| Summary of Contents
| STOCK IDEA Kalpataru Power Transmission
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs151
Current market price: Rs112 Concerns priced in, growth ahead Key points -
Better times ahead: Competition in the domestic T&D EPC space intensified in the last few years, adversely affecting the market share, margins and valuations of the established players including Kalpataru Power Transmission Ltd (KPTL). However, the stringent norms adopted by PGCIL recently could ease the competition to some extent in future. Meanwhile, KPTL has gained a strong foothold in some high-growth international geographies. Also, opportunity in the T&D space is huge and growing impressively. The domestic opportunity is pegged at Rs150,000 crore in the 12th Five-Year Plan and the global opportunity is around $1.5-2.0 trillion between FY2011 and FY2030. -
Strong order book provides growth visibility: After the muted performance of the past two years, we expect an improvement in the revenue growth of KPTL from FY2012. This will be backed by a strong order book of Rs5,500 crore (stand-alone), ie 1.8x its FY2012E revenues. In JMC Projects (a 67% subsidiary) the strong revenue traction is likely to continue in FY2013 and FY2014, thanks to an order book of over Rs5,000 crore. The consolidated revenue is estimated to grow at 17% CAGR during FY2012-14. Moreover, the renewed focus of the government on the power sector could improve the generation-linked transmission infrastructure demand. -
Concerns on margin and cash flows priced in: On account of a competitive bidding environment and the extended execution time line of projects (primarily ROW issues), the EBITDA margin of KPTL (stand-alone) is likely to remain subdued in the near term which is already priced in the stock. Further, on account of the tightened payment norms adopted by PGCIL, KPTL could witness strain in its working capital requirements and cash flows. Nevertheless, KPTL's balance sheet position is better than that of its peers with relatively less leverage (a consolidated debt-equity ratio of 0.6x). Further, the peaking of the interest rate in the near future could be beneficial, as for KPTL the interest cost is the highest cost component below the EBITDA line. -
Ripe for re-rating: Given the tough business environment, the valuation multiples of the T&D EPC companies have contracted significantly in the past few years. The current valuation multiple of 7-8x one-year forward earnings (as against the average of 15-16x earlier) does not factor in the potential revival in the overall business outlook. The estimated earnings growth of 17% (CAGR; during FY2012-14) implies a PEG of 0.4x. Based on the SOTP method, we value the stock (KPTL at 9x, JMC Projects at 6x of FY2014E earnings and SPV at 1x equity invested) at Rs151, which is 1x FY2014E book value and 5x EV/EBIDTA FY2014E. We initiate coverage on KPTL with a Buy recommendation.
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