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Bleak Prospects

Given the disappointing performance & stretched balance sheet, Lanco Infra does not enjoy good prospects…

I have 900 shares of Lanco Infratech (LITL) purchased at Rs 30.7. I am not able to decide what to do with them — dump them or hold them. Please advise what I should do?
- Horaira

Lanco Infratech is into engineering, procurement and construction, power, solar, natural resources, infrastructure and property development.
It became a listed entity in November 2006. Currently the stock is trading at a 37 per cent discount compared to its listing price. Moreover, the price has fallen drastically by around 79 per cent over the last one year. Lanco Infratech recently traded at a 52-week low of Rs 15.10 on August 19, 2011. The company has a free-float market capitalisation of Rs 1,166.6 crore.

The company’s balance sheet (consolidated) looks stretched with a debt-to equity ratio of 2.56. Margins and profitability have been declining. Since FY07 Lanco Infratech’s net profit margin and operating profit margin have declined by 975 basis points (bps) and 900 bps respectively. Over the same period, its return on capital employed (RoCE) and return on net worth (RoNW) too have declined by 821 bps and 1,191 bps respectively. The company has not been paying dividend to its shareholders.

The company’s earnings per share has grown at a CAGR of a meagre 5.1 per cent over the last three years. This translates into an unattractively high price-to-earnings to growth ratio of 2.5.
On a favourable note, an Australian court has dismissed multinational Perdaman Industries’ application seeking a restraint on the Indian group from mortgaging assets of Griffin Coal in future. Lanco Infra was slapped with a Rs 16,733 crore lawsuit by Australia’s Perdaman Chemicals & Fertilisers for alleged breach of coal supply agreement. Perdaman had signed a coal supply agreement for 25 years with Griffin Coal, which was acquired by Lanco last year. On the flip side, however, the company’s huge investments planned in solar power despite a stretched balance sheet, poor Q1FY12 performance due to low realisation of revenue from the merchant power area, and domestic fuel shortage may act as a dampener for the stock in the near- to medium-term.
Given the disappointing performance of the stock, expensive valuation, and stretched balance sheet, Lanco Infra’s stock does not enjoy good prospects in the medium term.

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