Lanco Infratech, an infrastructure development company with interests in power, construction and property development, is promoted by Mr. L. Madhusudhan Rao, Mr. G. Bhaskara Rao, Mr. L. Sridhar, Prince Stone. The company currently owns 11 power projects, of which five are in operation and six are under development.
To finance investments in various subsidiaries, pay for the acquisition of 13.3% equity interest in Aban Power, acquire 25.1% equity in Lanco Kodapalli, and for meeting general expenses, Lanco Infratech is coming out with an IPO.
Strengths
* Lanco Infratech intends to use the proceeds of the issue for acquisition of 25.1% equity interest in Lanco Kodapalli Power (LKPPL), which is expected to become a consolidated subsidiary of the company by quarter ended December 2006 as its holding will increase to 59%. LKKPL had earned revenue of Rs 555.82 crore from sale of electrical energy and a net profit of Rs 106.79 crore in FY 2006. FY 2007 consolidated financials will also include financials of Aban Power Plant, which had earned revenue of Rs 97.91 crore from sale of electrical energy and a net profit of Rs 3.35 crore in FY 2006. The plant had commenced operations in August 2005. Thus, revenue in FY 2007 likely to be higher than in the previous year. Hence, FY 2007 financials of consolidated Lanco Infratech are likely to be much higher than FY 2006.
* Currently managing power generation capacity of 518 MW (including LKPPL), power generation capacity of Lanco Infratech will increase to about 3793 MW by April 2010. This means the generation capacity will increase seven times the existing capacity in the next four years, As a result, revenue and profit from power business will increase significantly. The company has also been qualified to bid for two ultra mega power projects: Sasan and Mundhra.
* The construction division had an order book of Rs 1611.83 crore on 30 September 2006. Of this, Rs 1229.95 crore were contracts with affiliates of Lanco Infratech. The entire order book will be executed by 2010.
* Lanco Infratech is obtaining approvals for a large integrated IT park and township on a 100-acre plot on which it proposes to develop 18.5 million square feet of saleable area in Manikonda, Hyderabad. The company also owns land banks, aggregating about 21.8 acres, close to Ocean Park in Hyderabad, where it intends to develop a residential housing project with one million square feet of saleable area. In addition, it has won a bid to develop an IT park and township on a 10.7-acre plot, on which it proposes to develop two million square feet of saleable area, in Vishakhapatnam, Andhra Pradesh. The property is, however, under dispute.
Weaknesses
* Due to the nature of the business, Lanco Infratech’s projects typically require a long gestation period and substantial capital outlay before completion. It may be months or years before positive cash flows can be generated. Further, power, property development, and infrastructure and construction projects are capital intensive and will require high levels of debt financing. They will also lead to continuous dilution of equity.
* Contingent liabilities of Lanco Infratech amounted to Rs 755.92 crore on 30 September 2006. Apart from these, the offtake of the Kodapalli power plant has resulted in court proceeding related to Rs 224-crore charges paid by the offtaker to LKPPL. The offtaker claims the charges payable by it should be based on the capacity of 355 MW, which was operating capacity of the power plant at the time of signing the power purchase agreement (PPA). LKPPL has charged for electricity based on engineering, procurement and construction (EPC)- guaranteed capacity of 368.1 MW.
* Kondapalli Power Plant, Aban Power Plant and Lanco Amarkantak Power Plant rely on a single fuel supplier. Further, while LKPPL and APCL (Aban Power Company) have contracted with Gail for long-term supply of natural gas to the Kondapalli Power Plant and the Aban Power Plant, the management estimates these plants will not have sufficient fuel to operate at contracted capacity until alternative sources of fuel become available.
Valuation
The stock market’s experience with Lanco Industries and Lanco Global Systems, the group’s earlier listed companies, has not been satisfactory.
On the basis of FY 2006 earning, EPS of Lanco Infratech works out to Rs 0.8. Annualised EPS based on earning in the quarter ended June 2006 is 2.4. Though typically EPS of the power and construction companies cannot be annualised due to the seasonal nature of the business, for Lanco Infratech it is likely to be a better indicator of future earnings on account of the fact that the company had reorganised its business in May 2006 by acquiring controlling interest in 19 entities from the promoter group.
At the offer price band of Rs 200-240, the PE range (on the base Q1 earning) works out to 83 to 100. If the large numbers of projects under the company’s belt are implemented well, PE will gradually come down in the long run. Hence, only long-term investors with appetite for high risk are advised to consider this offer