Hold KSK Energy, JP Power, Rcom, Lanco Infra: Emkay

Emkay Global Financial Services has maintained hold rating on KSK Energy; Jaiprakash Power Ventures; Reliance Communication and Lanco Infratech in its August 17, 2011 research report. KSK Energy
1Q12 conso. PAT of Rs406mn was marginally below est. - mainly due to higher fuel cost (Rs3.2/unit vs our assumption of Rs2.9/unit) at Wardha Warora. Key highlight - linkage coal supply has started 1 wk back for Wardha Warora. KSK has been allocated 1.4mn MT for FY12 - cost ~30% cheaper than e-auction - full impact in 3Q. Reliance Infra’s supplies continuing and average realizations stood at Rs5.1/unit. With Reliance infra’s license extended, there is more clarity on these supplies going forward. Already factored domestic coal supply from 2Q - Maintain earnings; Though valuations prices in reliance infra contract and domestic coal supply, 2Q/3Q might be sentimentally positive.

Current valuations imply long term merchant tariff of Rs3.4/unit (our estimate - Rs2.7/unit). At CMP of Rs102/share, the stock is trading at 1.1xFY13E book. We believe that 2Q/3Q with lower fuel cost would be sentimentally positive for the stock though valuations already factors in linkage coal supplies and Reliance infra contract. We maintain our Hold rating on the stock with price target of Rs110/share.

Jaiprakash Power Ventures
1Q12 performance in line - revenue growth of 45% yoy, EBITDA margins of 89.6% and APAT growth of 50% yoy. Generation growth of 29% yoy led by Karcham commissioning. Karcham (key FY12E growth driver) two units have already commissioned. Balance two units scheduled to commission in Aug11 and Sep11 vs assumed timeline of Aug11. In our numbers, we have taken Karcham as merchant plant - company currently selling through PTC in the open market. Reduce FY12E earnings on slight delay and maintain FY13E. Valuations corrected significantly; with 1700MW of operational hydro capacity - downside protected. Karcham litigation, funding gap & fuel remain overhang.

Stock has underperformed by 12% in past three months. Valuations at 1.5xBook now imply long term merchant tariff of Rs3.2/unit. With (1) 1700MW of operational hydro power capacity by Sep11, (2) 5120MW of coal based plants with captive mine or linkage and fuel pass through in PPAs, we believe the downside is protected from these levels (Mkt cap of Rs103bn). But Karcham litigation with PTC, funding gap and domestic fuel shortage will continue to be an overhang. We highlight that even after assumed treasury stock sale in FY12E, JPVL is likely to need about Rs20bn as equity funding in FY14E. Maintain hold with revised price target of Rs42/Share.

Reliance Communication
Cons. Revenue at Rs49.4bn down 7.3% qoq, lower than our est. of Rs54.4bn. Wireless revenue up 3.1% but other business seg. reported qoq rev. decline of 12.6% to Rs22.9bn. EBITDA grew 1.6% qoq (adj. for IRU sales in Q4FY11), led by lower network opex & admin expenses. PAT at Rs1.57bn was down 6.7% qoq. ARPU decline of 3.3% qoq to Rs103 was inline with our expectations. MOU declined 3.3% qoq to 233 while RPM remains stable at Rs0.44. Wireless traffic was up 3.1% qoq. Based on the fare value & recent price correction we upgrade our rating on the stock to HOLD but maintain our cautious view. Valuations at 6.9x/ 5.7x EV/EBITDA for FY12E/13E.

Based on our fair value and recent price correction we upgrade our rating on the stock to HOLD from REDUCE with revised target price of Rs 82 (earlier Rs85). However, we maintain our cautious view on the stock. High debt on books remains key risk especially given the pressure on profitability. Nevertheless, stake sale in tower business would key trigger for the stock in near term. At CMP of Rs77, the stock trades at 6.9x & 5.7xEV/EBIDTA and 15.5x & 10.7x our revised EPS for FY12E and FY13E, respectively.

Lanco Infratech
Lanco’s PAT of Rs137mn was way below est. due to (1) higher inter-seg elimination (66% rev, 80% EBIT) vs our assumption of 60% elimination and higher tax rate of 55%. EPC margins at 16.7%, in line and flat yoy but elimination increasing significantly on revenue recognition from subs vs associates earlier - factor in higher elimination of 65%. Further delay in Udupi and Anpara COD (best case 3Q). cut earnings by 37/43% in FY12E/13E - driven by delays, elimination, higher fuel cost and lower merchant rates. Correction driven by - (1) domestic fuel issues, (2) Udupi and Anpara delays, (3) perdaman case (one still pending), (4) inv. planned in solar despite stretched BS & (5) interest rates; Issues persisting; downgrade to hold.

Lanco has corrected significantly due to various issues in recent times – (1) domestic fuel shortage and plants on domestic fuel, (2) Udupi and Anpara Delays, (3) perdaman case - one still pending, (4) rising interest rates and stretched balance sheet, (5) huge investments planned in solar despite stretched balance sheet and (6) gas supply issues and gas plant kept merchant. We believe that most of these issues are still persisting and will take time to resolve and to remain overhang despite valuations at 0.8xFY12E Book. Downgrade the stock to hold rating with a revised price target of Rs23/Share.

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