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INITIATING COVERAGE

Industry Diversified Mr. Suresh Kumar CFO, Lanco Infratech Ltd. (O) +91-124-4741000 Stock Metrics Bloomberg code LANCI IN Reuters code LAIN.BO BSE Group A BSE Code 532778 NSE Code LITL Face value ` 1/- ISIN No. INE785C01048

Market Data Market Cap. (Rs.Mn.) 160854 52week High/Low 74.70/40.80 SENSEX 20045 Nifty 6018 Average Volume(3 Mth) 524388

Share holding Pattern

Research Analyst: Divya Kant divya.kant@inventuregrowth.com 022-40751515 Ext: 582 Anshuman Jain anshuman.jain@inventuregrowth.com 022-40751515 Ext: 581 Date: 24th Sep, 2010

The Emerging Power house: Lanco Infratech Ltd. LITL is one of the emerging power houses of India. It has increased its power capacity from ~510 MW to 1349 MW in FY10. The total power portfolio stands at 9311MW of which company has achieved financial closure of around 4500 MW. LITL has strategically partnered with global companies like: OHL of Spain, Westports and Genting of Malaysia, Harbin, GE, Dongfang, Doosan etc. This has provided with a niche platform to the company with continuous implementation of best technologies and practices in projects undertaken. The current order book stands at ` 257137Million. Valuation: We initiate the coverage report on Lanco Infratech Ltd. (LITL) with a ‘BUY’ on it. We have evaluated the company on SOTP basis. We expect a potential upside of 45% to a price of ` 97/-. The current market price of the company is ` 66.8/-. We expect the company to perform well as its power portfolio is promising and few projects are expected to be completed soon. Key Financials ` Millions Year ended March FY09 FY10 FY11E FY12E

Net Income 60614 82160 121800 147900

EBITDA 8788 16355 22350 26400

PAT 3839 5679 8340 9751

EBITDAM (%) 14.5 19.9 18.4 17.8

PBTM (%) 9.2 11.5 11.0 11.0

PATM (%) 6.3 6.9 6.8 6.6

EPS 1.79 2.36 3.46 4.05

Current Price ` 66.80

Target price ` 97

Potential upside 45%

Time frame 18 mths

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Table of Contents Page No.

Company Insight …… 3

Investment rationales… 4-7

Sector Overview…... 8

Risk & Concerns…. 9

Price evaluation 10

Charts 11

Financials 12

Peer set analysis 13

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The Business Segments

Company Insight

Company has mainly two verticals i.e. EPC division, Power division. Order book mainly consists of Power Projects and few other EPC projects consisting of building projects, road and irrigation projects. The current order book stands at ` 257137Mn. Company is also into property development with its Lanco Hills project located in Manikonda of Hyderabad is spread over 100 acres and is one of India’s largest integrated IT parks. Lanco Hills 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. LITL is also into power trading and its unit Lanco Power trading Ltd. in FY10 reported trade of around 4269 million units.

Source: Company

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Order Book

88%

7%

1%

2%

2%

Power Building ProjectsRoad Projects Irrigation ProjectsTransmission Line Projects

Investment rationale Expansion and Execution is the key The key for LITL has been execution of the projects. From 506MW at the start of FY10 the company has added another 843MW to bring total capacity of 1349MW in March 2010. The projects that started generating power in FY10 are: Vamshi Hydro (Baner III a 5 MW hydro based plant), Amarkantak I & II both of 300 MW capacities and our coal based projects), Kondapalli (Unit II, 233 MW a Gas based plant) and Vamshi Industrial (5 MW a hydro based plant). Company expects to add another 3,957 MW capacity in next twelve months with the additional capacity of 133 MW from Kondapalli II, 1,200 MW from Udupi and Anpara each, 70 MW from Lanco Green and 5 MW from Vamshi Industrial. Company has a total power portfolio of ~9300 MW of which 75% of the capacity i.e. 6960 MW uses coal as fuel. 17% i.e. 1596 MW uses gas as fuel and remaining 8% i.e. 755MW is hydro based. Lanco Babandh achieves Financial Closure Lanco Babandh Power -- has achieved financial closure for its 1320 MW (2x660) thermal power project in Orissa. The estimated cost of the project is about ` 6 9,300 Million, which would be financed with a debt of ` 55,440 Million and equity of ` 13,860 Million. Financial closure for other projects seen soon It is expected that company will be able to achieve financial closure for other projects soon. The other projects that are expected to achieve financial closure are Amarkantak phase 3 & 4 of 1320 MW along with this Lanco Vidarbha of 1320 MW and expansion of 742 MW capacity in Kondapalli plant.

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Order book as on 31st March 2010

Projects ` . Mn

Power Projects Amarkantak I & II( Chhatisgarh) 347 Amarkantak III& IV( Chhatisgarh) 54291 Teesta(Sikkim) 16843 Anpara(UP) 12093 Udupi(Karnataka) 5716 Kondapalli II ( AP) 528 Kondapalli III ( AP) 20176 Vidarbha (Maharashtra) 56760 Babandh (Orissa) 55840 Others 4730 Sub Total 227324

Building Projects 17216 Road Projects 3150 Irrigation Projects 5163 Transmission Line Projects 3962 Chimneys 322 Total 257137

Innovative model: strategy for effective operations

Order book is lined up with in-house orders The strong in-house EPC projects order book looks attractive. The order book as on 31st March, 2010 stood at ` 257137 million. The majority of order book is of power projects which includes Kondapalli (742 MW), Vidarbha (1320 MW), Amarkantak (1320 MW) and Babandh (1320MW). Company also has projects into irrigation, construction of buildings and road projects. Lanco's Construction division has been awarded the Bhubaneshwar Airport construction project. This is the second Airport Project of Lanco, the first being Varanasi Airport Project. LITL plans to expand in global market As company aims to double its capacity from current levels to ~4000 MW by the end of this fiscal, Lanco Infratech is eyeing global market and it has tied/partnered with Indonesian coal mine Bukit Asam to bid for a 600 MW project in Indonesia. The coal based project is located in South Sumatra, Indonesia. This project is based on BOO (Built, Own and Operate) model, with a concession period of around 25 years and with approximate cost of the project to be ~`35000 millions. Increased competition in domestic market has changed the outlook. Companies are aiming at the international avenues to increase capacity. Innovative business model The company, like some other private power producers, is banking on an innovative business model where a part of the power generated is sold in the open market, unlike the earlier practice of selling through firm contracts. This helps to utilize the mismatch in demand-supply during peak period, when price are nearly twice the firm contract price or even more than that, adding significantly to the profitability. Its financial performance reflects the success of its strategy. Company has tied up with Reliance for supply of gas from KG basin that has been highly effective.

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The realty sector overall has underperformed due to financial crunch in the economy.

BOT Road Projects LITL 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 total project cost is estimated ~ `11000 Million and involves six laning of 16 km stretch and four laning of the remaining stretches. The concession periods for the project are 20 and 25 years for the two projects respectively including 30 months of construction period. The projects are expected to be completed in FY11 and FY12 respectively. Lanco Hills- Real estate arm still dragging Lanco Hills which is constructing Hyderabad's high-rise destination, has found the going tough with the impact of global recession followed by Telangana agitation, crippling sales. The Company was unable to make any significant sales during last one year. The existing buyers who booked flats at high rates have been keen for cancellation and refunds. Income from property development was down by 116%. The fall in income was triggered by fall in demand along with providing price discounts offered to new and existing customers. While several builders have ditched buyers by stopping construction and putting their projects in limbo, Lanco has been developing the project non-stop. Though the commercial amenities like malls etc which were the selling points are unlikely to materialize for a number of years.

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Source: Company

Lanco Hills has tied up with Hyatt Corp. Global Hyatt Corp has entered into an agreement with Lanco Hills Technology Park Ltd, part of the Lanco Group, for the management of the 400-room Grand Hyatt Hyderabad. The Grand Hyatt Hyderabad is set to open in early 2011. It will be Hyatt's second hotel in Hyderabad, following Park Hyatt Hyderabad. The hotel is part of a 100-acre township being developed by Lanco Hills in Manikonda. The project is located nearly 15 km away from the new international airport at Shamshabad. A PAN India network Company has a PAN India presence. It has a captive coal mine allocated by govt. of India at Babandh, Orissa. The coal produced in the mine has to be utilized for the portion of needs of Orissa based 1320 MW Babandh power plant. Company has major power plants under construction in UP, Uttarakhand, Sikkim, HP, Maharashtra, AP etc. The projects underway are expected to be completed soon providing a strategic benefit to the company. Udupi power to expand and install 1320 MW second plant LITL is planning to expand capacity of its thermal power plant by setting up two more units of 660 MW each at an estimated investment of ` 69,300 Million at Nandikur in Udupi district in coastal Karnataka. The funds required for expansion will be raised from a consortium of public sector banks. Presently, the company has executed its first plant in the debt-equity ratio of 72: 28 percent. Presently, UPCL is in the process of commissioning its second unit of 600 MW, which will be synchronised by October-end this year. The first unit has already started generating 600 Mw from June this year. With the state government, UPCL will supply 90 percent of the generated power to five Escoms in Karnataka for 25 years. The balance 10 percent will be supplied to Punjab. The company imports almost one ship load of 70,000 tonnes every week. It requires 12,000 tonnes per day to fire a 1,000 MW power plant.

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There are certain issues which can pose risk for LITL growth prospects

Risk & Concerns

Timely completion of the project is to be seen. Company has a strong order book but execution of the project on time will be of benefit to the company. But if there are any delays in the projects that could hamper the revenue growth.

Few projects are in the process of achieving the financial closure. It is expected company will be able to achieve timely financial closure but any delay will further delay the project.

The sector growth depends on economic factors and

policies, a stricter technical qualification norm will not allow many companies to enter into this segment. Already Govt. is planning to allow bids for mining-cum- power development for 1920 MW with minimum three years of experience in mining of 10 million tones either in India or abroad.

Few projects of the company are coal based and company mainly depends upon fuel that is imported. Any hike in global prices could impact the revenue cycle of the company.

Weather conditions are also important concern, unfavorable conditions could hamper production.

Political issues like Telangana agitation which has already hampered the lanco hills real estate project, with others can delay the projects.

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India’s installed power generating capacity as of March 31st, 2010 sector wise and fuel wise:

Source: CEA, Company, IGSL Research Fuel and sector wise capacity addition to be made in 11th five year plan ending March 31st, 2012:

Source: CEA, Company, IGSL Research

Sector Overview Indian economy has strongly phased out recession. The policy makers framed stringent policies that helped quick economy recovery. Despite of the fact that major developed economies like US and Europe, are still reeling under fiscal and monetary pressures. The Indian power sector has always seen demand supply gap and with years it has been on constant increase. In 2010 peak energy deficit increased to 13.3% as per CEA’s provisional numbers. In tenth plan the total installed capacity stood at 132329MW. The capacity targeted in eleventh plan is 78700MW of which around 60% has so far been achieved. Government aims at ‘power for all’ by 2012. Power sector lags behind despite the introduction of various progressive measures. The total demand for electricity in India is expected to cross 950,000 MW by 2030. The infrastructure needs to be improved in order to meet the rising demand. Four factors that will drive this demand

• Increase in demand of power for manufacturing sector. As growth in manufacturing sector is expected to step up.

• Residential consumption is expected to grow at 14 % over the next 10 years.

• Over one lakh villages are to be aligned with grid through several programs till 2012.

• The demand, if not met will force high rate of load shedding.

Power trading market in the country is also growing fast. This offers scope for private developers to sell power in the merchant market through short-term contracts.

FUEL SECTOR

Central State Private Total % of Total

Coal 31165 44977 8056 84198 53 Gas 6702 4046 6308 17056 11

Nuclear 4560 - - 4560 3 Hydro 8565 27065 1233 36863 23 Others 3304 13417 16721 10 Total 50992 79392 29014 159398 100 % of Total 32 50 18 100 -

Sector Hydro Coal Gas Nuclear Total

State 3482 19985 3316 - 26783 Private 3491 9515 2037 - 15043 Central 8654 23350 1490 3380 36874 Total 15627 52850 6843 3380 78700

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Valuation: We have valued the power segment on the basis of its contribution to the revenue. The revenue for unfinished project has been considered from the expected cash inflows from the projects. For the projects ending in near term i.e. FY11 and FY12 we have discounted the cash flows at 13% rate whereas, projects which are expected to complete beyond that at 16% rate. As LITL is mainly into power sector we expect this sector alone to contribute major chunk of the revenue for the company. The two BOT road projects are expected to be completed till FY12. The projects are small and does not hold upper hand in determining the revenue, we expect that BOT projects should contribute ~` 2 and the real estate sector which had a dismal show last year with contributing negative revenues is not expected to contribute much this year too. As Telangana issue still haunts with elections in Andhra Pradesh nearby, and slow economic recovery in the real estate sector pose a concern. Therefore, we are negative on Lanco Hills project of LITL.

Power Projects MW COD Contribution to Price Lanco Udupi 1200 FY11 16Lanco Green 70 FY11 3Lanco Amarkantak 1&2 600 FY10 8Lanco Kondapalli 1 368 FY01 4Lanco Kondapalli 2 360 FY11 8Lanco Kondapalli 3 732 FY13 8Lanco Anpara 1200 FY11 12Lanco Amarkantak 3&4 1320 FY13 4Lanco Aban Power 120 FY02 1Lanco Vidarbha 1320 FY14 16Lanco Babandh 1320 FY14 14Lanco Teesta 500 FY12 3Lanco Uttaranchal 1&2 152 FY12 1Vamshi Hydro 1&2 10 FY11 0.3Vamshi Industrial 1&2 10 FY11 0.3Total contribution from power sector 98BOT Projects FY11 2Lanco Hills FY12 -3Total Price contributed(`) 97

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The stock has gained around 18% since Jan’2010. On 4th of Jan.’2010 stock closed at 58.10 and when compared to recent prices stock has given a return of ~18%.

LITL’s revenue growth and promising order book will help company to continue uptrend in margins.

Price Movement

Source: IGSL Research, NW18 Margins performance

Source: IGSL Research

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Financials Valuations

Income Statement ` Millions Particulars FY09 FY10 FY11E FY12ENet Sales 60062 80825 120000 146000Add: Other income 552 1335 1800 1900Net Income 60614 82160 121800 147900Less: Expenditure 51826 65805 99450 121500EBITDA 8788 16355 22350 26400Less: Interest 2185 3554 4700 5200PBDT 6603 12801 17650 21200Less: Depreciation 1073 3479 4500 5100PBT 5530 9322 13150 16100Total Tax 1690 3643 4810 6349PAT 3839 5679 8340 9751

Balance Sheet Statement ` Millions

Sources of Funds FY09 FY10 FY11E FY12E

Equity Capital 2198 2385 2408 2408Reserve and Surplus 18570 30316 34560 38310

Secured Loan 52473 75619 80000 82000

Unsecured Loan 3497 7995 8000 8200

Total Liabilities 84154 125173 133840 139790

Application of Funds

Net Block 16252 50777 68000 75000

Capital WIP 29094 13281 13000 12000Other Expenditure during construction 8793 5956 6000 6000

Total Fixed assets 54139 70015 87000 93000

Investments 9837 20229 9000 8350

Net Current Assets 20178 34929 37840 38440

Total Assets 84154 125173 133840 139790

Ratios

Key Ratios FY09 FY10 FY11E FY12EP E Ratio 37.90 28.83 19.63 16.79Price to Book Value 7.8 4.9 4.3 3.9EPS 1.79 2.36 3.46 4.05EV/EBIDTA 23.8 12.8 9.4 7.9EBIDTA (%) 14.50 19.91 18.35 17.85PBT (%) 9.2 11.5 11.0 11.0PAT (%) 6.3 6.9 6.8 6.6ROCE (%) 7.2 8.0 10.5 12.3Debt/Equity 2.7 2.6 2.4 2.2

Cash Flow Statement ` Millions

Statements FY09 FY10 FY11E FY12E

Opening balance 5500 7554 7661 9622Net profit before taxes 5530 9322 13150 16100Cash generated before working cap. Changes 9904 17247 23026 26750Cash generated from operations [A] 2383 1557 4176 5450Net cash from investing activities[B] -17447 -28410 -32035 -33485Cash generated from financing activities[C] 17119 26959 29820 29400Net Changes in Cash (A+B+C) 2054 107 1961 1365Cash at the end of the year 7554 7661 9622 10987

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Peer Set Comparison ` Millions

Particulars GMR Infra.

GVK Power Infra.

Lanco Infratech

Adani Power

Net Sales 45665 17866 80825 4348Reported Net Profit 2253 1232 5679 1700Earnings Per Share 0.61 0.78 2.36 0.78Debt-Equity Ratio 0.26 0.02 2.60 1.89ROCE (%) 1.14 1.48 8.00 2.02

Considering the returns and Order book LITL looks strong performing amongst its peers.

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