HSBC cuts Lanco Infra's price target. Here's why investors won't give a damn

Will Lanco Infratech’s shareholders feel a major shock when they hear HSBC Global Research has cut the target price of the stock by a steep 71 percent? Surprisingly, probably not.

Even though the research firm cut the company’s target price to Rs 13.7 per share from an earlier target of Rs 47 per share, the fact is that the stock has already been hovering below Rs 20 since the end of July. The stock is currently trading at Rs 11.8. Since the stock has been steadily falling since the past 12 months, it is hard to avoid asking the question: what were the HSBC analysts doing all this time?

According to HSBC Global Research Report, the reasons for the downgrade are:

“While the company has added significant capacity to its power business in the past two years, its projects are running at a very low plant load factor (PLF), primarily due to a combination of inadequate fuel supply, untied power and lack of evacuation infrastructure. This causes a chain reaction, with the power segment’s lower cash generation ability leading to a slowdown in construction of newer power projects due to a lack of funding, which, in turns, hurts revenue generation of the engineering, procurement and construction (EPC) business.

Meanwhile, the coal business is still in an investment phase and the real-estate business is loss-making. While we believe that the company does have long-term growth catalysts, it is likely to struggle to implement its current expansion and capital expenditure in the next few quarters, given its high leverage, even if it is able to significantly improve performance”.

More from Investing

MSMEs are breaking the traditional convention. Look who’s funding them Scale-up your startup without an investor! Here’s how

 Despite these issues, the foreign brokerage said the 62 percent fall in the stock over the past six months had factored in most of these negatives and believes that the downside risk is limited from now on.

For the September-ending quarter, Lanco incurred a loss of Rs259 crore owing to sharp forex losses.

Not all brokerages have such a glum view of the company. Recently, UBS Investment Researchsaid it was bullish on Lanco Infratech and issued a price target of Rs 30.

Wishful thinking or shrewd bet? You decide.