Lanco Infratech Ltd announced last week that subsidiary Lanco Kondapalli Power Pvt. Ltd, which is developing a 732 MW gas-based power project, has received sanctions for the project’s debt requirement. The project, estimated to cost Rs2,610 crore, would be financed with debt of Rs1,827 crore and the rest would come from equity or internal accruals.
Even as financial closure is achieved for the project, the fuel linkages are not in place. The firm is awaiting a decision by a group of ministers (GoM) on this. This project is expected to become operational before March 2012. “Assuming a selling price of Rs4 per kilowatt hour (kwh) and considering generation cost of about Rs3.3-3.5, the project is expected to add about Rs3 to sum-of-total-parts (adjusting for 59% stake),” analysts from Edelweiss Securities Ltd wrote in a note to clients last week.
Lanco Infratech has ambitious plans for power capacity addition. By 2015, the company intends to scale up capacity to 15 GW. Currently, it has an operating capacity of around 2,100 MW and plans to end the fiscal with a total capacity of around 4,000 MW. In addition, around 5,500 MW of projects are under construction.
But timely execution within estimated costs would be key to Lanco’s power business, which accounted for 56% of total consolidated revenue in the June quarter. Another concern is Lanco’s high exposure to merchant power. “Lanco has high exposure to merchant rates; about 38% of capacity has not yet been tied up in power purchase agreements (PPAs),” wrote analysts from J.P. Morgan Chase and Co. in a note to clients on 28 September.
Lanco derives another major chunk of revenue from the engineering, procurement and construction (EPC) and property development business, which contributed 41% of the total revenue in the June quarter but saw a 28% year-on-year decline. According to the firm, old orders are tapering off and new orders would reflect in revenue beginning from December. The EPC and construction business profit margin expanded by 200 basis points to 17% but sustaining margins is one of the key concerns. A healthy order book of around Rs24,800 crore at the end of the June quarter offers good revenue visibility for the EPC and construction business.
Lanco’s stock has out-performed the BSE midcap index since the beginning of the fiscal and currently trades at Rs67.80. Edelweiss analysts expect Lanco’s revenue to grow 41.2% for the September 2010 quarter and core profit after tax to nearly double compared to last year. “EPC order execution and margins are key for earnings apart from merchant sales,” they wrote in their September results preview.