>POWER TRANSMISSION TOWERS (FIRST GLOBAL)

THE STORY........

Over the last six years, the power transmission towers sector has been delivering pretty good returns and strong growth, driven primarily by inter-regional capacity additions, distribution reforms, rural electrification and a robust growth in power generation. The Government of India’s (GoI) Eleventh Plan has envisaged a capital expenditure of over Rs.6,665 bn for the country’s power sector in order to ensure “Power for All”. The GoI’s Common Minimum Program is focusing on achieving 100% village electrification by the year 2009 and 100% household electrification by 2012. It plans to add 78,700 MW of power generation capacity in the XIth Five Year Plan, which, coupled with, its decision to set up transmission lines with generation capacity for effective power evacuation, has opened ample business opportunities for transmission lines companies. The planning commission has allocated a budget of Rs.3,773 bn towards power generation, Rs.1,404 bn for power transmission and Rs.1,487 bn for sub-transmission and power distribution system, in order to tackle the power deficit situation
prevailing in the country. We believe that companies possessing financial strength and project
execution skills will enjoy an edge over their competitors and will be better positioned to capitalize on the opportunities arising in the power transmission sector.

KEC International (KEC.IN/KECI.BO), Kalpataru Power Transmission Ltd. (KPP.IN/KAPT.BO)
(KPTL) and Jyoti Structures Ltd. (JYS.IN/JYTS.BO) are our top picks in this space, as we view
them to be the biggest beneficiaries of the positive developments in the sector. For players such as KEC International, which derives almost 60% of its revenues from the international market, there exist significant opportunities abroad, particularly in the Middle East and Africa, where grid expansion and development has just commenced and the power transmission & distribution
(T&D) infrastructure is being ramped up. We believe that these players will be able to sustain their growth momentum for the next few years, though the slow down in the international market could impact their order inflow, which might act as a hindrance to growth. We are positive on the transmission towers sector and our investment thesis on the top picks in this space is balanced between our outlook on the overall sector, as well as the strengths and weaknesses of each of these players. We reinitiate coverage on KEC International, Kalpataru
Power and Jyoti Structures with a rating of Outperform.

VALUATION & OUTLOOK
The strong and sustainable growth in the T&D sector across the world is being driven by huge spending towards transmission lines, both on account of increasing generation capacity and maintenance of existing lines, as well as distribution networks, especially in the developing countries of Asia, Africa and the Middle East. In India, the ratio of investments in power generation to T&D stands at 1:0.5, as against the global level of 1:1, thus leaving huge room for growth in the domestic T&D sector. The Government of India’s (GoI) spending on T&D in the X Five Year Plan stood at Rs.500 bn, while the XI Five Year Plan (2007-12) envisages an investment of Rs.2,891 bn in T&D, which provides huge growth opportunity for players in the
power transmission sector.

As per the CEA, India’s annual power shortage stands at 11% and the country has a peak shortage at 12.4%. The country’s estimated power requirements at the end of the XI Five Year Plan is 1,038 bn units, with a peak demand of 151,000 MW. The power ministry is focusing on increasing the power generation capacity and evacuation of power from these power stations, which provides huge opportunities for transmission companies. Also, India’s telecom and railway sectors are growing at a very fast pace and the planning commission has allotted a capex of Rs.2,584 bn and Rs.2,618 bn for both the sectors respectively. The development of the telecom and railways sectors will provide a boost to the order book of transmission sector companies. Considering the investments in transmission and distribution sector, we expect the growth of order book for the transmission EPC players in tandem with industry growth in the coming years. Further orders from other developing countries will add to the growth of integrated transmission line EPC companies. In H2FY08 and HIFY09, higher raw material prices and rising interest rates were the key concerns for power transmission companies. We expect the margin pressure to ease, due to lower interest rates in FY10 in comparison to FY09 and a decline in commodity prices. The margins of companies with a higher proportion of fixed price contracts in their order books will witness an improvement.

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