Multi Baggers

Kalpataru Power Transmission

Company Overview:

Headquartered at Gandhinagar, Kalpataru Power Transmission Ltd (KPTL) operates in the power transmission and distribution industry. The company has capabilities to execute EHV (Extra High Voltage) transmission line projects up to 800KV and is active on international level as well with the projects in Africa and Middle East. Apart from being active in T&D business its other businesses include oil & gas pipeline, biomass power generation and infrastructure business. JMC Projects (India) Ltd (67 percent stake), Shree Shubham Logistics Ltd (70 percent stake), Energy Link (India) Ltd (wholly owned), and Amber Real Estate Ltd (wholly owned) are its major subsidiaries.

JMC Projects (India) Ltd: JMC is primarily engaged in the construction of industrial buildings, and residential and commercial complexes. Also JMC has ventured into the infrastructure segment with projects in roads, bridges, flyovers, and transportation structures.

Major Clients:

Power: Power Grid Corporation of India Ltd(PGCIL), State Electricity Boards (SEBs) viz., Gujarat, Karnataka, Maharashtra, Rajasthan, Andhra Pradesh,  Orissa, Tamil Nadu, Madhya Pradesh, Chhattisgarh and  private players such as Adani, Essar etc.

Infrastructure: Gas Authority Of India Limited (GAIL), Bharat Petroleum Corporation Limited (BPCL), Gujarat State Petronet Limited (GSPL), Indian Oil Corporation Limited (IOC), Hindustan Petroleum Corporation Limited (HPCL), Engineers India Limited (EIL) etc.

Financial Analysis:

Reasonable growth but lower margins: In Q3FY14 net sales (standalone) witnessed growth 18.2 percent YoY and 9.3 percent QoQ to Rs. 10513mn backed by lift up in transmission revenue due fast execution of international orders. EBITDA stood at Rs. 940mn up 6.2 percent YoY and 3.2 percent QoQ while PAT grew by 8.7 percent QoQ but dropped by 4.1 percent YoY to Rs. 337mn. Margins were depressed because of execution of low margin orders and losses in railway orders as EBITDA margin was 8.9 percent which was lower in contrast to 10 percent in Q3FY13 and 9.5 percent in Q2FY14.

Tax rate: Effective tax rate increased to 34.3 percent from 33.9 percent in 2QFY14 and 30.2 percent in 3QFY13.

Order backlog and new orders:

Order backlog stood at Rs. 70000mn and new orders worth Rs14570mn (53.4 percent YoY growth) were booked during the quarter. During Q3FY14 the company has bagged an order worth Rs. 6.3bn in Egypt and also won an order of Rs.3.5bn from PGCIL (Power Grid). Besides it has won orders worth Rs. 1.3bn and Rs.1bn in infra segment from HPCL and BPCL respectively.

Orders break-up:

Capex: Capital expenditure amounting to Rs. 1500mn is planned and expected for the standalone entity in FY14 while collective capex for JMC Projects and Shubham Logistics is expected to be Rs. 500-600mn.

Leverage: Debt to equity ratio stood at ~0.8. Consolidated debt was Rs. 14520mn as of 9MFY14 while debt on standalone basis has fallen to Rs. 7350mn at the end of Q3FY14 from ~Rs.8300mn in Q2FY14.

Profitability: ROE had been decreasing since FY11 and ROE for FY13 stood at 7.1 percent. Falling ROE was mainly due to negative incremental ROE (FY12 = - 6.7 percent, FY13 = - 70 percent and incremental equity was Rs.2250mn for FY12 and Rs.899mn for FY13) but incremental ROE for FY14 is expected to be positive resulting in higher ROE for FY14 compared to FY13.

Working capital: Working capital days decreased to 51 days in FY13 from 90 days in FY12 mainly led by a big fall in debtor days by 40 days.

Selective approach in transmission business: KPTL prefer international projects over the domestic projects due to competitive pricing. This strategy helps keeping the margins healthy.

Positives:

Sound book to bill ratio: The Company has sound book to bill ratio of 1.8

Pick up in execution: Despite slow order execution in infra segment; international segment exhibited a sound execution trends in Q2FY14 and the trends are expected to remain strong going forward.

Improving working capital days: Decline in working capital days in FY13 shows the better working capital management.

Lower debt to equity ratio: The Company has lower debt to equity (0.8) ratio relative to its peers, so it is going to be less effected from any hike in interest rates.

Increasing T&D spending in the domestic market: T&D spending are estimated to be about Rs1800bn and Rs2300bn for 12th and 13th plans as compared to Rs1400bn in the 11th plan. Holding 12-13 percent share of orders of Power Grid, KPTL is going to be a gainer.

Valuations:

Trading at Rs. 75.75, the stock is valued at 8.7x FY13 EPS. Based on sound book to bill ratio of 1.8 and pick up in order execution, the earnings are expected to grow at CAGR of 19 percent over FY13-15E. We give buy recommendation for the stock at current price level and with target price of Rs 105, we value the stock at 9.9x FY14E EPS and 8.54x FY15E EPS.