On  the  prowl  for  overseas  power  assets. We are not entirely surprised by this piece of news  although  any  potential  transaction  may  only  be  preliminary.  Lanco  Infratech,  one  of India's largest  independent  power  producers  with  a  combined  3,330MW  of  coal  and  gas fired power plants and power projects with 7,402MW under construction, has been trying to deleverage  its  balance  sheet,  which  is  laden  with  a  net  debt  to  equity  of  545%  and  net debts  totaling  RM18bn.  Meanwhile,  Genting  has  been  seeking  to  expand  its  power business abroad following the sale of its Malaysian power business to 1MDB for RM2.3bn. 

Not  all  smooth  sailing  in  India. Power asset investments in India continue to be fraught with structural challenges as the country faces major headwinds such as: i) inadequate coal supply, ii) the slow pace of reforms, and iii) a poor tariff structure. For example, we  gather
that  one  of  the  power  plants  that  Lanco  Infratech  is  looking  to  sell  -  the  600MW Amarkantak plant - had only recently resolved its long-standing tariff issue with its off-taker last December despite having signed the power purchase agreement back in 2005. Of the three  plants  the  group  intends  to  sell,  we  believe  that  only  Amarkantak  has  a  transparent long-term fuel cost pass-through mechanism in its PPA. Anpara is currently operating on a load factor of only 37% while the Baband power plant is under construction. In the absence of a transparent fuel pass-through mechanism built into the PPAs of all three power plants Lanco Infratech hopes to sell, we believe that it is unlikely that Genting would be interested in taking on such risk. This is especially so after its experience in China, where it has been plagued by rising coal prices and  a time lag in passing on the impact of higher fuel costs. As India is currently facing domestic coal supply constraints, independent power producers are  required  to  meet  the  commodity's deficit  through  potentially  more  expensive  coal imports. The power plants in India in which Genting currently has an associate stake are all gas-fired combined cycle power plants.

No  newcomer  to  India.  All said,  Genting is  not  a  newcomer  in  India's  power  sector  as it currently has a successful working relationship with Lanco Infratech via its associate stake in the latter's 734MW Lanco Kondapalli power plant in Andhra Pradesh.

Small  contribution  to  group  profit  but  enough  to  raise  energy  profile. Genting's  current power portfolio in India comprises: i) a 30% stake in the 734MW Lanco Kondapalli gas-fired  power  plant,  and  ii)  a  36.2%  stake  in  the  113MW  Aban  gas-fired  power  plant  in Tamil Nadu, which jointly contribute  RM60.8m, or 1.3% of group PBT.  Assuming i) a 76% capacity factor on 100% stakes in the three power plants Genting is rumoured to be eyeing, ii)  70%  debt  financing,  and  iii)  a  purchase  consideration  of  USD0.6m/MW  or  an  absolute pricing  of  RM5.4bn,  we  estimate  that  the  potential  acquisitions  could  perk  up  the  group's PBT  by  a  marginal  4.7%.  More  importantly,  this  would  replenish  earnings  in Genting's power portfolio, which have dwindled after it sold off its Malaysian power assets.
 
Group  gearing  remain  manageable  post  acquisition.  Based  on  a  typical  70%  debt financing  assumption,  we  estimate  that  the acquisition will raise Genting group level's net gearing  from  the  current  RM2.1bn  to  RM5.9bn  with  net  gearing  ratio  rising  from  5%  to  a manageable 14%. Given its gross cash of RM18bn at group level and RM4.3bn at company level, the group can well afford to finance the potential equity commitment of RM1.6bn. Net interest cover will also remain manageable 7.1x vs the current 13.8x
 
Maintain  BUY. We are maintaining  our  BUY  recommendation  and  fair  value of  RM10.02. The stock is currently trading at an undemanding 12.7x FY13 PE.

Source: OSK