Lanco results disappoint

M. V. S. Santosh Kumar BL Research Bureau | Updated on February 09, 2011


Lanco Infratech reported a profit growth of 54 per cent for the quarter ended December 2010 but the stock price fell by almost 17 per cent in a single day.

This was because the profit was inflated by change in depreciation policy this quarter. If this change were excluded, profit growth year on year would be lower by 70 per cent.

Earnings this quarter were muted even as the power generation capacity more than doubled and EPC revenues grew at a strong pace.

Profits were pulled down due to falling realisation from power tariffs, lower PLFs, higher interest costs and tax incidence.

The depreciation policy was initially changed from straight line method to written-down value method to accelerate the recovery of project cost since short-term tariffs were then expected to be higher.

This policy was reversed this quarter probably due to the decline in short-term tariffs.

While the total generation of Lanco Infratech grew at 95 per cent, its segment revenue from power went up by 66 per cent only which is indicative of falling realisation especially from short-term tariffs.

The power trading revenues for the quarter stood at Rs 373 crore against Rs 801 crore and Rs 759 crore during the June 2010 and September 2010 quarter.

Additionally, the PLF was also low and hasn't really grown sequentially (excluding Udupi which started generation in December quarter) indicative of sub-optimal performance from the power projects.

Udupi project is an associate company; therefore, only Lanco's share in the profit is accounted for. This project has made loss this quarter as a conservative estimate was used to calculate tariffs. It might start contributing to the bottom-line going forward.

Interest costs have been mounting thanks to its high leverage and rising interest rates.

The interest costs on a consolidated basis went up by 232 per cent to Rs 189 crore. The company continues to have a 75:25 mix for long and short-term PPAs.

With merchant power tariffs expected to pick up, one may see better earnings. The capacity is also set to double in the next six-month period.

While the power business disappointed, EPC made up with a revenue growth of 53 per cent.

Additionally, the EBIDTA margin at 19 per cent was also on the higher side improving from 18 per cent during same quarter the previous year. Therefore, the profit before interest and tax of EPC segment witnessed a strong growth of 57 per cent.

However, it has to be noted that the EPC segment revenues are lumpy and may not consistently aid the earnings growth of Lanco Infratech.

Currently, the order book stands at Rs 27,520 crore with MoserBaer project being the recent addition.

Published on February 08, 2011

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