Integrating operational businesses with in-house engineering capabilities to drive growth:

Presently, Lanco derives its consolidated revenues from two main streams, one being the construction and EPC business of the holding company and the other is operating companies’ revenues. The holding company is using its expertise in EPC and execution of projects for the benefits of its own operating companies. Lanco power sector operating companies already contribute to its consolidated revenues and profits. Its property initiatives would begin contributing from FY08E. We expect the toll-based road projects to contribute to the revenue flow in the next three years. We expect Lanco’s consolidated revenues to increase 126% CAGR over FY07-09E to Rs81.7 bn with construction revenues contributing 47% and operating entities contributing the balance 53%.

Lanco to own 9,553MW of power projects:

Lanco’s power business has high visibility of revenue growth with 518MW of power plants in operation, 2,205MW under implementation and 1,670MW to achieve financial closure in the near future. The company has signed MoU’s for additional 5,160MW power projects. We expect these operating power companies to generate revenues of Rs16.4 bn in FY09E from 1,208MW of operational capacity. We have valued these operating companies, which are either in operation or have achieved financial closure, at Rs133 per share based on our DCF methodology.

Construction order book to reach Rs130 bn:

This is the core business of the company, and contributed 47% to its consolidated revenues in FY07. While Lanco historically derived 70% of its construction revenues from external contracts, internal contracts now constitute 94% of its Rs75 bn order book. We have valued the construction business at Rs174 (10x FY09E EPS of Rs17.4).

Ambitious property development projects over 170 acres:

The company’s flagship project, Lanco Hills in Hyderabad has 19.5 mn sq feet of saleable area. This project includes a SEZ, hotels, malls, residential towers and a Signature tower which would be the tallest residential building in the world. The company is also developing an integrated 4mn sq feet township in Chennai. We value these ventures at Rs93 per share based on the equity cash flows for the first ten years of the projects.

Valuation and recommendation:

We have valued Lanco on a sum-of-the-parts (SOTP) basis, with its power portfolio being valued at Rs133, road projects at Rs9 and the real estate business at Rs93 per share. We have valued the construction business at Rs174. At the current price, the stock trades at 10.7x its estimated consolidated FY09E EPS of Rs24.2. We initiate a BUY recommendation with a price target of Rs369, an upside of 42%.