Lanco Infratech: Powering up execution

Executing projects on time and in line with estimates will mean more stability in the stock price

Strong execution —critical for earnings visibility for power projects — has been noticed in case of Lanco Infratech. Its systematic and mostly on-track commissioning of projects has seen the total capacity grow from 511 Mw in FY09 to 1,995 Mw in FY10. The company also increased its employee count from 3,200 in FY08 to 5,500 in FY10. If execution rate remains strong, the company will have a generating capacity of 8,384 Mw by 2015, according to analysts.

The interesting part is that the company has built hedges against fluctuations in input costs. Its revenues will be skewed in favour of the power business. It has focused on projects with complete or partial fuel cost pass-through mechanisms. Analysts estimate such projects will constitute 70-80 per cent of the total capacity from FY11 to FY15. This is expected to support valuations.

The fact that the company has an in-house engineering, procurement and construction division means faster execution, which it has already demonstrated. Moreover, the need for an upfront equity in projects can also be avoided, say analysts at Citi. Overall, other fundamentals, like coal supply and financial closures for four of its projects, remain strong.

Interestingly, the company will be changing its method of calculating depreciation to 14 per cent of the effective written down value from the 5.3 per cent straight-line earlier. This could drive down earnings estimates as the depreciation amount is expected to double in the next three financial years. But, tax savings could positively impact free cash flows and result in a reduction of taxation expenses.

More important, analysts are looking at a reduction in the stock’s volatility as the company has witnessed high risk-oriented price movements over the past six months.