Kalpataru Power Transmission: Buy

Power transmission companies received a fresh lease of life after order flows from Power Grid Corporation of India (PGCIL) picked up sharply in the last quarter of FY12. But quite a few lost their market shares to new players last fiscal.

Despite aggressive competition, Kalpataru Power Transmission (Kalpataru) managed to retain its status in the top five in terms of market share, a minor dip notwithstanding.

The company’s strong order book supplemented by its infrastructure subsidiary JMC Projects’ robust portfolio provides revenue visibility for the next couple of years.

Sharp pick up in execution in both the parent and subsidiary companies in the recent quarter also suggests that the phase of slow delivery may be over. 

 Investors with a two-year perspective can consider limited exposure to Kalpataru. At the current market price of Rs 79, the stock trades at 4.4 times its consolidated expected per share earnings for FY14. While this is in line with peer KEC International, the latter has lost market share in FY12 in orders from PGCIL.

Order flows

PGCIL awards a host of orders in the transformer, substation, transmission lines and conductor segments to name a few. In FY12, the proportion of power transmission towers and lines in the total orders awarded increased to about 45 per cent from 37 per cent a year ago. But this also prompted a number of new entrants in the space, resulting in players such as KEC International losing a good chunk of their market share. Kalpataru, though, managed to remain in the top five, losing market share by just a percentage point. 

But retaining market share may have been possible only through aggressive bidding. Hence, we reckon that Kalpataru’s EBITDA margins are likely to hover in the 9-9.5 per cent range over the next couple of years, from the 10-11 per cent it enjoyed earlier. Unlike a few others, the company may not see further deterioration in margins on account of two reasons — one, Kalpataru has nearly half of its orders from overseas markets. These are typically margin accretive.

Two, while its EBITDA margins were dented in the fourth quarter of FY12 (8.8 per cent) due to volatile steel prices, it may yet recover it, given that about two-thirds of its orders have price variation clauses linked to indices. However, the recovery on these will come with a lag. Kalpataru’s consolidated order book stood at Rs 11,600 crore in FY12. That’s a healthy 2.2 times FY12 sales.

JMC Projects’ orders accounted for nearly half. Close to 50 per cent of the subsidiary’s orders are from the buildings and factories segment that may suffer lesser uncertainties in execution, unlike infrastructure projects.

Higher execution pace in the subsidiary is likely to provide traction to overall revenue growth. JMC Projects’ 43 per cent growth in sales in the fourth quarter over a year ago is evidence to this.

Manageable debt

 With both the parent and the subsidiary company requiring capital deployment, Kalpataru saw its debt double in FY12. That said, its debt equity ratio of 0.6 provides enough room for it to leverage more. Profits before interest and taxes too comfortably covered interest costs 2.8 times, causing little concern over debt servicing.

 Kalpataru’s consolidated sales expanded 22 per cent to Rs 5266 crore in FY12. Net profits, though, dipped 5 per cent to Rs 189 crore. Sedate quarters in the early part of FY12 and foreign exchange losses, besides higher steel prices, worked as drags. But recoveries on input costs seem likely through escalation clauses. 

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