Kalpataru Power: Strong execution with improved visibility: HSBC

Visit http://indiaer.blogspot.com/ for complete details �� ��


Kalpataru Power Transmission
OW: Strong execution with improved visibility


 2Q FY11 results beat our estimates by 5%; consolidated
order book remains strong at INR93bn (c2.3xFY10 sales)
 We lower our EPS estimates by 15% for FY11e/FY12e to
INR15.2/INR19.4 to incorporate equity dilution
 Lowering target price to INR250 from INR260 on equity
dilution; maintain Overweight (V flag removed), higher raw
material costs is the key risk




2QFY11 results released on 30 October 2010 beat our estimates: Kalpataru Power
reported 2QFY11 results, which were 5% higher than our estimates. Although the
company reported sales growth of c14% y-o-y, the EBITDA margin declined by c135bp
to 11.6% due to high erection and subcontracting expenses reported during the quarter.
The net profit increased 12% y-o-y to INR414m, but EPS was marginally lower by 3%
due to equity dilution.
Order book of INR93bn (c2.3x FY10 sales) which provides strong revenue visibility:
The closing order book of Kalpataru standalone at the end of 2QFY11 was cINR50bn
(c1.9x FY10 sales) while that of JMC projects is cINR43bn (c3.3x of FY10 sales). The
consolidated order book stands at INR93bn, c2.3x FY10 consolidated sales which provide
strong revenue visibility going forward. Notably KPP’s order book is the highest of its
peers Jyoti Structures (cINR42bn, JYS IN, OW(V), INR135) and KEC International
(INR56.5bn, KECI IN, N(V), INR.497)
Lowering EPS estimates by 15% due to equity dilution: Kalpataru Power had raised
INR4.5bn though QIP (Qualified Institutional Placement) in May 2010 to fund its capex
plans and BOT (Build Operate Transfer) project. We maintain our net profit forecasts of
INR2.3bn/INR3bn for FY11e/FY12e, however we lower our earnings EPS estimates by
15% to incorporate the equity dilution.
Maintain Overweight with a revised target price of INR250: We value Kalpataru on
an unchanged target PE of 13x our March-2012 EPS estimate (rolled over from Sept 2011
previously), we arrive at our new target price of INR250 (vs INR260 previously). We
maintain our Overweight rating but remove the V flag. Downside risks include lower than
expected revenues and higher raw material costs.


Overweight remove Volatility flag, target price INR250 (earlier
was INR260)
We are removing the volatility indicator from our rating. Volatile ratings are defined as stocks having
historical volatility (defined as the past month’s average of the daily 365-day moving average volatilities)
of more than 40%. As at 1 Nov 2010, BHEL scored 29.68% on this measure.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5 percentage
points above and below the hurdle rate for India stocks of 10.5%. For Kalpataru, this translates into a
Neutral band of 5.5%-15.5% above the current share price. Our target price of INR250 for Kalpataru
shares implies a potential total return, including dividend yield (for FY11) of c44%, which above Neutral
band. We therefore maintain an Overweight rating on the stock.
Risks
The key downside risks to our rating are as follows:
 Lower than-expected revenues
 Higher raw material costs leading to lower EBITDA margins
 A decrease in the pace of order flow
 Lower margin contribution from other businesses than we expect
 Higher working capital requirements leading to higher interest cost. In FY09, the debtors increased
substantially for the company to c160days of sales
 Lower margins on JMC Projects
 Equity dilution to fund transmission built-own-transfer projects