Wednesday, May 23, 2012


Strong execution but weak margins…
Kalpataru Power and Transmission (KPTL) reported its Q4FY12 results that were largely in line with our estimates. Execution remained robust with the topline coming in at | 1061 crore (I-direct estimate: | 1052 crore), up 20% YoY. EBITDA margins remained subdued at 8.8% owing to higher raw material cost and forex impact. Consequent to a lower operating margin, the bottomline came in at | 56.7 crore (I-direct estimate: | 63.4 crore), down 5% YoY. A lower debt burden (down 35% QoQ) eased the finance costs by 31% on a sequential basis.

Reasonable order book amid change in margin profile…
With order inflows of | 2000 crore in the quarter, total standalone order book is at | 6,100 crore (up 11% YoY). This implies a book to bill of 2.0x, providing ample revenue visibility for the coming two years. On a consolidated basis, total order book stands at | 11,600 crore. Of the
standalone order book, more than 90% is transmission orders (domestic 40% & international 50%) while remaining 10% consists of infrastructure & distribution orders. The key surprise was the adverse impact on margins due to a changing order backlog mix and inability to pass on higher raw material costs. We believe, going ahead, margins would hover between 10% and 10.5% in FY13E as execution will be more skewed towards international orders. JMC Projects (KPTL’s 69% subsidiary) reported healthy revenues at | 703 crore, up 44% YoY. EBITDA & PAT margins were at 7.4% and 3.3%, respectively. Total order book for JMC stands at | 5,500 crore, implying a book to bill of 2.6x on a TTM basis.

At the CMP of | 82, the stock is trading at 7.1x and 5.7x its FY13E and FY14E EPS, respectively. Even though there will be a structural shift in the margin profile of the standalone business, ~20% decline in the stock price over past month has discounted this negative. A pick-up in execution and orders will drive the re-rating. We have valued KPTL at 103 (8xFY13E EPS for base business + ~70% stake in JMC projects) and have assigned a BUY rating to the stock.