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Firstcall India Equity Advisors Pvt Ltd

Lanco Infratech Ltd (LITL)

BUY Target Price: Rs.700.00

CMP: Rs.565.00 Market Cap.:Rs.134611.25 mn

Date: 18th

November, 2009

Key Ratios:

Particulars FY09 FY10E FY11E

OPM (%) 15.54 15.92 15.56

NPM (%) 4.62 6.57 6.94

ROE (%) 13.37 20.56 22.04

ROCE (%) 10.86 13.25 14.78

P/BV(x) 1.51 5.05 3.94

P/E(x) 11.29 24.58 17.88

EV/EBDITA(x) 3.35 12.67 12.47

Debt-Equity(x) 2.67 2.38 2.02

Key Data:

Sector Infrastructure

Face Value Rs.10.00

52 wk. High/Low Rs.575.00/Rs.99.00

Volume (2 wk. Avg.) 490651

BSE Code 532778

SYNOPSIS

• Lanco Infratech is an integrated infrastructure

company with focus on construction, power, roads

and property development.

• The company has an operating power generation

capacity of 511MW comprising two gas-based plants,

two wind energy plants and one hydro power

project.

• The company has raised Rs.7.3bn through a QIP

issue.

• The board of the company has approved stock split

from Rs.10 face value to Rs.1 face value.

• The company’s revenue surged 50% year-on-year to

Rs.19265.60mn in the September quarter and net

profit increased 137.42% to Rs 1224.10mn.

• Lanco’s profitability is one of the highest among its

peers.

• The top line and bottom line of the company are

expected to grow a CAGR of 49.4% and 28.5% over

FY08 to FY11E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

[email protected]

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

[email protected]

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Table of Content

Content Page No.

1. Investment Highlights 03

2. Company Profile 11

3. Peer Group Comparison 20

4. Key Concerns 20

5. Financials 21

6. Charts & Graph 23

7. Outlook and Conclusion 25

8. Industry Overview 26

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Investment Highlights

• Results Update (Q2 FY10)

For the quarter ended on September 30, 2009(Consolidated) the company has registered a 50.63 %

(YOY) growth in the net sales and stood at Rs.19265.60 mn from Rs.12789.71 mn of the

corresponding period of the previous year. This strong growth came on the back of strong order

book and timely expansion in the Power Segment.The operating profit increased to Rs.3309.70 mn

from Rs.2094.84 mn, for the same quarter of last year.The company reported net profit of

Rs.1224.10 mn.The profit was boosted by engineering and construction contracts from group

companies and gains from trading in power. EPS for the quarter stood at Rs.5.13 per equity share

of Rs.10.00.

Quarterly Results –Consolidated (Rs in mn)

As at Q2FY09 Q2FY10 %Change

Net Sales 12789.71 19265.60 50.63%

Net Profit 1224.10 515.58 137.42%

Basic EPS 2.44 5.13 110.25%

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• Margins (%):

Operating Profit Margins (OPM %)

Net Profit Margins (NPM %)

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• Strong Order Book

The Construction and EPC Segment Order book, stands at Rs.140000 mn. Lanco’s internal orders

(power projects) constituted a significant portion of its total order Book. The company’s External

Order Book is diversified across the Road, Infrastructure and Transmission-line Segments.

• Approves stock spilt

Recently the board of directors of the company approved the Sub-division of One Fully paid up

Equity Share of Face Value of Rs. 10/- each into Ten (10) Equity Shares of Face Value of Re. 1/-

(Rupee One Only) each fully paid up.

• Acquires equity shares of Lanco Amarkantak Power

The Company has acquired 2,56,84,613 Equity Shares of face Value of Rs. 10 each equivalent to

5.44% in the total Paid-up Share Capital of Lanco Amarkantak Power (Subsidiary of the Company)

from International Finance Corporation.

• Major orders

• 1015 MW Imported Coal –based Power Project of Udipi Power Corporation Ltd at Udupi in

Karnataka.

• 2 x 300 MW Coal-based Power Project of LANCO Amarkantak Power Pvt Ltd at Pathadi near

Korba in Chhattisgarh.

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• 2 x 35 MW Hydropower Projects of LANCO Green Power Pvt Ltd in Himachal Pradesh.

• 2 x 5 MW Hydropower Projects of Vamshi Industrial Power Ltd.

• 4 X 125 MW Teesta VI Hydro Electric Project of LANCO Energy Pvt Ltd in Sikkim

• 2 X 600 MW Thermal Power Project of LANCO Anpara Power Pvt Ltd in Uttar Pradesh.

• 368 MW Kondapalli Gas Power Project

• 81 km Road connecting Bangalore –Hoskote–Mudbagal in Karnataka for NHAI.

• 82 km Road Connecting Neelamangla-Devihalli in Karnataka for NHAI.

• Construction Order for Lanco Hills.

• Construction of New Terminal Building at Varanasi Airport for Airports Authority of India.

• Construction of Medical College at Srikakulam in Andhra Pradesh.

• Construction of Medical College at Ongole in Andhra Pradesh.

• Construction of Vedic University at Tirupati in Andhra Pradesh.

• Construction of Medical College at Belgaum in Karnataka.

• Lanco is executing the construction of New Terminal for Varanasi Airport for the Airports

Authority of India.

• Money raised via QIP:

The company has raised US $100-150mn at Rs395/share.The equity dilution to the tune of US

$150mnat the Dollar rate of Rs48, and at Rs395/share and accordingly factored in numbers as the

exact numbers are still awaited.The dilution is good for the company as it would not only help it de-

leverage its Balance Sheet, but would also improve the company’s liquidity position.

• Lanco Infra to boost capacity by 750MW at Kondapalli plant

The company is firming up plans to add 750MW of power generation capacity at its Kondapalli

facility in Andhra Pradesh, as it lines up to receive more gas supplies from Reliance Industries Ltd’s

Krishna-Godavari (KG) basin.The expansion would cost around Rs2,6250mn, based on an estimated

Rs35 mn per mega mw.

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• Power generation capacity of 511MW

Lanco Infratech has an operating power generation capacity of 511MW comprising two gas-based

plants, two wind energy plants and one hydro power project, spread over Andhra Pradesh, Tamil

Nadu, Karnataka and Himachal Pradesh.

• Small project commissioning

The company commissioned a small hydro project in Himachal Pradesh. The 5 MW power project

was implemented by its subsidiary-Vamshi Hydro Energies at Dharmshala. The company stated that

the project has already started commercial generation.

• Achieves financial closure for power project

The company has stated that financial closure has been achieved for the 76 Mw Phatabyung

Hydroelectric Project being developed in Uttarakhand by Lanco Hydro Energies Private Limited, a

subsidiary of the Hyderabad-based company.The power project, estimated to cost Rs 5200mn,

would be financed with a debt of Rs 4160mn and an equity of Rs 1040mn.A consortium of five

banks with Axis Bank in the lead are providing the debt required for the project.

• Sells biomass arm to Agri Gold Projects

The company has transferred the ownership, management and control of its subsidiary Rithwik

Energy Systems Limited, which has a 6 Mw biomass-based power project in Chittoor district of

Andhra Pradesh, to Agri Gold Projects Limited.

• Punjab approves Lanco's bid for Rajpura project

The Punjab Government gave nod for the revised bid offer of power major Lanco Infratech for

setting up 1,320 MW Rajpura Thermal Power project.

• Plans to bid for Hyderabad Metro Rail project

Andhra Pradesh government issued a new notification inviting bidders for the project, a week after

it scrapped the contract awarded to a Maytas Infra Ltd-led consortium. It proposes to finalize the

winning bidder by 15 November Lanco is interested in bidding for the project this time and is

currently discussing with prospective partners to form a consortium.

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• Lanco Infratech in talks with US, European EPCs for N-foray

Lanco Infratech Ltd is in talks with European and US-based engineering procurement contractors

(EPCs) for the group’s foray into nuclear power generation. The nuclear energy generation is capital

intensive and they are looking at big plants in the range of 1,000 MW. Typically, it is estimated that

for one MW of nuclear energy capacity, the investments required are in the range of $1.5 million to

$1.7 million (Rs 6.82 crore to Rs 7.72 crore).

• India’s nuclear deal success is a new opportunity for lanco infra

The success of current nuclear deal as a way to bring the US and India closer, and also for India to

do business with the cliquish club of international nuclear suppliers.India is supposed to open up its

14 civilian reactors to international inspectors, and in return will be allowed to buy and trade

nuclear fuel, reactors, and spares with the 45-member Nuclear Suppliers Group.

• Lanco Infratech in talks with US, European EPCs for N-foray

Lanco Infratech Ltd is in talks with European and US-based engineering procurement contractors

(EPCs) for the group’s foray into nuclear power generation. The nuclear energy generation is capital

intensive and they are looking at big plants in the range of 1,000 MW. Typically, it is estimated that

for one MW of nuclear energy capacity, the investments required are in the range of $1.5 million to

$1.7 million (Rs 6.82 crore to Rs 7.72 crore).

• Wins india's largest container transhipment port project in kerala

Lanco Consortium has emerged winner for development of the INR 8000 Cr (USD 2 Billion)

Vizhinjam International Container Port Project in Kerala. LANCO has tied-up with Pembinan Radzai

Sdn. Bhd (PRSB), Malaysia.The Port was bid out by Government of Kerala (GoK) in August 2007

through Vizhinjam International Seaport Limited on a 33 years’ concession basis. The other

contenders who were in the race for the project include NCC- Maytas, Videocon - Gammon – SICAL,

Apollo Enterprise - DS Construction, Zoom Developers -Portia Management Services. Lanco

Kondapalli Power Pvt. Ltd in consortium with Lanco Infratech Ltd and Pembinaan Redzai Sdn. Bhd.

Malaysia (Lanco Consortium) were declared as the successful bidder by the Government of Kerala

(GOK) for 'Development of International Deepwater Seaport and Container Transshipment

Terminal at Vizhinjam, Trivandrum, and Kerala.

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• Entered in to hotel business

Affiliates of Global Hyatt Corporation and Lanco Hills Technology Park Private Limited, a part of the

Lanco Group, today announced the signing of a definitive management agreement for the 400-

room Grand Hyatt Hyderabad, due to open in Hyderabad, India in early 2011. The hotel will be

Hyatt's second hotel in Hyderabad, following Park Hyatt Hyderabad, which is scheduled to open in

early 2010.

The planned 400-room hotel is part of a 100-acre township development in Manikonda called

Lanco Hills, about two miles from Gachibowli and HITEC city. The entire development is

approximately 10 miles from the new international airport at Shamshabad and is part of the

emerging Central Business District.

• Lanco Infratech wins 3300 MW Power Projects in Uttar Pradesh

The Company has won two super critical power projects with an installed capacity of 3300 MW in

Uttar Pradesh. The bids called by the Uttar Pradesh Government for development of the two

thermal power projects viz., Prayagraj of 1980 MW (3x660 MW) and Sangam of 1320 MW (2x660

MW) were opened on April 11, 2008 at the Office of Uttar Pradesh Power Corporation Ltd which

conducted the competitive bidding process on behalf of the Government.

As per the terms of the bids, while 90% of power generated through the projects must be sold to

the Government of Uttar Pradesh, the remaining 10% could be sold by the successful bidder

through the merchant market.

• Setting up a 2640 MW power project in Orissa.

Lanco has signed a Memorandum of Understanding (MoU) with the Government of Orissa for

setting up a 2640 MW(4x660) Coal-fired LANCO Orissa Power Project in Dhenkanal district of the

State marking LANCO's entry into the state of Orissa, which has 28 per cent of India's coal reserves.

The project, located in an area measuring 2000, acres has the capacity to expand in the future. The

site is 3 km from NH42 (Angul - Dhenkanal), 13 km away from Dhenkanal Railway Station on the

East Coast Railway and 93 km from Bhubaneswar airport. The nearest sea port is 150 km away at

Paradip. The plant will have state of the art technology with advanced technology Boilers, which

will be one of the largest in Orissa . The project will be commissioned in 48 months from the date

of Financial Closure.

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• Developing 1800MW Thermal Power Station

Lanco Amarkantak power pvt ltd (LAPPL) is a subsidiary of Lanco group is developing LANCO

Amarkantak Thermal Power Station near Pathadi - Saragbundia villages on the Champa - Korba

State Highway in Chhattisgarh, India. Set to emerge as a trend-setter in the Indian Independent

Power Project sector this coal-based Project is being developed in phases to ultimately become a

1800 MW Power Project.

• Lanco Kondapalli Power Pvt Ltd has obtained Environmental Clearance

Lanco Kondapalli Power Pvt Ltd (LKPPL) is subsidiary of Lanco group has obtained Environmental

Clearance from the Ministry of Environment and Forests for upgrading its capacity to 1155 MW.

This expansion project will be executed in three phases. The first module of 368 MW CCPP is being

executed under Stage II expansion project. LKPPL has awarded the EPC contract and also engaged

Fichtner India as Owner’s Engineer. The power generated from Stage II expansion project will be

evacuated through the grid of the Power Grid Corporation of India Ltd. A dedicated transmission

line is being proposed between the plant and the PGCIL substation.

• Largest private sector player in the power trading market

Lanco Electric Utility Ltd (LEUL) is the largest private sector player in the power trading market,

trading 2600 Million Units (MU) in the Financial Year 2007-08. LEUL had more than 60 per cent of

its volume of banking power arrangement with various utilities, amounting to 12 per cent of the

market share. LEUL traded from all the five regions of India by covering 32 utilities from 19 States.

Lanco Electric Utility Ltd (LEUL) has been awarded F Category National Power Trading Licence of

CERC (Central Electricity RegulatoryCommission) under the Electricity Act 2003. LEUL finished all

the quarters by consistently trading 600 MUs in each quarter with a turnover of about Rs 665 crore.

LEUL often traded more than 10 MUs on a daily basis. On 21st May 2008 LEUL transacted 19.81

MUs, the highest for any single day transaction since its inception.

• Having great investment plans in real estste.

Lanco Hills is one of the largest mixed property development projects in India located at

Manikonda in Hyderabad, India. Spread over 100 acres, LANCO Hills, encloses facilities and

features that will rank it amongst the best townships in the world. Designed to create a city of the

future, Lanco Hills an Rs 5500 Crore project, includes 15 Residential Towers, 11 towers of sez/non

sez IT spaces, club house, multiplex, mall, 5 star and business class hotels, serviced apartments and

more. The proposed signature tower with 121 floors would be the tallest residential tower in the

world.

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• Entered into wind energy

Lanco has undertaken wind-turbine manufacturing and project development activities in India,

Europe and the AmericasIt is launching its best-in-class 2 MW wind turbine in April 2009 with

technology from a German engineering company of international repute.On the project

development front, Lanco has already acquired quality wind sites for development of wind farms in

excess of 6,000 MW and aims to achieve 15,000 MW over the next three years.

• Foray into solar sector

Lanco is set to foray into solar modules’ manufacturing and solar power generation with significant

investments. A special purpose vehicle is being formed for this purpose. This move follows the

company’s recent initiative for wind energy equipment manufacturing facility, which will later lead

to wind energy farms in India and abroad with investment of about Rs 10000mn initially.

Company Profile

Lanco Infratech Limited's principal activities are construction and development of infrastructure

facilities, property development, generation of power and trading in power. It operates in three

business segments, Construction, Power, Property Development and Infrastructure development.

The Construction segment involved in development of infrastructure facilities like water supply,

mass housing, industrial structure, institutional buildings and expressways. The Power segment

consists of generation of power. The Property development segment involved in development of IT

park, residential buildings, retail and commercial complex.

Lanco’s operations have always been marked by creation of synergies, backward and forward

integrations and strategic innovations for competitive edge. Today, Lanco Infratech, through

twenty-two subsidiaries has operations across a synergistic span of verticals.

The Major business segments of Lanco infra are as follows

1. Construction

2. Power

3. EPC

4. Infrastructure

5. Property development

6. Wind energy

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1. Construction

Lanco Infratech Ltd has an excellent track record in Construction projects. Its project expertise

spans:

Power plants based on Gas, Coal, Bio-mass, Hydro and Wind.

Irrigation and water supply projects, including dams, tunnels, lift irrigation, sewerage schemes and

marine works.

Civil construction including commercial and residential buildings, mass housing projects and

townships, industrial structures, information technology parks, Corporate offices, Hospitals and

more and transportation engineering projects including roads, highways, bridges and flyovers.

2. Power

Lanco has proven expertise in power generation from conventional and non-conventional sources

of energy including gas, coal, biomass, hydro and wind. Lanco has operational and under

execution projects amounting to over 8000MW.

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3. EPC

The EPC group at Lanco ensures project delivery cycles, greater capital expenditure control,

sourcing the best service and technology providers and most importantly allows its clients to focus

on their core business.The core competence of Lanco is its experienced team for managing

contracts during all phases of a project, while meeting the highest international standards.

Lanco provides engineering, procurement, construction, project management and commissioning

services on a Turnkey basis to the Power Sector leveraging on the experience and expertise of its

Group companies, its construction capability and competent manpower.

Lanco has ongoing projects across India and has in place an established network of resources. The

completed list of power projects includes Thermal, Hydro and Non conventional Energy.

4. Infrastructure

Lanco Infratech Ltd has executed many challenging infrastructure projects across India including

Highways. Lanco is currently executing the Varanasi Non Metro Airport Project and has emerged

winner for the Vizhinjam Trans shipment Port Project in Kerala, India.

(a) Roads

Lanco has constructed roads and highways across India for the National Highways Authority of

India. Lanco has won the contract for construction and operation of two road projects in

Karnataka, the 81 km Bangalore-Hoskote-Mudbagal stretch on National Highway 4 and the 82 km

Neelamangla - Devihalli stretch on National Highway 48 on Build, Operate and Transfer (BOT) basis

under the National Highways Development Project (NHDP) Phase III.

The concession agreements for the projects have been signed with the National Highways

Authority Ltd. The total project cost is estimated at Rs 1300 crores and involves six laning of 16 km

stretch and four

laning of the remaining stretches. The concession periods are 20 and 25 years for the two projects

respectively, including 30 months of construction period. The contracts have been awarded

through a competitive bidding process

(b) Air ports

Lanco is executing the construction of New Terminal for Varanasi Airport for the Airports Authority

of India.

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(c) Seaports

Lanco has emerged winner for the Rs 8000 crore Vizhinjam Trans shipment Port in Kerala. LANCO

has tied-up with Pembinan Radzai Sdn., Bhd (PRSB), Malaysia for this project. The project is

proposed to be developed as a Container Transhipment hub, given its 15 meter natural draft and

proximity to International sea routes. The project was envisaged to be developed in 4 phases with

an ultimate capacity of 6.5 Million TEUs (Twenty foot Equivalent Unit). The Port will be equipped

with state of the art technology, equipment and highest industry service standards. The

construction of the initial phase would be completed in 60 months and the other 3 phases will be

initiated after reaching stipulated traffic levels.

5. Property development

Lanco's property development is all set to change the skyline of major metros with some of the

finest mixed property townships and realty projects incorporating state of the art features and

amenities. Lanco Hills, one such project, is a 100 acre township coming up in Hyderabad. Lanco

Ville in the IT corridor of Chennai is scheduled to commence shortly.

(a) Lanco hills

Lanco Hills is one of the largest mixed property development projects in India located at

Manikonda in Hyderabad, India. Spread over 100 acres, LANCO Hills, encloses facilities and

features that will rank it amongst the best townships in the world. Designed to create a city of the

future, Lanco Hills an Rs 5500 Crore project, includes 15 Residential Towers, 11 towers of sez/non

sez IT spaces, club house, multiplex, mall, 5 star and business class hotels, serviced apartments

and more. The proposed signature tower with 121 floors would be the tallest residential tower in

the world.

(b) Lanco Horizon Properties Pvt Ltd

Lanco Horizon Properties Pvt Ltd, a newly formed venture of LANCO, has entered into a Joint

Development Agreement for development of 80 acres land located near SIPCOT Industrial Estate,

Siruseri on the IT corridor ( Old Mahabalipuram Road), Chennai, India. The property is being

developed as an Integrated Township consisting of Residential Towers, Shopping Space and

Service Apartments with a built-up area of approximately 10 million sq ft.

(c) Ocean park

Lanco owns a stretch of land measuring approximately 21.8 acres on the outskirts of Hyderabad.

The company proposes to develop this property as a large residential project in the next two-three

years. Currently Lanco is in the process of seeking necessary approvals from various State

regulatory authorities for the development of the property.

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(d) Lanco Property Management Company Pvt Ltd

Realising the need for professional property experts in the emerging property development sector

Lanco Property Management Company Pvt Ltd (LANPRO) has been incorporated as a

professionally managed company to manage investor funds to invest in the Real Estate Sector. The

company is into buying, selling and overall maintenance of property for investors. Besides

providing marketing development information about all kinds of properties, LANPRO gives optimal

solutions to achieve maximum growth of investments and standardised regular income to the

investors in the Real Estate Sector.

6. Wind energy

Lanco has undertaken wind-turbine manufacturing and project development activities in India,

Europe and the AmericasIt is launching its best-in-class 2 MW wind turbine in April 2009 with

technology from a German engineering company of international repute.On the project

development front, Lanco has already acquired quality wind sites for development of wind farms

in excess of 6,000 MW and aims to achieve 15,000 MW over the next three years.

• Subsidiaries

Aban Power Company Limited

The company was incorporated in the State of Tamil Nadu on March 6, 1997 and received the

certificate of commencement of business on April 16, 1997. Its registered office is at 3rd Floor, 25

G.N. Chetty Road, T. Nagar, Chennai – 600 017, India. The company was incorporated for setting

up the Aban Power Plant towards which Aban entered into a PPA with TNEB for a period of 15

years. The company started its commercial operations in August 2005.

Lanco Amarkantak Power Private Limited

The company was originally incorporated as “KVK Energy Private Limited” in the State of Andhra

Pradesh on February 22, 2001 and the name of the Company was changed to “Lanco Amarkantak

Power Private Limited” on December 16, 2003. The company is a SPV that was incorporated to

implement the project of setting up the Lanco Amarkantak Power Plant. The company entered

into a PPA with Power Trading Corporation for a period of 25 years. Thecompany has not

commenced any commercial operations yet.

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Lanco Hills Technology Park Private Limited

The company was originally incorporated as “Lanco Technologies Private Limited” on September

7, 2004 and subsequently renamed as “Lanco Technology Park Private Limited” on June 7, 2005.

The name of the company was further changed to “Lanco Mantri Technology Park Private Limited”

on November 24, 2005 and finally to Lanco Hills Technology Park Private Limited” on July 6, 2006.

The company was incorporated as SPV for the purpose of developing a 100 acre IT Park in

Hyderabad, AndhraPradesh. The company has not commenced any commercial operations yet.

Lanco Electric Utility Limited

The company was incorporated on March 6, 2000 in the State of Andhra Pradesh with its

registered office at Lanco House”, 141, Avenue #8, Banjara Hills, Hyderabad – 500 034. Lanco

Electric Utility obtained its certificate for commencement of business on March 27, 2000.The main

business of the company is powertrading.

Lanco Green Power Private Limited

The company was incorporated on March 21, 2002 in the State of Andhra Pradesh with its

registered office at Lanco House”, 141, Avenue #8, Banjara Hills, Hyderabad – 500 034, India. It

was incorporated to implement the Budhil Power Project and the company entered into a PPA

with Power Trading Corporation for a period of 35 years. The company has not commenced any

commercial operations yet

Clarion Power Corporation Limited

The company was originally incorporated as “Heritage Agritech Limited” on January 23, 1996. The

name of the company was subsequently changed to “Clarion Industries Limited” on January 27,

1997 and then to “Clarion Power Corporation Limited” on July 17, 1997. Its registered office is at

“Lanco House”, 141, Avenue #8, Road No. 2, Banjara Hills, Hyderabad – 500 034, India. The

company was incorporated to set up the Clarion Power Plant and the company entered into a PPA

with APTRANSCO for a period of 20 years for the sale of the entire power generated by the Clarion

Power Plant. It started its commercial operations in January 2004.

Rithwik Energy Systems Limited

The company was incorporated on December 22, 1999 to set up the Rithwik Power Plant. Its

registered office is at “Lanco House”, 141, Avenue #8, Road No. 2, Banjara Hills, Hyderabad – 500

034, India. The company has entered into a PPA with AP Transco for a period of 20 years for sale

of entire power generated by the Rithwik Power Plant. It started its commercial operations in

September 2002.

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Vamshi Industrial Power Limited

The company was incorporated as on February 6, 2002 in the State of Andhra Pradesh with its

registered office at “Lanco House” 141, Avenue #8, Banjara Hills, Hyderabad – 500 034. It was

incorporated to implement the project of setting up the Drinidhar Power Project and the Upper

Khauli Power Project. The company has notcommenced any commercial operations yet.

Lanco Hydro Power Ventures Private Limited

The company was originally incorporated as “Hydro Power Ventures India Private Limited” on

January 31, 2005 and subsequently renamed as “Lanco Hydro Power Ventures Private Limited” on

September 1, 2005 with its registered office at “Lanco House”, 141, Avenue #8, Banjara Hills,

Hyderabad – 500 034. The business of the company is to promote establish, run, finance, invest,

generate, develop, distribute and supply electricity by setting up power plants. The company has

not commenced any commercial operations yet.

Lanco Hydro Energies Private Limited

The company was incorporated on February 21, 2006 with its registered office at “Lanco House”,

141, Avenue #8, Banjara Hills, Hyderabad – 500 034. It is a SPV that was incorporated to

implement the Rambara Power Project, the Gaurikund Power Project and Phata-Byung Power

Project in the State of Uttaranchal. The company has not commenced any commercialoperations

yet.

Lanco Energy Private Limited

The company was incorporated on June 26, 2000 with its registered office at “Lanco House”, 141,

Avenue #8, Banjara Hills, Hyderabad – 500 034. It is a SPV that was incorporated to implement the

Teesta VI Power Project. The company has not commenced any commercial operations yet.

Neptune Projects Private Limited

The company was incorporated in Andhra Pradesh on February 27, 2004 with its registered office

at 141, Avenue 8, Road No. 2, Banjara Hills, Hyderabad – 500 034. The company was incorporated

to carry on then business of builders, engineers, architects, interior designers, contractors for the

construction of bridges, culverts, roads, highways and expressways. The company has not

commenced any commercial operations yet and holds certain land admeasuring 1 acre 59 guntas

situated at Kokapet village, Rajendranagar Mandal, Rangareddy District, Andhra Pradesh.

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Uranus Projects Private Limited

The company was incorporated in the State of Andhra Pradesh as on February 27, 2004 having its

registered office at 141, Avenue 8, Road No. 2, Banjara Hills, Hyderabad –500 034. The company

was incorporated to carry on the business of builders, engineers, architects, and interior

designers, contractors for the construction of bridges, culverts, roads, highways and expressways.

The company has not commenced any commercial operations yet and holds certain land

admeasuring 2 acres 8 guntas situated at Kokapet village, Rajendranagar Mandal, Rangareddy

District, Andhra Pradesh.

Ruby Agro Farms Private Limited

Ruby Agro Farms Private Limited was incorporated in Andhra Pradesh on January 27, 2004 with its

registered office at 141, Avenue 8, Road No. 2, Banjara Hills, Hyderabad – 500 034. The company

was incorporated to cultivate, grow, produce, process or deal in agricultural products, vegetables

products of floriculture and horticulture, herbs, carry on the business as dairy men and to

undertake the business of dealing in poultry, cattle, - 21 8 - sheep, goat, mutton and meat

products. The company has not commenced any commercial operations yet and holds certain land

admeasuring 4 acres 20m guntas situated at Kokapet village, Rajendranagar Mandal, Rangareddy

District, Andhra Pradesh.

Coral Agro Estates Private Limited

The company was incorporated in Andhra Pradesh on December 30, 2003 with its registered office


to cultivate, grow, produce, process or deal in agricultural products, vegetables products of

floriculture and horticulture, herbs, carry on the business as dairy men and to undertake the

business of dealing in poultry, cattle, sheep, goat, mutton and meat products.

Garnet Agro Estates Private Limited

The company was incorporated in Andhra Pradesh as on January 2, 2004 with its registered office


to cultivate, grow,produce, process or deal in agricultural products, vegetables products of


business of dealing in poultry, cattle, sheep, goat, mutton and meat products. The company has

not commenced any commercial operations yet and holds certain land admeasuring 3 acres 14

guntas situated at Kokapet village, Rajendranagar Mandal, Rangareddy District, Andhra Pradesh.

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Diamond Farms Private Limited

The company was incorporated in Andhra Pradesh on January 27, 2004 with its registered office at

141, Avenue 8, Road No. 2, Banjara Hills, Hyderabad – 500 034. The company was incorporated to

cultivate, grow, produce, process or deal in agricultural products, vegetables products of




guntas situated at Kokapet Village, Rajendranagar Mandal, Rangareddy District, Andhra Pradesh.

Pearl Farms Private Limited

The company was incorporated in Andhra Pradesh on January 27, 2004 with its registered office at

141, Avenue 8, Road No. 2, Banjara Hills, Hyderabad – 500 034. The company was incorporated to

cultivate, grow, produce, process or deal in agricultural products, vegetables products of




guntas situated at Kokapet village, Rajendranagar Mandal, Rangareddy District,Andhra Pradesh.

Associates

Lanco Kondapalli Power Private Limited

LKPPL was originally incorporated in the State of Andhra Pradesh as “Lanco Power Limited” on

August 21, 1995. The name of the company was subsequently changed to “Kondapalli Power

Corporation Limited” on April 1, 1997 and thereafter to “Lanco Kondapalli Power Limited” on June

21, 1999. The name was further changed to “Lanco Kondapalli Power Private Limited” on July 11,

2001. Its registered office is at Lanco House, 141, Avenue #8, Road #2, Banjara Hills, Hyderabad –

500 034, Andhra Pradesh, India.

Genting Lanco Power (India) Private Limited

Genting Lanco Power (India) Private Limited was originally incorporated as “Eastern Generation

Services (India) Private Limited” in the State of National Capital Territory of Delhi on September 9,

1997. The registered office of the company was shifted from National Capital Territory of Delhi to

Andhra Pradesh on December 10, 2004 and subsequently the name of the company was changed

to “Genting Lanco Power (India) Private Limited” on February 23, 2005. The registered office of

Genting Lanco is situated at Kondapalli IDA, Kondapalli- 521228, Ibrahimpatnam Mandal, Krishna

District, Andhra Pradesh. The main object of the Genting Lanco is to carry on the business of

acquiring, setting up, running, operating and maintaining power plants.

20


Peer Group Comparison

Name of the

company

CMP(R.s)

(As on

Nov18,,2009)

Market

Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

Lanco Infratech Ltd 565.00 134611.25 12.75 44.31 5.92 0.00

GVK Power & Infra

Ltd 50.60

79908.0 0.11 460.00

4.55

0.00

GMR Infrastructure

Ltd 67.55

247729.8 0.13 519.62

4.34

0.00

Reliance

Infrastructure Ltd 1150.10

259083.3 52.27 22.00

2.46

70.00

Key Concerns

• Global economic slowdown

• Rise in the prices of petroleum products and the increasing cost of power

• Highly competitive with diverse players

• Government policies.

• The increase in the excise duty on cement, will affect construction players.

• Slow down in Real estate.

• Delay in power projects

21


Financials 12 Months Ended Profit & Loss Account (Consolidated)

Value(Rs. in million) FY08 FY09 FY10E FY11E

Description 12m 12m 12m 12m

Net Income 32412.57 60,719.60 83401.48 108421.92

Other Income 952.93 562.44 675.00 810.00

Total Income 33365.50 61,282.0 84076.48 109231.92

Expenditure -25507.40 -51846.05 -70799.52 -92364.64

Operating Profit 7858.10 9,436.0 13276.96 16867.29

Interest -832.19 -1,772.89 -2365.36 -3102.22

Gross Profit 7025.91 7,663.1 10911.60 13765.07

Depreciation -775.74 -1073.39 -1346.99 -1616.39

Profit before Tax&E.t 6250.17 6589.71 9564.61 12148.68

Exceptional items 0.00 -1059.61 -391.45 -219.00

Profit before Tax 6250.17 5530.10 9173.16 11929.68

Tax -1404.52 -1,690.40 -2751.95 -3578.90

Profit after Tax 4845.64 3839.70 6421.21 8350.78

Minority Interest&etc -1303.93 -1036.15 -944.86 -821.36

Net profit 3541.71 2,803.55 5476.35 7529.42

Equity Capital 2197.93 2,198.34 2382.50 2382.50

Reserves 16135.48 18777.85 24254.20 31783.62

Face Value 10.00 10.0 10.00 10.00

Total No. of Shares 219.79 219.83 238.25 238.25

EPS(Rs) 16.11 12.75 22.99 31.60

22


Quarterly Ended Profit & Loss Account (Consolidated)

Value(Rs. in million) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec-09E

Description 3m 3m 3m 3m

Net Income 20,561.30 21,953.50 19,265.60 20,228.88

Other Income 151.30 376.00 187.30 169.36

Total Income 20,712.50 22,329.50 19,452.90 20,398.24

Expenditure -17,519.70 -19,184.80 -16,143.20 -16,990.24

Operating Profit 3,192.90 3,144.70 3,309.70 3,408.00

Interest -528.70 -605.20 -518.80 -501.26

Gross profit 2,664.20 2,539.50 2,790.90 2,906.74

Depreciation -329.80 -328.30 -332.30 -336.39

Profit before Tax&E.t 2,334.40 2,211.20 2,458.60 2,570.35

Exceptional items -494.70 -29.20 -207.80 -102.00

Profit before Tax 1,839.70 2,182.00 2,250.80 2,468.35

Tax -681.40 -813.20 -769.30 -839.24

PAT 1,158.30 1,368.80 1,481.50 1,629.11

Minority. I -259.70 -211.10 -257.40 -245.36

Net Profit 898.60 1,157.70 1,224.10 1,383.75

Equity Capital 2,198.30 2,198.30 2,382.50 2,382.50

Face Value 10.00 10.00 10.00 10.00

EPS(Rs) 4.10 5.20 5.14 5.81

A=Actual, Estimated

23


Charts

A) Net sales & PAT Chart

B) EV/EBITDA chart

24


C) P/E Chart

D) Debt-Equity ratio chart

25


1 Year Comparative Graph

Outlook and Conclusion

• At the current market price of the stock Rs.565.00 and it trades at a P/E of 24.58 x an 17.88x FY10E

and FY11E earnings respectively.

• The EPS of the stock is expected to be at Rs.22.99 and Rs.31.60 for the earnings of FY10E and

FY11E respectively.

• The top line and bottom line of the company are expected to growth a CAGR of 49.4% and 28.5%

over FY08 to FY11E.

• On the basis of EV/EBDITA, the stock trades at 12.67x and 12.47x for FY10E and FY11E

respectively.

• Price to Book Value of the stock is expected to be at 5.05 x for FY10E and 3.94x for FY11E.

• Increasing levels of investment in the Infrastructure Sector both by the government and private

players is expected to be major driver of growth for the Infrastructure players in India going

ahead.

• The Construction and EPC Segment Order book, stands at Rs.140000 mn. Lanco’s internal orders

(power projects) constituted a significant portion of its total order Book.

• The government has taken various steps to encourage substantial investments in the

Infrastructure space including plans to set up SEZs at various locations in India and providing

economic benefits to private sector players for projects executed on a BOT or Annuity basis.

• Recently the company has raised Rs.7.3bn through a QIP issue.

• Lanco Infratech is in talks with European and US-based engineering procurement contractors

(EPCs) for the group’s foray into nuclear power generation.

LANCO BSE SENSEX

26


• Lanco aims to increase its existing capacity of approximately 500MW to 15,000MW by 2015. The

power segment should start adding significantly to the top line from FY10 as new power plants

come online.

• We recommend ‘BUY’ for this stock with a target price of Rs.700.00 for medium to long term.

Infrastructure Sector Overview:

The Infrastructure sector is currently going through tough phase due to the global slow down. As

the sector’s dependency on other sectors are much more, any slow down in other sectors will

affect the performance of this sector. Decline in the price of commodity and easing interest rates

will help the companies to come out from the troubles created by the slowdown. But we expect

that the effects of these factors will be seen only from the last quarter of the current fiscal. Slow

execution of orders is the main concern for the companies in the sector. Even some companies in

the sector are facing order cancellation also.

As a positive indication towards this, the country has witnessed a rapid increase in private

investment in infrastructure over the last five years. The estimated investment in infrastructure

has now been pegged at USD 500 billion by the end of the Eleventh Five Year Plan. This is both a

challenge and an opportunity for the Government as well as for the private sector

The General Index for the month of November grew by 2.4% as compared to the level in the

month of November 2007. The cumulative growth for the period April-November 2008-09 stands

at 3.9% over the corresponding period of the pervious year.

Hit by the global financial meltdown, the key infrastructure sector industries showed poor

performance during December, registering a dismal growth of 2.3 per cent, a trend which

economists feel is likely to continue during the remaining part of the fiscal year. With steel and

crude oil showing negative growth during the month, six infrastructure industries in December

recorded the second-lowest growth during

2008-09, marginally up from 1.8 per cent in November. For the nine-month period of April-

December, the growth of the infrastructure sector - crude oil, petroleum refinery products, coal,

electricity, cement and finished steel -dropped to 3.5 per cent from 5.9 per cent in the same

period of 2007-08.

27


However, now that the infrastructure sector is struggling with liquidity problem, high interest

rates and financing constraints.On the positive side, the government’s investment in infrastructure

sectors can receive a boost from the fiscal stimulus announced as part of the package to boost

economic growth.Despite strong estimated revenue growth of about 25-30 per cent in Q4, net

profit growth in the construction sector will only be about 8-10 per cent. This is primarily on the

back of higher cost of funds of about 13-14.5 per cent compared to 11-12 per cent earlier.

Meanwhile, there is enough visibility in the infrastructure sector given the order book of 3-3.5

times FY08 revenue. Also, as interest rates are on a downtrend and liquidity is improving, the

funding and visibility of the projects could improve. Lastly, the lag effect of lower commodity

prices should reduce the pressure on the margins in the coming quarters.

The Indian construction industry

Construction activity is an integral part of a country’s infrastructure and industrial development. It

includes hospitals, schools, townships, offices, houses and other buildings; urban infrastructure

(including water supply, sewerage, drainage); highways, roads, ports, railways, airports; power

systems; irrigation and agriculture systems; telecommunications etc. Covering as it does such a

wide spectrum, construction becomes the basic input for socio-economic development. Besides,

the construction industry generates substantial employment and provides a growth impetus to

other sectors through backward and forward linkages. It is, essential therefore, that, this vital

activity is nurtured for the healthy growth of the economy.

With the present emphasis on creating physical infrastructure, massive investment is planned

during the eleventh Plan. The construction industry would play a crucial role in this regard and has

to gear itself to meet the challenges. In order to meet the intended investment targets in time, the

current capacity of the domestic construction industry would need considerable strengthening.

In India, construction is the second largest economic activity after agriculture. Investment in

construction accounts for nearly 11 per cent of India’s Gross Domestic Product (GDP) and nearly

50 per cent of its Gross Fixed Capital Formation (GFCF). Fund injection into the sector could go up

to US$ 124.65 billion by FY2010. Construction accounts for nearly 65 per cent of the total

investment in infrastructure and is expected to be the biggest beneficiary of the surge in

infrastructure investment over the next five years.

The Indian construction industry recorded a consistent double-digit year-on-year growth (12%)

during 2000-2005, and is expected to grow at 25-30% during 2005-2010. The key drivers of this

growth are government investment in infrastructure creation and real estate demand in the

residential and industrial sectors.

28


The industry is experiencing increasing polarisation between large and small players. These players

are increasing their market share through large-scale contracts, joint ventures, and foreign

operations. Though an increasing number of small players are also entering the market, most of

them do not have the resources to bid for big contracts.

The construction segment constitutes a significant part of infrastructure development in the

economy. The following table shows the construction investments figures in the various areas of

infrastructure development:

(Rs. in billion)

FY02-FY06 FY07-FY11

Roads 1167 2306

Urban infrastructure 536 1150

Power 578 861

Irrigation 514 744

Railways 225 639

Others 193 429

Total 3,213 6129

Demand for construction has resulted in the following macro trends:

The increasing spend in the infrastructure sector has resulted in an increased order book for

construction companies thereby easing the supply – demand competitive pressure.

Margins of construction companies were adversely impacted by increase in prices of inputs in the

past especially steel, aggregate and now cement. Whilst commodity prices continue to exhibit

volatility, price escalation clauses are being used to allow for some protection. Whilst partly

mitigated, this remains an area of concern.

Construction companies are moving towards public-private partnership, raising funds from the

market to finance these projects. Whilst some participants, especially the smaller ones, have

adopted a fragmented approach to the market, bidding aggressively, the more established

players who have financial strength, experience and access to technology and an appetite to

undertake large contracts are adopting a selective approach in their order mix and client

selection, leading up to risk management on margins. To accelerate and increase public private

partnerships in infrastructure, two major initiatives have been taken by the GoI provision of

viability gap funding and Establishment of India Infrastructure Finance Company Limited.

29


These initiatives are designed to implement public projects to make them financially feasible and

involve either a one-time grant or a deferred grant of funds to aid in the respective project.The

Indian construction industry is facing the challenges of outdated land and property ownership

regulations, infrastructural bottlenecks, and a shortage of civil engineers.

The construction sector has major linkages with the building material industry since construction

material accounts for sizeable share of the construction costs.These include cement, steel,

bricks/tiles, sand/aggregates, fixtures/fittings, paints and chemicals, construction equipment,

petro-products, timber, mineral products, aluminum, glass and plastics.

Power

As the Indian economy continues to surge ahead, its power sector has been expanding

concurrently to support the growth rate. The demand for power is growing exponentially and the

scope of growth of this sector is immense.

India's total installed capacity of electricity generation has expanded from 105,045.96 MW at the

end of 2001–02 to 150,323.41 MW at the end of June 2009. In fact, India ranks sixth globally in

terms of total electricity generation.

Source-wise, thermal power plants account for an overwhelming 63.9 per cent of the total

installed capacity, producing 96,044.24 MW. Hydel power plants come next with an installed

capacity of 36,916.76 MW, accounting for 24.6 per cent of the total installed electricity

generation capacity.

Besides thermal and hydel power, renewable energy sources contribute 8.8 per cent to the total

power generation in the country producing 13,242.41 MW.

Nuclear energy makes up the balance 2.7 per cent contributing 4,120 MW.

Growth Potential

According to a report by KPMG and CII, India's energy sector will require an investment of around

US$ 120 billion-US$ 150 billion over the next five years.

The government has revised its target of power capacity addition to 90,000 MW in the 11th Five-

Year-Plan (2007-12), up by 11,423 MW from the earlier estimate of 78,577 MW to sustain the

growth momentum of the economy.

Further, according to the Planning Commission estimates, renewable energy (RE) projects worth

US$ 16.50 billion, for the generation of 15,000 MW power, would come up in the 11th Plan.

Moreover, the government has earmarked a total capital subsidy of US$ 6.88 billion for providing

electricity connections and for the distribution of infrastructure to rural households.

30


The Indian Real Estate Industry

Size

• Real Estate and Construction is a US$50 billion (2008) industry in India

• Rapid growth in the industry in the past few years

• FDI it is expected that the sector would witness inflows to the tune of US$ 8-10 billion by FY 2010

• High demand growth has led to prices doubling over 3 years in many cities.

Outlook

• The Real Estate market is projected to grow to US$60 billion by 2010 at a CAGR of 40%

• Real Estate companies have been successfully tapping the country’s booming capital markets for

funds

• Companies have also raised equity internationally at the AIM in London

• Tier 2 cities (non metros) likely to experience faster growth in the future

Opportunity

• Commercial and office complexes mushrooming in major Indian metros

• Over 20 million new housing units required in 5 years

Potential

• Several factors are expected to contribute to the rapid growth in Real Estate

• Large demand-supply gap in affordable housing, with demand being fuelled by tax incentives and

a growing middle class with higher savings.

• Increasing demand for commercial and office space especially from the rapidly growing Retail, IT/

ITeS and Hospitality sectors.

• The recently announced JNNURM expected to provide further impetus

31


• Investment opportunities exist in almost every segment of the business

• Housing: About 20 million new units expected to be built in five years

• Office space for IT/ITeS: Five-fold increase in office space requirement over the next 3 year

• Commercial space for organized retailing: 200 million sq. ft. by 2010

• Hotels & Hospitality: Over 40,000 new rooms in the next 5 years.

• Investment opportunity of over US$75 billion in the next five years.

____________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or

sale of any financial instrument or as an official confirmation of any transaction. The information contained

herein is from publicly available data or other sources believed to be reliable but we do not represent that it is

accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any

inadvertent error in the information contained in this report. This document is provide for assistance only and is

not intended to be and must not alone be taken as the basis for an investment decision.

32


Firstcall India Equity Research: Email – [email protected]

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