Finquest Sec positive on Lanco Infra’s future prospects

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Diversified business model

Lanco has diversified presence in sectors of power, construction and property development sectors. Within power sector the company executes assignments in gas, bio-mass, hydro, coal and wind-based power plants. The company also executes provide construction services for various types of civil construction and infrastructure projects, including power plants, irrigation and water supply projects, transportation engineering projects.

Lanco is also into construction of commercial and residential buildings, mass housing projects and townships, industrial structures, corporate offices and hospitals. In the property business, Lanco proposes to develop IT parks and residential and commercial projects. This model reduces its dependence on one sector along with multi - sector participation.

Turnkey service provider and a branded player

The company undertakes projects on a turnkey basis, in which it provides a range of specialised construction and operational services including electrical, fire prevention and control, plumbing, air conditioning and other civil works. Lanco also provides design-build services to clients in various segments.

Due to the long standing history of the Lanco group of companies, Lanco brand enjoys brand recognition in India. Over the years Lanco has positioned its brand to be associated with reliability, trust and value. Also real estate industry has a deep inclination towards branding. Thus in long run established brand name will help Lanco to pitch its sales more readily.

Strong tie ups

The company has entered into strategic and financial partnerships with leading international firms and has strong relationships with leading Indian financial institutions. In the power sector, the company is or will be working with Genting Group (Malaysia), Doosan Engineering (Korea) and General Electric Company.

Lanco has established a relationship with Globeleq, a large infrastructure-focused private equity fund in the UK, through its purchase of a 25.1% interest in the company's power subsidiary, LKPPL. For its construction projects, it has had strategic partnerships with Hyosung - Ebara Company, Voist-Alpine Tech Wabagh (India) and Punchak Niaga Holdings Berhad Malaysia.

Investment concerns

Hike in raw material prices

Spiraling raw material prices can put the margins of the company's under pressure. With the prices of the basic raw materials like cement, iron & steel on a high the company need to off- set this through greater efficiency.

Slow growth in power sector

Growth in power generation capacity decelerated to 4.1% in FY2001-05 from 4.5% over FY1991-F2000, 8.5% over FY1986-F1990. The most important investment deterrent is the poor financial condition of the SEBs, which are the counter-parties monopolizing the distribution and transmission of power. In addition to the SEBs' poor financial health, complicated clearance requirements impede investment.

Slump in real estate scenario

Real estate sector is highly price and sentiment sensitive. Any change in the sentiments of the general public affects the prices drastically. Also any environmental changes can lead in drastic fall in real estate prices. Thus this situation may cramp the company's inventories and properties affecting the realisations.

Valuations

Lanco is strongly poised to take advantages in the upcoming power sector. Lanco has an order backlog of Rs 16.2 billion and sizable land bank. Lanco has on its back an experienced management base along with good brand image. The model looks attractive from a long term view. The issue is priced at 142x the upper band of diluted FY2007 annualized EPS of Rs 1.7. We are positive on the company's future prospects.