Lanco Infratech: Despite past underperformance, stock price is showing stability
The fundamentals of Lanco Infratech are set to receive a boost after the positive developments in the recent past.
It also refused to grant an injunction against the sale of Bluewaters Power Plant to the Japanese consortium of Sumitomo Corp and Kansai Electric Power. Once this sale deal comes through, Griffin Coal can enter into a new coal supply agreement (CSA) with the Bluewaters Power Plant and realise a much better price for its products. In addition to an initial jump in the current price, coal prices will be linked to inflation in the future. The revised CSA is expected to help Griffin Coal break even at the EBITDA level. The revised CSA is expected to be effective from mid-2011 and will entail an upfront payment of $50 million, which will be utilised for reducing its debt and meet its working capital requirement. Once the deal is finalised, Lanco Infratech may not have to chip in with additional funding.
However, the company’s problems are far from over. Investors should note that the main case by Perdaman Chemicals and Fertilisers against Griffin Coal is still pending and its resolution could take some time. This means that there may be some uncertainty for its Australian subsidiary. Several issues like high debt at the parent level, tariff issues at Amarkantak II, and poor PLF conditions at Kondapalli will continue to haunt it in the next few quarters. After years of massive underperformance, Lanco Infratech has started showing stability in its stock price.
This is clearly visible from the two-year relative performance chart. (Typically, we give a one-year chart, but shall illustrate a two-year one to capture the change in the market mood in this counter). This means that most of these negatives have already been factored in the price and, therefore, the downside seems to be limited from here on. The company is expected to bring down its consolidated loss in the third quarter of 2012-13, and this can be an upward trigger for the stock. The management has already started taking steps to reduce its debt burden at the parent level by equity infusion and/or asset divestment, which can be another trigger for it. Selection methodology: We pick the stock that has shown the maximum increase in consensus analyst rating during the past month.
Consensus rating is arrived at by averaging all analyst recommendations after attributing weightages to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell). Any improvement in consensus rating indicates that the analysts are becoming more bullish on the stock. To make sure that we pick only companies with a decent analyst coverage, this search will be restricted to the stocks that have been covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in ETW 100 table.