Wednesday, March 25, 2009

>Kalpataru Power Transmission (HSBC)

Reiterate OW (V); strongest order book and least geared

The company has the strongest order book of INR68bn, or 2x of FY09e sales, compared to peers

■ FY10e net debt-to-equity of 0.4x is least among peers like Jyoti structures, at 0.6x, and KEC International, at 1x

■ Reiterate our Overweight (V) rating and INR360 target price; new order flow is potential trigger, lower margin is key risk

● Strongest order book: Kalpataru Power in the last month announced orders of INR11.6bn, including orders from PGCIL and a pipeline laying order from Hindusthan Mittal Energy Limited (HMEL). Thus, its consolidated order book has increased to cINR68bn, or 2x FY09e sales (this excludes part of Q4FY09e revenue). Its stand-alone order book is INR51bn, or 2.4x of FY09e stand-alone sales, is the strongest among the transmission tower companies like Jyoti Structures, at 1.9x of FY09e sales, and KEC International, at 1.5x.

● Lowest balance sheet gearing: In a business that is working capital-intensive, Kalpataru Power has the least balance-sheet gearing, of FY10e net debt/equity of 0.4x, compared to peers such as Jyoti structures, at 0.6x, and KEC International, at 1x. Based on FY10e PB, Kalpataru Power stock is trading at the cheapest multiple of 0.7x; among peers, Jyoti Structures is trading at 0.8x and KEC International at 0.9x.

● Risks to earnings: The key downside risks that we see: 1) lower-that-estimated revenue and margin for transmission line business. 2) lower execution by JMC projects and the impact of the slowdown in the real estate sector; we estimate that even if revenue from JMC project is flat in FY10e, the impact on consolidated EPS of Kalpataru will be only c3%. 3) higher interest cost, as a 100bps rise in effective interest rates would lead to c3% fall in stand-alone profits.

● We reiterate our Overweight (V) rating and INR360 target price: We value Kalpataru using PE and PB multiple-based methods. Based on a target PE of 5x and December 2009e EPS, we arrive at a fair value for the stock of INR340. Our target PB multiple is 1x, and based on December 2009 BVPS, we arrive at a fair value of INR380. Our target price of INR360 is the midpoint of our PE and PB multiple-based valuations.