Kalpataru Power:Impacted by downpour: JM Financial

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Impacted by downpour
􀂄 Headline numbers below expectations: Kalpataru Power (KPP) reported a
modest 12.1% YoY increase in 2Q11 net profit at `414mn, below estimates,
as sales came in lower than estimates largely due to excessive rainfall
hampering execution. Sales grew 15% YoY to `6.3bn (JMFe `6.7bn). Major
decline in biomass (-24% YoY due to plant closure/water unavailability) and
infra business (-17% YoY) negated strong 22% YoY T&D growth. Higher than
expected other income (`149mn) and lower depreciation aided net profit.


􀂄 115bps margin compression on unutilized days: KPP’s margins at 11.4% (-
115bps) were lower as 300bps increase in RM/sales dented operational
profitability, despite 80bps savings in other expenditure (as % of sales) and
100bps decline in staff costs. T&D segment EBIT margins declined 190bps
YoY to 10.6% due to higher manufacturing and erection as equipment lied
idle on well-distributed downpour near construction sites. Infrastructure
business margins improved 245bps to 8.5% on project closures and hence,
contingency provisioning reversal.
􀂄 OB flat at `50bn; 2H11 outlook stronger: KPP’s OB for 2Q11 stood at `50bn
was flattish (-4% YoY) as inflows declined 21% YoY at `8.3bn. Many tender
openings (esp by PGCIL) have shifted to 2H11 and management is confident
of inflows picking-up in the coming quarters. KPP has bid for c.`40bn worth
PGCIL tenders (to open in next 4-6 weeks).
􀂄 JMC net profit -6%; strong OB at `42.5bn: Management guided that KPP’s
61% subs (81% post successful open offer) JMC Projects’ net income de-grew
6% YoY to `54mn as sales declined 16% to `2.6bn. Despite 1H de-growth, KPP
is confident of JMC doing 20% sales growth in FY11E. JMC had robust OB of
`42.5bn, +52% YoY.
􀂄 Revise estimates by 5-6%; maintain BUY with revised TP of `240: We tweak
estimates 5-6% lower based on 1H11 performance: a) lower generation for
biomass, b) heavy rains impacting execution, c) 2Q11 T&D margins decline.
We introduce FY13E EPS at `19.5 on 15.5% FY13E sales growth. We maintain
exit multiple of 12x on Sept’12E EPS of `18.0 for KPP (`216/share) and 10x
on Sept’12E net profit for JMC (`23/share) to arrive at a revised Sept’11 TP of
`240 (Mar’11 `230). Maintain BUY. 1