Kalpataru Power Transmission -Right steps forward; initiate with Buy: Anand Rathi

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Kalpataru Power Transmission
Right steps forward; initiate with Buy
We initiate coverage on Kalpataru with a Buy and a price target
of `198. We favor Kalpataru owing to its strong project
management skills, healthy order book, relatively high operating
margin and better performance of its subsidiary JMC Projects.

 Quality player in EPC. Kalpataru is a leading power T&D-EPC
player in India and also undertakes oil & gas pipeline-laying jobs
and biomass-based energy generation. Through its subsidiaries,
KEC undertakes EPC jobs for power plants, roads, factories &
buildings, and real estate development, and operates warehouses.
 Healthy order book; relatively higher margin. The company
reported a healthy order book of `50.7bn as of Sep ’10, which is
2x FY10 sales. Over the past eight fiscals (FY02-10), average
operating margin has been 12.5% vs. 10-11% for listed peers.
 Focus on asset creation. Kalpataru has won a 25-year
concession for a 100km-400kV BOOT transmission project and
JMC Projects has won two road-BOT concessions to build and
maintain roads from NHAI, with project costs of `12.5bn.
 Financials. We expect revenue and earnings CAGR of 14.6% and
11.6% respectively over FY10-13e. EBITDA CAGR would be
13.7% over the same period, with EBITDA margin of 12-12.5%.
 Valuation and risks. We value the stock at `198 – the standalone
business at `183, based on 14x FY12e earnings, and `14.7 for
61% equity stake in JMC assuming 20% holdco discount. Key
risks: execution delay; rising commodity prices & interest rate;
forex fluctuations.