, which is the single biggest risk factor for most power sector players, has also been sorted for capacities coming onstream till FY15. Lanco’s success in its efforts of scouting for coal mines in Australia, Indonesia and Africa will further ease fuel risk.
The market gave a thumbs-up to the IPO move, with the stock gaining 1.54 per cent to Rs 69.45. Better revenue visibility and in-house construction division, which ensures timely completion of projects, are huge positives. Analysts expect a 20 per cent upside in the stock over the medium term.
