India’s leading construction company L&T which has tremendous know-how in building mega power plans and projects has jumped into the business of power generation. Its 100% subsidiary L&T Power Development Ltd (LPDL) has emerged as lowest bidder to develop and operate a 1,320MW thermal power project in state of Punjab.
The project is expected to be operational only in 2014. However, on a longer term basis, we believe that it is positive because:
- it expands L&T’s foray into the power sector as a power developer. This is the first large-scale power project to be developed and operated by L&T
- it provides an opportunity for an equipment order of cINR50bn to its power division, including its JV with Mitsubishi Heavy Industries (MHI)
- post development provides a stable long term cash flow (INR5-6bn per year, RoE of 20-25%) and reduces the earning cyclicality attached to an industrial company.
In terms of valuation, the project can add cINR15bn (c1x P/BV) to Larsen’s valuation. However, as the project is in its initial stage with financial closure and other milestones yet to be achieved, analysts are unlikely to factor it into valuation this early.