Power Transmission Towers
Power Transmission Towers
Power Transmission Towers
of the power T&D EPC industry in the last two years of the Tenth Plan period (FY02-07).
Misal Singh
Historically, activity levels are much higher in the later years of five year plans. Power Grid +91-22-2286 4316
Corporation (PGCIL) is likely to invest INR 65 bn in FY08E (~INR 20 bn in Q4FY08E), ~INR [email protected]
85 bn in FY09E, and ~INR 300 bn from FY10-12E to upgrade India’s power transmission Pawan Parakh
network. Hence, in the Eleventh Plan period, we are likely to see heightened activity in +91-22-4019 4995
[email protected]
power T&D EPC industry from FY10-12E.
Addition in generation capacity in Africa and Middle East will facilitate expansion of regional
transmission network. We believe capacity expansion in the African and Middle Eastern
power sectors will positively impact our coverage universe. The integration of regional grids in
the above geographies will supplement domestic demand and emerge as a large business
opportunity for domestic T&D companies, leading to strengthening of their order books.
While demand for experienced and qualified power T&D EPC players is increasing,
competition is also on the rise simultaneously, which is likely to keep margins under
pressure. The industry posted peak margins in FY07, however, we believe the EBITDA
margins of ~12%, in line with global standards; are likely to be sustainable in the long term.
Outlook and valuations: Positive; KPP is our top pick; downgrading JYS
While the revenue growth and profitability remains impressive across the industry we prefer
companies which have lower risk profile and superior working capital management.
International geographies are likely to grow at a high rate, however we believe they increase
the risk profile of the business due to fixed price contracts and exchange rate variations.
Hence, KPP is our top pick, as we believe it has an optimal revenue mix from domestic and
international geographies and sound working capital management. On our current
estimates KPP is trading at a P/E of ~13x and ~10x our FY09E and FY10E, respectively.
We maintain our ‘BUY’ recommendation on the stock. We like KECI primarily because it
has the highest RoCE’s driven by higher than industry working capital turnover. KECI is
trading at a P/E of ~16x and ~13x, while JYS is trading at a P/E of ~15x and ~11x our
FY09E and FY10E, respectively. We maintain our ‘BUY’ recommendation on KECI, while
we are downgrading JYS to ‘ACCUMULATE’.
1 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
2
Power Equipment
AT A GLANCE
Company Price Revenues (INR mn) Working capital turnover (x) EPS (INR) P/E (x) RoCE (%)
(INR) FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E
Kalpataru Power Transmission 1,236 15,987 26,981 36,623 3.6 3.8 4.1 60.9 72.9 93.5 20.3 17.0 13.2 31.6 26.3 28.6
KEC International 710 20,406 26,786 36,305 11.7 8.3 7.4 27.8 33.6 44.4 25.6 21.2 16.0 37.1 42.3 44.1
Jyoti Structures 209 9,708 14,906 19,938 3.3 2.9 2.6 6.8 10.7 13.9 30.7 19.5 15.1 33.3 31.5 28.4
Power Equipment
Investment Rationale
Fortunes of the power T&D EPC industry are governed by the capacity expansion plans of
Power Grid Corporation of India (PGCIL) to a large extent, as it is the central transmission utility
in India. PGCIL added more than twice the transmission capacity in FY07 compared to FY03,
which has directed the revenue growth pattern of the industry as demonstrated in table 1.
From FY05 onwards, the industry started posting robust growth with Kalpataru Power
Transmission (KPP) posting a revenue growth of ~81%, KEC (KECI) of ~18%, and Jyoti
Structures (JYS) of ~39% in FY07.
Historically, activity levels are much higher in the later years of five year plans. PGCIL is likely to
invest INR 65 bn in FY08E (~INR 20 bn in Q4FY08E), ~INR 85 bn in FY09E, and ~INR 300 bn
from FY10-12E to upgrade India’s power transmission network. Hence, in the Eleventh Plan
period, we are likely to see heightened activity in the sector in FY11E and FY12E.
Besides PGCIL, Damodar Valley Corporation (DVC) and various state electricity boards (SEBs)
also undertake transmission capacity expansion in India. However, their plans are less
dependable than PGCIL’s, as most of the SEBs are crunched for funds. Further, their poor
payment record does not make them preferred customers.
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Power Equipment
Besides transmission projects initiated by PGCIL and others, power T&D EPC companies are
also present in power distribution upgradation projects for which the nodal agencies are Power
Finance Corporation (PFC) and Rural Electrification Corporation (REC). Also, some distribution
upgradation projects are initiated by SEBs. The outlay for distribution upgradation projects is
~INR 800 bn, equally divided between rural electrification (Rajeev Gandhi Grameen Viduytikaran
Yojna) and Accelerated Power Development Reform Programme.
While power transmission EPC primarily involves transmission lines and substations, power
distribution EPC entails strengthening of the distribution network. Transmission lines entail tower
and conductor supplies, civil construction, engineering, and testing. Substation projects include
procurement of electrical equipment, civil construction, engineering, and testing.
Given PGCIL’s capacity expansion plans, we have arrived at the likely spend on each of the
above components of power transmission EPC.
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Power Equipment
As is evident from table 5, revenue visibility in the sector is high and likely to remain so over the
long term. Quarterly volatility in order accretion is likely, however, the power situation in India is
so grim (per capita annual consumption of ~660 kwh) and the need to correct the same is so
crucial that we have seen increased emphasis on rectifying the situation from the government in
the first year of the Eleventh Plan itself.
Besides the above players, there are also likely to be a few private companies catering to power
distribution EPC jobs being floated by SEBs. Increase in competition is likely to limit margin
expansion. The industry posted peak margins in FY07, but the same are unlikely to be repeated
in the medium to long term. However, the RoCEs are likely to improve given the improvement in
working capital turnover.
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Power Equipment
Of the top three players in the industry, KECI has the highest RoCE, primarily due to its distinct
business model. Since the company has a history of troubled labour relations, it outsources its
tower manufacturing capacities. The two key issues in an outsourced business model are that
outsourced tower manufacturing capacities need to be preapproved by PGCIL and the issue of
steel accounting, which implies higher wastes. However, we believe, over the years, KECI has
mastered this business model and hence, it is earning higher returns on its capital employed
than peers. The company also has higher working capital turnover than KPP and JYS, which is
driven by higher creditors/revenues compared to peers. We believe this is primarily driven by its
outsourced business model.
Due to high working capital requirement, JYS’s cash flow requirements are higher than the
others and hence, the cash flow situation of KPP and KECI is better than that of JYS. The same
is also reflected in JYS’s capital history, wherein it has gone in for frequent dilutions compared
to KPP or KECI.
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Power Equipment
However, in a high growth environment, investors prefer to look at growth opportunities and
hence, revenue and PAT growth become key focus areas. We believe this is likely to be the
case in the power T&D EPC industry as well, as the industry is currently in a high growth phase
and JYS is likely to show higher growth than KPP and KECI and hence, negative cash flows due
to low working capital turnover are likely to be overlooked. However, we believe negative cash
flows make JYS more susceptible to dilution risks than KPP and KECI.
The African market’s power generation capacity in FY07 was ~84 GW and demand growth in
the continent has significantly outpaced supply, leading to frequent blackouts and disruptions in
the country’s key mining sector. Growth in demand has been driven by the rising mining and oil
prospecting activities in the continent.
35,000
28,000
21,000
(MW)
14,000
7,000
-
Egypt
Morocco
Cameroon
Sudan
Republic of
South Africa
Algeria
Nigeria
Libya
Mozambique
Tunisia
Zimbabwe
Zambia
Ghana
Kenya
Cote d'Ivoire
Congo,
Power generation is concentrated majorly in the northern and southern parts of the continent.
South Africa contributes ~50% of the total electricity production in the continent And Eskom
(South Africa) dominates power generation in the region. It generates, transmits, and distributes
electricity to industrial, mining, commercial, agricultural, and residential customers and
redistributors and generates ~95% of electricity used in South Africa and ~45% of electricity
used in Africa. Among other countries, Egypt, Algeria, Nigeria, Morocco, and Libya are major
producers of electricity in the continent; they, together, contribute ~38% of the total electricity
produced in the continent.
7
Power Equipment
As the generation capacity in the continent is concentrated, countries have formed pools (such
as South Africa Power Pool–SAPP; West African Power Pool–WAPP, among others) to build a
robust inter-regional power transmission system. These regional pools have planned a series of
priority projects in generation and transmission segments. Over 2004-06, SAPP commissioned
1,140 MW of new capacity.
The SAPP region’s available capacity in FY07 stood at ~41 GW. It is estimated that the South
African regional demand will grow by ~3.6% annually to ~57 GW in 2010.
70,000
62,000
54,000
(MW)
46,000
38,000
30,000
FY05
FY06
FY07E
FY08E
FY09E
FY10E
FY11E
FY12E
FY13E
FY14E
FY15E
To bridge the demand-supply gap, SAPP is working on short term generation projects to be
commissioned before 2010 and long term generation projects to be implemented after 2010.
Under short term projects, it plans to commission ~13 GW over FY07-10.
8
Power Equipment
Over the long term, SAPP will add ~32 GW of power generation capacity to bring the total
available capacity to ~82 GW. Outlay for this project stands at ~USD 43 bn over the next 8-10
years. Of the USD 43 bn, Eskom plans to spend ~USD 39 bn, which includes 70% in the power
generation space and the balance in transmission and distribution systems.
The total installed capacity in the western region is ~8 GW as in 2003. The per capita
consumption of electricity in the region is among the lowest in the world. Economic and
population growth, with ~70% of the population currently off grid, has led to a strong demand
for electricity. Power demand in the region is expected to grow at 7.6% annually till 2020.
WAPP has identified following projects for first phase of regional network development to be
executed over the next five years.
9
Power Equipment
According to the World Energy Council, the Gulf Cooperation Council (GCC) region will require
100 GW of additional power over the next 10 years to meet the growing demand. As stated in
table 14, GCC countries plan to invest ~USD 36 bn for power generation projects by 2010. It is
expected that ~USD 57 bn will be spent over the next five to six years in the MENA region for
installing new capacity.
The GCC countries are in the midst of implementing a regional power grid project at an
estimated cost of ~USD 3 bn to be completed by the end of 2010. The states have established
the GCC Interconnection Authority, aimed at linking power grids of all the six GCC countries (viz.,
Saudi Arabia, Qatar, Bahrain, Kuwait, Oman, and UAE). The GCC Interconnection Grid will be
developed in three phases: First phase will form the north grid, interconnecting Kuwait, Saudi
Arabia, Bahrain, and Qatar. Thirteen contracts worth USD 1.25 bn will be awarded in this phase.
In the second phase, the south grid interconnection of the independent system in the UAE as
well as Oman will be completed. Third phase will interconnect the south and north grids, which
will complete the interconnection of the six Gulf states.
We believe the addition in generation capacity will facilitate expansion of regional transmission
network and inter regional capacity to transmit power. We expect the African and Middle
Eastern power sectors to have a positive impact on our coverage universe. The integration of
regional grids will emerge as a great business opportunity for domestic T&D companies, leading
to strengthening of their order books in case of any slow down in domestic (PGCIL majorly)
spending as had happened in H1FY08.
KEC already has a strong foothold in foreign markets compared to peers; KPP and JYS have
also increased exposure in the export market, with both the companies receiving key orders in
the following regions:
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Power Equipment
Saudi Arabian Mining Turnkey job of 380 kV DC transmission lines of 123 2,600 KEC Saudi Arabia
Company (MA'ADEN) kms.
NamPower Turnkey job of 350 kV double circuit bipolar HVDC 1,400 KEC Namibia, Africa
transmission line of 306 kms.
GRTE Sonelgaz Turnkey job of laying 400 KV transmission line 1,550 Kalpataru Algeria, Africa
project
Ethiopian Electric Power Turnkey job for construction of 230 kV & 63 kV 1,580 Kalpataru Ethiopia& Djibouti,
Corporation & Electricity De transmission lines of Ethiopia-Djibouti power Africa
Djibouti interconnection
Source: Edelweiss research
11
Power Equipment
Valuation
In the power T&D EPC space, KPP is our top pick, notwithstanding its disappointing Q3FY08 results.
We like the company due to its historical record, significant revenues coming from the Indian market,
diversified business model, and robust return ratios.
If we look at five year total returns to shareholders (TRS), KPP has performed better than peers; also
its three years’ TRS have been better than JYS and KECI. However, one year TRS for KPP are low,
primarily due to the share price reaction to poor Q3FY08 results.
Jan 03-08
Jan 05-08
Jan 06-08
Jan 07-08
Kalpataru Power Transmission (KPP) did not incur losses in FY01 or FY02, even when the rest
of the industry posted losses. Its margins have always been higher than the industry average.
12
Power Equipment
2,500 25,000
Kalpataru Power Transmission BSE SENSEX
2,000 20,000
QIB pla c e m e nt
1:1 bo nus (INR 3.5 bn)
a nno unc e m e nt
1,500 15,000
(Sensex)
Ac qn o f J M C
(INR)
pro je c ts
B io m a s s po we r pla nt
1,000 10,000
o f 7.8 M W
c o m m e nc e s o pe ra tio n
500 5,000
- -
Apr-02
Aug-02
Jan-03
Jun-03
Nov-03
Apr-04
Aug-04
Jan-05
Jun-05
Nov-05
Mar-06
Aug-06
Jan-07
Jun-07
Nov-07
Source: Edelweiss research
Apart from power T&D EPC, KPP has presence in power generation EPC, EPC for pipelines,
and also in the construction sector through JMC Projects. It is also entering the power
generation utility space, wherein it has bagged a ~150 MW hydel power plant order. KPP is also
likely to bid for power transmission BOT projects.
To fund expansion, the company has announced plans of raising INR 5 bn capital. While we
believe KECI and JYS also offer substantial upsides, KPP is our favourite bet in the sector. On
our current EPS estimates of ~INR 94 and ~INR 120, the stock is trading at a P/E of ~13x and
~10x for FY09E and FY10E, respectively. We believe the stock offers upsides from current
levels, and maintain our ‘BUY’ recommendation.
2,000 20x
18x
1,600 16x
14x
1,200 12x
10x
(INR)
800 8x
400
0
Apr-03 Nov-03 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07
13
Power Equipment
Key risks
Slowdown in the scale up of the EPC business pipeline.
KEC International
KEC International (KECI) has made stupendous progress compared to the turbulent years of
FY01 and FY02. We like the company’s business model. It has successfully initiated the
outsourcing concept in the industry and this business model has resulted in superior working
capital turnover for the company. Further, by virtue of being active in the international geography,
the company procures equipment from locations close to its project sites. However, rupee
appreciation is likely to negatively impact its revenue growth.
1,000 25,000
Shareholders approve arrangement
between RPGT and NITEL
800 20,000
Strong
Q3FY07
600 15,000
(Sensex)
(INR)
400 10,000
200 5,000
KEC INTERNATIONAL BSE SENSEX
- -
Mar-06
May-06
Aug-06
Oct-06
Dec-06
Mar-07
May-07
Aug-07
Oct-07
Dec-07
Source: Edelweiss research
On our current EPS estimates of ~INR 44 and ~INR 56, the stock is trading at P/E of 16x and
13x for FY09E and FY10E, respectively. KECI aims to be the leading power T&D EPC contractor
in the world, with presence in Africa, Central Asia, and the US. While operations in the
international market are risky due to fixed price contracts, we believe KECI is better placed than
JYS or KPP to handle the complexities of the international market due to its long standing
record in the international market. We maintain our BUY recommendation on the stock.
Key risks
Adverse movement in rupee and commodity inflation.
Jyoti Structures
We like Jyoti Structures (JYS) as it is more of an India power T&D EPC play compared to KPP
or KECI. Hence, the company offers higher scope for growth at a lower risk profile. However,
we are concerned about the company’s negative cash flows in the foreseeable future as it goes
for further expansion. Also, JYS is looking at growth opportunities outside India, more precisely
Africa and the Middle East, which increases the company’s risk profile, even as it increases
revenue visibility. Further, JYS has to frequently raise capital due to negative cash flows, which
increases the risk of dilution in the future. Due to lower working capital turnover, JYS also has
lower RoCEs than KPP and KECI.
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Power Equipment
350 25,000
Jyoti Structures BSE SENSEX S AF ve nture
a nno unc e m e n
280 20,000
Inve s tm e nt by M o rga n
S ta nle y a nd De uts c he
210 15,000
Sensex
Duba i J V
(INR)
a nno unc e m e nt
140 10,000
P vt pla c e m e nt Invs t by R e lia nc e
(~20% dilutio n) Ene rgy
70 5,000
0 -
Apr-02
Aug-02
Jan-03
Jun-03
Nov-03
Apr-04
Aug-04
Jan-05
Jun-05
Oct-05
Mar-06
Aug-06
Jan-07
Jun-07
Oct-07
Source: Edelweiss research
On our current EPS estimates of ~INR 14 and ~INR 19, the stock is trading at a P/E of 15x and
11x for FY09E and FY10E, respectively. We do not expect any significant re-rating from current
levels over the medium term. We are downgrading our recommendation to ‘ACCUMULATE’
from ‘BUY’.
350 27x
24x
21x
280
18x
210 15x
(INR)
12x
140
9x
70
0
Apr-03 Dec-03 Aug-04 Apr-05 Dec-05 Aug-06 Apr-07 Dec-07
Key risks
Lower-than-expected margins and higher-than-expected working capital requirement in
international geographies.
15
Power Equipment
India Equity Research | Power Equipment Company Update
the former has significant international presence and the latter concentrates on various
Misal Singh
business verticals besides power T&D EPC. Hence, we believe for investors keen to play +91-22-2286 4316
the power T&D story in India, JYS can be the preferred choice. [email protected]
Pawan Parakh
High growth will compensate negative cash flows +91-22-4019 4995
[email protected]
JYS has negative operating cash flows due to higher working capital requirement. We
prefer companies with positive operating cash flows and hence, we believe, JYS runs the
risk of frequent dilution. However, revenue visibility continues to point towards high revenue
and PAT growth over the long term.
Financials
Year to March FY07 FY08E FY09E FY10E
Revenue (INR mn) 9,708 14,906 19,938 25,955
Rev. growth (%) 39.1 53.5 33.8 30.2
EBITDA (INR mn) 1,254 1,918 2,493 3,193 360 800
Net profit (INR mn) 545 989 1,228 1,637
295 600
Basic shares outstanding (mn) 81 88 88 88
('000)
(INR)
Adjusted diluted EPS (INR) 6.8 10.7 13.9 18.5 230 400
EPS growth (%) 98.7 57.6 29.5 33.3
P/E (x) 30.7 19.5 15.1 11.3 165 200
EV/ EBITDA (x) 15.8 10.3 8.0 6.2
ROAE (%) 27.7 22.2 19.4 21.5 100 -
ROACE (%) 33.3 31.5 28.4 29.4 Feb-07 Aug-07 Feb-08
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
16
Power Equipment
JYS has negative operating cash flows due to higher working capital requirement, and hence,
we believe JYS runs the risk of frequent dilution. The company had recently planned to raise
~ INR 4 bn through a mix of equity, debt, and quasi-debt instruments which was withdrawn to
be done at a later date.
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Power Equipment
350 25,000
S AF ve nture
Jyoti Structures BSE SENSEX
a nno unc e m e n
280 20,000
Inve s tm e nt by M o rga n
S ta nle y a nd De uts c he
210 15,000
Sensex
Duba i J V
(INR)
a nno unc e m e nt
140 10,000
P vt pla c e m e nt Invs t by R e lia nc e
(~20% dilutio n) Ene rgy
70 5,000
0 -
Apr-02
Aug-02
Jan-03
Jun-03
Nov-03
Apr-04
Aug-04
Jan-05
Jun-05
Oct-05
Mar-06
Aug-06
Jan-07
Jun-07
Oct-07
We believe JYS’s order intake is likely to increase from Q4FY08E onwards, given sharp uptick in
order flow from PGCIL as well as increase in distribution order flow. We do not have concerns
on the revenue visibility front; in fact, it is one of the key factors in power T&D EPC companies
and one of the main reasons why companies have re-rated over the past two years. However,
we are concerned about JYS’s negative operating cash flows due to high working capital
requirement. We believe the working capital requirement is likely to increase further given the
company’s entry in international geographies. On our current EPS estimates of ~INR 14 and
~INR 19, the stock is trading at a P/E of 15x and 11x for FY09E and FY10E, respectively. We
do not expect any significant re-rating from current levels over the medium term. We are
downgrading our recommendation to ‘ACCUMULATE’ from ‘BUY’.
18
Power Equipment
Company Description
Incorporated in 1975, JYS is a leading turnkey/EPC player, providing solutions in the field of high
voltage power transmission lines and substations. The company has uniquely positioned itself to pre-
qualify for transmission lines up to 800 KV, substations up to 400 KV, and distribution projects. JYS is
amongst the very few companies in the world capable of executing turnkey jobs that involve setting up
both transmission lines and substations. The company has three business segments—power
transmission towers, rural electrification and substations. Power transmission contributes ~60%,
substations contribute about 15% and rural electrification contribute the rest to the revenues.
Investment Theme
India’s inter-regional power transmission capacity is likely to increase from ~11,500 MW currently to
~16,450 MW at the end of the tenth plan (FY07-end) and to ~37,150 MW at the end of the eleventh
plan (FY12-end). Progress on planned power T&D infrastructure upgradation is driving the current
phase of growth. Further, we expect an investment of ~INR 1,400 bn for the expansion of the
transmission infrastructure during the eleventh plan. Consequently, the addressable market for the
power transmission tower industry from this opportunity is likely to increase manifold over the eleventh
plan period. We believe JYS, with its execution capabilities, is well-placed to leverage this opportunity.
Key Risks
Since power T&D investments are executed by state utilities, any change in the political environment
can potentially impact the pace of execution in the industry, which in turn, could impact the timing of
revenue growth. Additionally, the customer concentration risk is high in this business, which affects the
bargaining power of transmission tower companies adversely.
19
Power Equipment
20
Power Equipment
21
Power Equipment
Ratios
Year to March FY06 FY07 FY08E FY09E FY10E
ROAE (%) 25.6 27.7 22.2 19.4 21.5
ROACE (%) 28.6 33.3 31.5 28.4 29.4
Current ratio 1.8 2.3 2.4 2.4 2.3
Debtors (days) 130 137 140 140 140
Fixed assets t/o (x) 14.1 17.5 24.1 27.2 29.7
Average working capital t/o (x) 3.7 3.3 2.9 2.6 2.7
Average capital t/o (x) 2.9 2.7 2.5 2.4 2.5
Net debt/Equity 1.0 0.7 0.2 0.1 0.2
Gross debt/Equity 1.3 0.8 0.4 0.3 0.4
Valuations parameters
Year to March FY06 FY07 FY08E FY09E FY10E
Adjusted diluted EPS (INR) 3.4 6.8 10.7 13.9 18.5
Y-o-Y growth (%) 140.0 98.7 57.6 29.5 33.3
Diluted CEPS (INR) 4.0 7.5 11.6 14.9 19.7
P/E (x) 61.1 30.7 19.5 15.1 11.3
Price/BV(x) 11.9 6.1 3.2 2.7 2.2
EV/Sales (x) 2.9 2.0 1.3 1.0 0.8
EV/EBITDA (x) 26.5 15.8 10.3 8.0 6.2
22
Power Equipment
India Equity Research | Power Equipment Company Update
Others : 8.4
Financials
Year to March FY07 FY08E FY09E FY10E
Revenue (INR mn) 15,987 26,981 36,623 48,522
Rev. growth (%) 90.2 68.8 35.7 32.5
EBITDA (INR mn) 2,563 3,480 4,526 5,855 2,200 300
Net profit (INR mn) 1,630 2,070 2,683 3,494
1,800 225
Shares outstanding (mn) 26 27 27 27
('000)
(INR)
EPS (INR) (adjusted for split) 60.9 72.9 93.5 120.4 1,400 150
EPS growth (%) 98.8 19.8 28.3 28.7
P/E (x) 20.3 17.0 13.2 10.3 1,000 75
EV/ EBITDA (X) 13.3 9.8 7.5 5.8
ROAE (%) 25.0 24.0 23.7 24.0 600 -
Feb-07 Aug-07 Feb-08
ROACE (%) 31.6 26.3 28.6 30.2
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
23
Power Equipment
KPP’s higher RoCEs over the cycle are a result of better margins and lower working capital
compared to JYS. Further, lower tax rate also results in higher RoCEs. Due to superior RoCEs
and business model compared to the industry, KPP has historically traded at a premium to
other companies in the sector. The changing business profile, which in effect complements the
EPC business, is likely to result in KPP getting superior valuations compared to the past. Hence,
we expect the current mispricing to correct as investors gain confidence as further clarity
emerges post Q4FY08 results.
24
Power Equipment
2,500 25,000
Kalpataru Power Transmission BSE SENSEX
2,000 20,000
QIB pla c e m e nt
1:1 bo nus (INR 3.5 bn)
a nno unc e m e nt
1,500 15,000
(Sensex)
Ac qn o f J M C
(INR)
pro je c ts
B io m a s s po we r pla nt
1,000 10,000
o f 7.8 M W
c o m m e nc e s o pe ra tio n
500 5,000
- -
Apr-02
Aug-02
Jan-03
Jun-03
Nov-03
Apr-04
Aug-04
Jan-05
Jun-05
Nov-05
Mar-06
Aug-06
Jan-07
Jun-07
Nov-07
Source: Edelweiss research
KPP is our top pick in the power T&D EPC segment. We believe the company’s Q3FY08 results
were an aberration, primarily due to slowdown in execution in distribution orders due to
inspection delays by a few select utilities. The company is a leading contractor in the power
sector and has higher capital efficiency than peers. Further, we continue to like KPP’s
expansion plans in project management and utilities space in the power sector as further
diversification is likely to reduce the risk profile of its business model, which otherwise is
primarily driven by expansion in the power transmission and distribution segment. On our
consolidated EPS estimates of ~INR 94 and ~INR 120, the stock is trading at P/E of ~13x and
~10x FY09E and FY10E earnings, respectively. We continue to maintain our ‘BUY’
recommendation on the stock.
25
Power Equipment
Company Description
KPP designs, fabricates, erects, constructs, and commissions power transmission lines and sub station
structures on a turnkey basis in India and overseas. It is also in the business of laying pipelines and
construction of biomass power plants.
Investment Theme
India’s inter-regional power transmission capacity is likely to increase from ~11,500 MW currently to
~16,450 MW at the end of the Tenth Five Year Plan (FY07-end) and to ~37,150 MW at the end of the
Eleventh Plan (FY12-end). Progress on planned power T&D infrastructure upgradation is driving the
current phase of growth. We expect an investment of ~INR 2,475 bn for the expansion of the
transmission infrastructure during the Eleventh Plan. Consequently, the addressable market for the
power transmission tower industry from this opportunity is likely to be ~INR 250 bn over the Eleventh
Plan period. We believe KPP is well placed to leverage from the opportunity. Further, KPP’s pipeline
business is relatively easily scalable and going forward it is likely to become a strong player in the
pipeline business.
Key Risks
Power T&D investments are executed by state utilities, which, in turn, are mandated by the government.
Hence, any change in the political environment can potentially impact the pace of execution in the
industry, thus impacting the timing of revenue growth. Additionally, customer concentration risk is high
in the business and this in turn impacts the bargaining power of transmission tower companies.
26
Power Equipment
27
Power Equipment
28
Power Equipment
Ratios
Year to March FY06 FY07 FY08E FY09E FY10E
ROAE (%) 39.6 25.0 24.0 23.7 24.0
ROACE (%) 39.1 31.6 26.3 28.6 30.2
Current ratio 1.6 2.0 1.8 1.8 1.8
Debtors (days) 129 160 126 126 126
Fixed assets t/o (x) 5.5 5.1 7.6 9.0 10.5
Average working capital t/o (x) 4.5 3.6 3.8 4.1 4.1
Average capital t/o (x) 2.7 2.2 2.4 2.8 3.0
Net debt/Equity 0.7 0.2 0.1 0.1 0.1
Gross debt/Equity 1.4 0.6 0.5 0.4 0.4
Valuations parameters
Year to March FY06 FY07 FY08E FY09E FY10E
EPS (INR) (adjusted for split) 30.6 60.9 72.9 93.5 120.4
Y-o-Y growth (%) 131.7 98.8 19.8 28.3 28.7
CEPS (INR) (adjusted for split) 69.4 68.4 86.8 111.3 142.1
P/E (x) 40.4 20.3 17.0 13.2 10.3
Price/BV(x) 8.0 5.1 4.1 3.1 2.5
EV/Sales (x) 4.0 2.1 1.3 0.9 0.7
EV/EBITDA (x) 25.9 13.3 9.8 7.5 5.8
29
Power Equipment
India Equity Research | Power Equipment Company Update
In the Eleventh Plan, Indian Railways has an ~INR 430 bn outlay for expanding capacity.
KECI has pre qualifications from Indian Railways as the company was earlier been involved
in setting up infrastructure for it. KECI has recently bagged two railway electrification Reuters : KECL.BO
projects from Northern and Central Railways. We believe entry into EPC for railways is likely Bloomberg : KECI IN
Outlook and valuations: Positive; maintain ‘BUY’ 52-week range (INR) : 922 / 478
We continue to remain positive on KECI on the back of strong revenue growth visibility. Share in issue (mn) : 49.3
Further, merger with National Information Technologies Ltd (NITEL) gives KECI presence in M cap (INR bn/USD mn) : 35.0 / 897.9
the high-growth telecom towers market. The company is currently trading at a premium to
Avg. Daily Vol. BSE/NSE (‘000) : 56.5
KPP and JYS, which was not the case historically. At our current EPS estimates of ~INR 44
and ~INR 56 the stock is trading at a P/E of ~16x and ~13x for FY09E and FY10E,
respectively. We believe scope for valuation re-rating is unlikely from current levels. Share Holding Pattern (%)
However, the growth story remains encouraging. We continue to maintain our ‘BUY’
Promoters : 34.6
recommendation on the stock.
MFs, FIs & Banks : 34.8
FIIs : 15.1
Others : 15.5
Financials
Year to March FY07 FY08E FY09E FY10E
Revenue (INR mn) 20,406 26,786 36,305 43,890
Rev. growth (%) 18.1 31.3 35.5 20.9
EBITDA (INR mn) 2,518 3,474 4,435 5,335 1,000 500
Net profit (INR mn) 1,046 1,656 2,192 2,764
850 375
Shares outstanding (mn) 38 49 49 49
('000)
(INR)
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
30
Power Equipment
Table 1: KECI’s and RPG Transmission’s consolidated order backlog over past six quarters
KEC International & RPGT (INR bn)
Qtr ended International Domestic Total
Jun-06 21 11 32
Sep-06 23 11 33
Dec-06 20 13 33
Mar-07 23 12 35
Jun-07 25 12 37
Sep-07 37 15 52
Dec-07 30 20 50
Source: Edelweiss research
KECI has executed projects in diverse terrains—across Kazakhstan, Saudi Arabia, Iraq, and
Afghanistan. While this kind of project profile does raise the risk profile of the business, we believe,
over the years, KECI has acquired the necessary skills to manage projects in difficult terrains.
Further, the company outsources its tower supplies requirements, unlike JYS and KPP. Hence,
KECI’s creditors/revenues are higher than others in the industry. Consequently, its working capital
requirement per unit of revenue is lower, which results in higher RoCE.
31
Power Equipment
In the Eleventh Plan, Indian Railways has an ~INR 430 bn outlay for expanding capacity. The
basic skill set that KECI brings to the table is project management capability, the mainstay for
securing contracts from Indian Railways. Further, KECI has pre qualifications from Indian
Railways as the company has earlier been involved in setting up infrastructure for it. The
company has recently bagged two railway electrification projects from Northern and Central
Railways. The diversification will also lend KECI the opportunity to participate in the dedicated
freight corridor (DFC) plan of Indian Railways, the outlay for which is ~INR 350 bn.
In the past two quarters, KECI has had a higher order accretion than peers. This can be
attributed to the company’s significant presence in international markets compared to peers,
who are more active in the domestic market. Higher order accretion in 9mFY08 lends KECI
higher revenue visibility compared to JYS and KPP. Key order wins in the past few quarters are
given below.
NamPower Turnkey job of 350 kV double circuit bipolar HVDC 1,400 Namibia, Africa
transmission line of 306 kms.
TRANSCO Turnkey job of 400 kV DC and quad circuit transmission lines 3,910 Abu Dhabi
of 173 kms.
SONELGAZ Turnkey job of 380 kV DC transmission lines of 123 kms. 2,460 Algeria
Afghanistan's Ministry of Energy & Water Turnkey construction of 2 X 110 kV transmission lines over l00 NA Afghanistan
kms; 4 sub stations and; 8 power distribution systems of 20
kV each.
Rajasthan Rajya Vidyut Prasaran Nigam Ltd Turnkey job of 400 kV DC circuit transmission line of 220 kms. 915 Rajasthan
32
Power Equipment
1,000 25,000
Shareholders approve arrangement
between RPGT and NITEL
800 20,000
Strong
Q3FY07
600 15,000
(Sensex)
(INR)
400 10,000
200 5,000
KEC INTERNATIONAL BSE SENSEX
- -
Mar-06
May-06
Aug-06
Oct-06
Dec-06
Mar-07
May-07
Aug-07
Oct-07
Dec-07
Source: Edelweiss research
KECI’s stock started moving upwards after the merger with RPG Transmission and NITEL was
proposed. We believe the merger is positive as it will provide KECI added visibility in the
domestic power T&D and railway electrification segments. Hence, we believe the valuation
expansion post the merger is logical. KECI is currently trading at a premium to KPP and JYS,
which was not the case historically. At our current EPS estimates of ~INR 44 and ~INR 56 the
stock is trading at a P/E of ~16x and ~13x for FY09E and FY10E, respectively. We believe
scope for valuation re-rating is unlikely from current levels, however, we remain positive on the
stock given the revenue visibility and growth profile. We continue to maintain our ‘BUY’
recommendation on the stock.
33
Power Equipment
Company Description
KECI was incorporated in 1945 as Kamani Engineering Corporation by the RPG group. It is in the
business of designing and manufacturing power transmission towers and telecom infrastructure.
Nearly, ~60% of KECI’s revenues come from the international market. The company’s order backlog
was ~INR 42 bn, with ~890% contributed by transmission projects, and ~10% by distribution
projects at the end of Q3FY08.
Investment Theme
The Middle Eastern and North African (MENA) power sectors installed power generation capacity of
~151GW in FY05. It is estimated that the regional power demand will grow 6% annually till 2010, to
increase the total installed power generation capacity to ~230GW. On the power T&D side, Gulf
Cooperation Council (GCC) countries are currently working on the first phase of the Gulf Electricity
Interconnection Grid that is likely to cost INR 53 bn and is expected to be completed by mid-2008.
We view the MENA power T&D upgradation in positive light for our coverage universe. Additionally,
the US market size is likely to grow to ~INR 450 bn over the next four years. KECI is the most active
player in the MENA and US market in our coverage universe and is likely to be positively affected by
the up-gradation in the power T&D infrastructure in the MENA and US markets.
Key Risks
Power T&D investments are executed by state utilities, which in turn, are mandated by the
government. Hence, any change in the political environment can potentially impact the pace of
execution in the industry, thus impacting the timing of revenue growth. Additionally, the customer
concentration risk is high in the business, which in turn, impacts the bargaining power of
transmission tower companies.
34
Power Equipment
Financial Statements
35
Power Equipment
Ratios
Year to March FY06 FY07 FY08E FY09E FY10E
ROAE (%) 19.3 45.6 43.9 38.4 35.7
ROACE (%) 20.5 37.1 42.3 44.1 43.5
Current ratio 1.1 1.3 1.3 1.4 1.4
Debtors (days) 144 162 166 152 152
Fixed assets t/o (x) 4.0 5.0 6.4 8.6 11.4
Average working capital t/o (x) 5.4 11.7 8.3 7.4 6.0
Average capital t/o (x) 2.6 3.5 3.6 4.0 3.9
Net debt/Equity 1.3 1.3 0.6 0.3 0.1
Gross debt/Equity 1.8 1.4 0.7 0.5 0.4
Valuations parameters
Year to March FY06 FY07 FY08E FY09E FY10E
EPS (INR) 13.1 27.8 33.6 44.4 56.0
Y-o-Y growth (%) 16.5 112.3 20.9 32.4 26.1
CEPS (INR) 20.2 36.6 40.8 52.3 64.3
P/E (x) 54.3 25.6 21.2 16.0 12.7
Price/BV(x) 14.3 9.8 7.3 5.3 3.9
EV/Sales (x) 2.2 1.9 1.4 1.1 0.9
EV/EBITDA (x) 23.7 15.3 11.1 8.7 7.2
36
Power Equipment
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]
350 2050
300 1800
Buy
(INR)
(INR)
Buy
Buy
200 Buy 1300 Buy
Buy
150 1050
100 800
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Aug-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
KEC International Recent Research
Buy
Transmission Result Update
590 Buy
Buy 1-Feb-08 KEC Leading the pack 702 Buy
470 International Result update
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
37 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Power Equipment
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]
Market Cap (INR) 88 74 26 Sell depreciate more than 10% over a 12-month period
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38 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.