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A diversified business model, focus on high growth areas and strong
client base make Kalpataru Power Transmission Ltd (KPTL) an attractive
play in the power transmission space. KPTL enjoys strong sales visibility
with a consolidated order book of | 9,250 crore and standalone order
book of | 5,000 crore (TTM book-to-bill ratio of 1.8x). The company is
well placed to benefit from higher infrastructure spending in multiple
sectors (power, oil & gas, civil engineering, logistics). We project
standalone revenues and PAT will grow at 15% and 14% over FY10-13E,
respectively. We are initiating coverage on the stock with a BUY rating.
T&D to dominate standalone business…
We forecast standalone revenues will grow at 15% CAGR to | 3,902 crore
in FY10-13E. The transmission & distribution (T&D) segment is expected
to dominate overall revenues (~90% of total in FY13E) fuelled by the
large power sector opportunity in the domestic and overseas markets. We
believe KPTL is well-placed to expand its order book driven by its credible
project execution track record and strong client base (PGCIL, state utilities
and foreign power utilities). In our view, the anticipated higher tendering
activity by PGCIL and state utilities in order to meet their XI Plan (in
H2FY11-FY12E) investment targets and the commencement of order
intake from planned generation capacity addition in the XII Plan (2013-17)
will translate into robust order inflows for KPTL. As a result, we expect
KPTL’s order book to grow at 17% CAGR to | 6,625 crore over FY10-13E.
…supported by strong performance of subsidiaries
KPTL has exposure to high growth business opportunities (civil
engineering, logistics) through its subsidiaries JMC Projects and Shree
Shubham Logistics. We expect these businesses to perform strongly over
the next few years fuelled by the large infrastructure spending in the XI
Plan and robust growth for agri-logistics services in India. Additionally,
profitability of both subsidiaries is expected to improve in FY11E-13E.
Valuations
At the CMP of | 135/share, the stock is trading at P/E multiple of 11.3x
and 9.8x on FY11E and FY12E earnings, respectively. With reasonable
sales visibility, continued traction in the domestic and international
orders and higher capex by domestic oil & gas companies, we estimate
standalone revenues and PAT will grow at 15% and 14% CAGR,
respectively, over FY10-13E. We have valued the stock based on SOTP
methodology and arrived at a fair value of | 147.
Company Background
Kalpataru Power Transmission Ltd (KPTL) is an EPC contractor operating
in the power transmission and distribution sector. The company has
capabilities to execute EHV transmission line projects up to 800 KV. Since
inception, it has installed ~8,500 km transmission lines and ~700,000 MT
towers. It has undertaken several projects in India and abroad (mainly in
Asia, Africa and the Middle East). Besides the power transmission and
distribution sector, the company has interests in the oil & gas pipeline,
power generation (biomass) and real estate businesses.
As on Q3FY11, KPTL’s order book stood at ~| 5,000 crore with the
domestic transmission, international transmission, distribution and
infrastructure segments constituting 56%, 34%, 3% and 7% of the total
order book, respectively. In FY06-10, the company’s revenues have
grown at 33% CAGR to | 2,596 crore driven by robust growth of T&D
revenues (30% CAGR) backed by strong investment in the domestic
power sector. It has geographically diverse revenues with the share of
international sales at 45% in FY10 (vs. 26% in FY06) for the standalone
entity.
KPTL’s largest subsidiary is JMC Projects (India) Ltd, a publicly-listed civil
contracting company, with an order book of | 4300 crore (Q3FY11). Other
operating subsidiaries of KPTL include Shree Shubham Logistics, Energy
Link (India) Ltd, and Amber Real Estate Ltd.
KPTL has two fabrication plants in Gandhi Nagar with a combined
capacity of 108,000 MT per annum. The company is headquartered in
Mumbai and has employee strength of 2,000 personnel. It was listed on
the BSE/NSE in 2000.
Investment Rationale
Strong sales visibility; sustained growth of order book expected
With standalone entity order book of | 5,000 crore, KPTL enjoys strong
sales visibility (TTM book-to-bill ratio of 1.8x). With the company bidding
aggressively for domestic and international orders (placed bids for orders
of | 4,000 crore at the end of 9MFY11 – L1 position in several of them),
massive transmission sector spending and repeat orders from existing
clients, we expect sustained order book expansion in FY11E-13E.
Additionally, robust demand for oil & gas pipelines in India over the next
few years is likely to drive infrastructure segment orders. Consequently,
we project the company’s order book and revenues will grow at 13%
CAGR and 17% CAGR to | 6,625 crore and | 3,902 crore in FY11E-13E,
respectively.
However, the FY11E sales growth (14.2% YoY vs. 33% CAGR in FY06-10)
is likely to be moderate due to execution slippages in 9MFY11 as a result
of the severe monsoon season. Also, in Q3FY11, KPTL experienced
slippages to the tune of | 20 crore due to disturbances in the Middle East
particularly in Algeria where the company has an order book to the tune
of |100 crore.
T&D to remain core business for KPTL
PGCIL, state utilities to step-up tendering activity
As of Q3FY11, the T&D segment accounted for ~90% of KPTL’s order
book. Of this, the share of domestic transmission projects stood at ~56%.
With a diverse domestic customer base (PGCIL, state utilities and private
sector clients), credible project execution track record and large power
sector opportunity, we believe KPTL is well placed to expand its T&D
order book in FY11E-13E. We expect the order backlog to grow at 13%
CAGR over FY11E-FY13E.
Although the order intake in 9MFY11 (~2% YoY de-growth over 9MFY10)
has been subdued, we expect it to pick up over Q4FY11 and FY12E-FY13E
driven by PGCIL and state utilities (to meet their XIth and XIIth Plan
targets). In Q4FY11, PGCIL is expected to offer projects worth | 3,000
crore for bidding. These include orders for HCPTC projects (nine projects
in total worth ~| 58,000 crore), which are likely to continue till FY12E-13E.
PGCIL has historically been a key client for KPTL.
Greenfield manufacturing facility in Raipur to cater to domestic demand
KPTL is expanding its transmission tower manufacturing capacity by
30,000 MT to 138,000 MT. A new greenfield facility will be set up in
Raipur, Central India, to cater to the demand in the central and eastern
belt of the country (and achieve savings in freight cost). The existing
Gandhi Nagar facility will continue to cater to the western belt and export
markets.
Attractive opportunities in Africa, CIS and GCC regions
KPTL is actively bidding for projects in Africa, CIS and GCC regions. In the
international arena, over the last few years, KPTL has enjoyed handsome
order inflows from government-owned utilities in Africa (Algeria, Ethiopia,
Kenya, Congo, etc) and the Middle East (Abu Dhabi, Kuwait, etc). The
company has executed projects in over 28 countries across the globe.
Focusing on international markets for order inflow would also help KPTL
to cushion against rising competition in the Indian T&D EPC segment
wherein marginal players are bidding aggressively at competitive
margins.
We expect continued momentum in the international order intake driven
in the long-term (except for the troubled Middle East and Africa region
wherein order inflows may taper down in the medium-term due to
ongoing political crisis in the region), due to the substantial investment
planned in the transmission sector. According to industry sources, of the
US$867 billion investment expected in the global transmission sector in
2007-15, the Middle East and Africa are expected to have 7% share (a
large opportunity for transmission tower manufacturers).
Sustained growth of T&D order book in FY11E-13E
KPTL’s credible track record of executing domestic and international
projects has resulted into repeat orders from key clients, including PGCIL,
Maharashtra State Electricity Transmission Co, Sonelgaz (Algeria), etc. We
expect this trend to continue in future.
Consequently, we project the company’s T&D segment order book and
revenues will grow to | 6245 crore (14% CAGR in FY11E-13E) and | 3,457
crore (18% CAGR in FY11E-13E), respectively. The segment is expected
to continue to dominate KPTL’s revenues (~89% of total in FY13E).
Asset ownership: Moving up the value chain
KPTL is trying to move up the value chain from being an EPC contractor
to an asset owner. With a consolidated net worth of over | 1,000 crore,
the company is pre-qualified to bid for large BOOT projects. It has
secured three PPP projects till date, one each in the domestic power
transmission, roads and highways (by subsidiary JMC Projects) and
logistics (by subsidiary Shree Shubham Logistics Ltd) sectors. According
to the management, KPTL plans to secure two or three power
transmission BOOT projects over the next few years.
Recently, KPTL achieved financial closure of the transmission BOOT
project of SPV (Jhajjar JT Transco Pvt Ltd). It is for a 400 KV, 100 km
power transmission line project secured from Haryana Vidyut Prasaran
Nigam. The | 450-crore project will be executed by KPTL and Techno
Electric (51% stake of the former in the JV) over a period of 18 months.
Exhibit 12: Details of BOOT project
Location Jharli-Bawana (Haryana)
Project Cost |450 crore
Grant |92 crore
Debt | 270 crore
Equity contrinution | 90 crore
Concession Period 25 years
Length & Voltage 100 kms -400Kv
Annutiy to be received | 54 crore
Terminal Value 20 months rentals
Source: Company, ICICIdirect.com Research
Sufficient funding to finance BOOT projects due to QIP receipts
In Q1FY11, KPTL raised | 450 crore from equity dilution through the QIP
route. The objective of the QIP was to finance capex for a new
transmission line facility, equity requirements of existing and future BOOT
projects and investment in subsidiaries. Hence, we believe funding will
not be a constraint in case KPTL secures any new BOOT projects in the
near future.
Big potential from oil & gas pipeline business
Pipeline network addition by domestic oil & gas companies is expected to
grow strongly during the next few years fuelled by the current low
penetration of pipelines in India, high growth of natural gas usage and the
recent oil & gas discoveries. This opens up an opportunity of over |
45,000 crore over the next few years as pipeline laying contracts of
~10,000 km are expected to be offered by domestic public and private
sector companies (KPTL estimates).
KPTL has a presence in this sector and has laid 1,800 km of pipelines over
the last five years. It has secured large projects from Bharat Oman
Refinery, GAIL, HPCL-Mittal Energy JV and OIL India in recent years.
Although the segment contribution in the order book is currently low at
7.5% in Q3FY11, we believe the segment holds attractive growth
prospects given the scale of investment planned. The management is also
eyeing opportunities in the international markets in addition to executing
projects across the full value chain of the oil & gas pipeline business
(upstream and downstream).
Diversified infra exposure through subsidiary JMC Projects…
Through its listed subsidiary, JMC Projects, KPTL has an exposure
towards opportunities in the civil construction space in factories &
building, power, roads & bridges and railways sectors. With an order book
of | 4,300 crore, JMC Projects enjoys strong sales visibility (book-to-bill
ratio of 3.4x). Fuelled by the robust growth of domestic infrastructure
spending, the company’s order book has grown to | 4300 crore in
Q3FY11 (vs. | 1,162 crore in FY07).
JMC Projects has been awarded toll-road concessions by NHAI in
Haryana. The project was secured by the JV of JMC and Srei
Infrastructure (51:49, respectively) in March 2010, to construct a four-lane
highway in the Rohtak-Bawal section in Haryana under NHDP-III. The
project cost is | 1000 crore with a concession period of 27 years,
including the construction period of three years. The EPC portion of the
project is placed with JMC and is included in the current order backlog.
The JV has achieved financial closure of the project to the tune of | 820
crore. The remaining will be contributed in the form of equity wherein the
share of JMC would be pegged at | 60 crore.
Exhibit 13: Project details of BOOT project
Rhotak- Bawal Project
Highway & NHDP Phase NH-71 & NHDP III
Length 83 Kms
Total Project cost | 995 crore
Debt Funding | 820 crore
Equity Funding | 175 crore
JMC 's stake in JV 51%
Source: Company, ICICIdirect.com Research
The management is bullish on the growth prospects of this business and
expects to achieve 25-30% topline growth in FY11E-FY12E and margin
expansion. The margins are expected to expand driven by the higher
diversity of the company’s order book (as opposed to mainly the factories
and building sector earlier – that had low margins).
…and further diversification through logistics subsidiary
KPTL has a small presence in the logistics sector through its subsidiary,
Shri Shubham Logistics Ltd (SSLL). In FY10, SSLL accounted for ~3% of
the consolidated revenues. We believe SSLL has robust growth and
margin expansion potential. In addition to the 190,000 MT storage area
spread across 12 locations in Gujarat and Rajasthan, SSLL has signed an
agreement with Rajasthan State Warehousing Corporation (RSWC) to
manage the latter’s 38 warehouses across the state (total capacity of
405,000 MT). Thus, SSLL will get access to RSWC’s large warehousing
facilities at relatively low capex. Additionally SSLL plans to set up
warehouses in Madhya Pradesh and Maharashtra.
According to management estimates, SSLL is expected to clock revenues
of | 150 crore in FY11E (vs. | 88 crore in FY10) and generate positive PBT
margins of 5% (vs. –6% in FY10). For 9MFY11, SSLL clocked revenues of
| 90 crore while PBT and PAT stood at | 2 crore and | 1.6 crore,
respectively
Risks and concerns
Lower profitability due to rupee appreciation
KPTL’s profitability is exposed to fluctuations in foreign currency due to
the high share of overseas projects in the overall order book (~40%).
Margin contraction due to higher commodity prices
With ~20-25% of the order book on a fixed price basis, the company’s
margins are susceptible to volatility in commodity prices. In FY10, steel
and zinc accounted for ~45% of the total raw material expenses.
High working capital requirements
KPTL has high working capital requirements (42.5% of net sales in FY10)
due to high share of government projects in the order book (back
payment and high proportion of retention money). Majority of borrowings
constitute working capital loans. Hence, a higher-than-expected rise in
interest rates would result in higher interest expenses and lower
profitability.
Increased competition
The company’s margins could come under pressure due to higher
competition in the sector. KPTL’s competitions (domestic and
international) have in the past bid aggressively for PGCIL and state utilities
projects.
Other risks
Since the projects undertaken by KPTL have a relatively long gestation
period, risk of lower-than-expected revenues exists from execution
delays. Factors that can result in delays include unavailability of skilled
manpower, external factors like right of way, natural calamities, change in
government regulations, etc.
Valuations
At the CMP of | 135/share, the stock is trading at 11.3x and 9.8x FY11E
and FY12E earnings, respectively. With reasonable sales visibility,
continued traction in domestic and international orders and higher capex
by domestic oil & gas companies, we estimate standalone revenues and
PAT will grow at a 15% and 14% CAGR, respectively, over FY11E-13E.
We have valued the stock at | 147/share. We are initiating coverage on
the stock with ADD rating.
We have valued the core business at | 133 per share (80% weight to
FY12E with a multiple of 10x and 20% weight to FY12E book value at 1x)
and also added | 14/share arising out of JMC’s stake (67%). The SOTP
target works out to | 147/share. We have ascribed lower earnings multiple
to KPTL as the present macro headwinds and recent dilution that the
company has done will be RoE dilutive in the medium term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A diversified business model, focus on high growth areas and strong
client base make Kalpataru Power Transmission Ltd (KPTL) an attractive
play in the power transmission space. KPTL enjoys strong sales visibility
with a consolidated order book of | 9,250 crore and standalone order
book of | 5,000 crore (TTM book-to-bill ratio of 1.8x). The company is
well placed to benefit from higher infrastructure spending in multiple
sectors (power, oil & gas, civil engineering, logistics). We project
standalone revenues and PAT will grow at 15% and 14% over FY10-13E,
respectively. We are initiating coverage on the stock with a BUY rating.
T&D to dominate standalone business…
We forecast standalone revenues will grow at 15% CAGR to | 3,902 crore
in FY10-13E. The transmission & distribution (T&D) segment is expected
to dominate overall revenues (~90% of total in FY13E) fuelled by the
large power sector opportunity in the domestic and overseas markets. We
believe KPTL is well-placed to expand its order book driven by its credible
project execution track record and strong client base (PGCIL, state utilities
and foreign power utilities). In our view, the anticipated higher tendering
activity by PGCIL and state utilities in order to meet their XI Plan (in
H2FY11-FY12E) investment targets and the commencement of order
intake from planned generation capacity addition in the XII Plan (2013-17)
will translate into robust order inflows for KPTL. As a result, we expect
KPTL’s order book to grow at 17% CAGR to | 6,625 crore over FY10-13E.
…supported by strong performance of subsidiaries
KPTL has exposure to high growth business opportunities (civil
engineering, logistics) through its subsidiaries JMC Projects and Shree
Shubham Logistics. We expect these businesses to perform strongly over
the next few years fuelled by the large infrastructure spending in the XI
Plan and robust growth for agri-logistics services in India. Additionally,
profitability of both subsidiaries is expected to improve in FY11E-13E.
Valuations
At the CMP of | 135/share, the stock is trading at P/E multiple of 11.3x
and 9.8x on FY11E and FY12E earnings, respectively. With reasonable
sales visibility, continued traction in the domestic and international
orders and higher capex by domestic oil & gas companies, we estimate
standalone revenues and PAT will grow at 15% and 14% CAGR,
respectively, over FY10-13E. We have valued the stock based on SOTP
methodology and arrived at a fair value of | 147.
Company Background
Kalpataru Power Transmission Ltd (KPTL) is an EPC contractor operating
in the power transmission and distribution sector. The company has
capabilities to execute EHV transmission line projects up to 800 KV. Since
inception, it has installed ~8,500 km transmission lines and ~700,000 MT
towers. It has undertaken several projects in India and abroad (mainly in
Asia, Africa and the Middle East). Besides the power transmission and
distribution sector, the company has interests in the oil & gas pipeline,
power generation (biomass) and real estate businesses.
As on Q3FY11, KPTL’s order book stood at ~| 5,000 crore with the
domestic transmission, international transmission, distribution and
infrastructure segments constituting 56%, 34%, 3% and 7% of the total
order book, respectively. In FY06-10, the company’s revenues have
grown at 33% CAGR to | 2,596 crore driven by robust growth of T&D
revenues (30% CAGR) backed by strong investment in the domestic
power sector. It has geographically diverse revenues with the share of
international sales at 45% in FY10 (vs. 26% in FY06) for the standalone
entity.
KPTL’s largest subsidiary is JMC Projects (India) Ltd, a publicly-listed civil
contracting company, with an order book of | 4300 crore (Q3FY11). Other
operating subsidiaries of KPTL include Shree Shubham Logistics, Energy
Link (India) Ltd, and Amber Real Estate Ltd.
KPTL has two fabrication plants in Gandhi Nagar with a combined
capacity of 108,000 MT per annum. The company is headquartered in
Mumbai and has employee strength of 2,000 personnel. It was listed on
the BSE/NSE in 2000.
Investment Rationale
Strong sales visibility; sustained growth of order book expected
With standalone entity order book of | 5,000 crore, KPTL enjoys strong
sales visibility (TTM book-to-bill ratio of 1.8x). With the company bidding
aggressively for domestic and international orders (placed bids for orders
of | 4,000 crore at the end of 9MFY11 – L1 position in several of them),
massive transmission sector spending and repeat orders from existing
clients, we expect sustained order book expansion in FY11E-13E.
Additionally, robust demand for oil & gas pipelines in India over the next
few years is likely to drive infrastructure segment orders. Consequently,
we project the company’s order book and revenues will grow at 13%
CAGR and 17% CAGR to | 6,625 crore and | 3,902 crore in FY11E-13E,
respectively.
However, the FY11E sales growth (14.2% YoY vs. 33% CAGR in FY06-10)
is likely to be moderate due to execution slippages in 9MFY11 as a result
of the severe monsoon season. Also, in Q3FY11, KPTL experienced
slippages to the tune of | 20 crore due to disturbances in the Middle East
particularly in Algeria where the company has an order book to the tune
of |100 crore.
T&D to remain core business for KPTL
PGCIL, state utilities to step-up tendering activity
As of Q3FY11, the T&D segment accounted for ~90% of KPTL’s order
book. Of this, the share of domestic transmission projects stood at ~56%.
With a diverse domestic customer base (PGCIL, state utilities and private
sector clients), credible project execution track record and large power
sector opportunity, we believe KPTL is well placed to expand its T&D
order book in FY11E-13E. We expect the order backlog to grow at 13%
CAGR over FY11E-FY13E.
Although the order intake in 9MFY11 (~2% YoY de-growth over 9MFY10)
has been subdued, we expect it to pick up over Q4FY11 and FY12E-FY13E
driven by PGCIL and state utilities (to meet their XIth and XIIth Plan
targets). In Q4FY11, PGCIL is expected to offer projects worth | 3,000
crore for bidding. These include orders for HCPTC projects (nine projects
in total worth ~| 58,000 crore), which are likely to continue till FY12E-13E.
PGCIL has historically been a key client for KPTL.
Greenfield manufacturing facility in Raipur to cater to domestic demand
KPTL is expanding its transmission tower manufacturing capacity by
30,000 MT to 138,000 MT. A new greenfield facility will be set up in
Raipur, Central India, to cater to the demand in the central and eastern
belt of the country (and achieve savings in freight cost). The existing
Gandhi Nagar facility will continue to cater to the western belt and export
markets.
Attractive opportunities in Africa, CIS and GCC regions
KPTL is actively bidding for projects in Africa, CIS and GCC regions. In the
international arena, over the last few years, KPTL has enjoyed handsome
order inflows from government-owned utilities in Africa (Algeria, Ethiopia,
Kenya, Congo, etc) and the Middle East (Abu Dhabi, Kuwait, etc). The
company has executed projects in over 28 countries across the globe.
Focusing on international markets for order inflow would also help KPTL
to cushion against rising competition in the Indian T&D EPC segment
wherein marginal players are bidding aggressively at competitive
margins.
We expect continued momentum in the international order intake driven
in the long-term (except for the troubled Middle East and Africa region
wherein order inflows may taper down in the medium-term due to
ongoing political crisis in the region), due to the substantial investment
planned in the transmission sector. According to industry sources, of the
US$867 billion investment expected in the global transmission sector in
2007-15, the Middle East and Africa are expected to have 7% share (a
large opportunity for transmission tower manufacturers).
Sustained growth of T&D order book in FY11E-13E
KPTL’s credible track record of executing domestic and international
projects has resulted into repeat orders from key clients, including PGCIL,
Maharashtra State Electricity Transmission Co, Sonelgaz (Algeria), etc. We
expect this trend to continue in future.
Consequently, we project the company’s T&D segment order book and
revenues will grow to | 6245 crore (14% CAGR in FY11E-13E) and | 3,457
crore (18% CAGR in FY11E-13E), respectively. The segment is expected
to continue to dominate KPTL’s revenues (~89% of total in FY13E).
Asset ownership: Moving up the value chain
KPTL is trying to move up the value chain from being an EPC contractor
to an asset owner. With a consolidated net worth of over | 1,000 crore,
the company is pre-qualified to bid for large BOOT projects. It has
secured three PPP projects till date, one each in the domestic power
transmission, roads and highways (by subsidiary JMC Projects) and
logistics (by subsidiary Shree Shubham Logistics Ltd) sectors. According
to the management, KPTL plans to secure two or three power
transmission BOOT projects over the next few years.
Recently, KPTL achieved financial closure of the transmission BOOT
project of SPV (Jhajjar JT Transco Pvt Ltd). It is for a 400 KV, 100 km
power transmission line project secured from Haryana Vidyut Prasaran
Nigam. The | 450-crore project will be executed by KPTL and Techno
Electric (51% stake of the former in the JV) over a period of 18 months.
Exhibit 12: Details of BOOT project
Location Jharli-Bawana (Haryana)
Project Cost |450 crore
Grant |92 crore
Debt | 270 crore
Equity contrinution | 90 crore
Concession Period 25 years
Length & Voltage 100 kms -400Kv
Annutiy to be received | 54 crore
Terminal Value 20 months rentals
Source: Company, ICICIdirect.com Research
Sufficient funding to finance BOOT projects due to QIP receipts
In Q1FY11, KPTL raised | 450 crore from equity dilution through the QIP
route. The objective of the QIP was to finance capex for a new
transmission line facility, equity requirements of existing and future BOOT
projects and investment in subsidiaries. Hence, we believe funding will
not be a constraint in case KPTL secures any new BOOT projects in the
near future.
Big potential from oil & gas pipeline business
Pipeline network addition by domestic oil & gas companies is expected to
grow strongly during the next few years fuelled by the current low
penetration of pipelines in India, high growth of natural gas usage and the
recent oil & gas discoveries. This opens up an opportunity of over |
45,000 crore over the next few years as pipeline laying contracts of
~10,000 km are expected to be offered by domestic public and private
sector companies (KPTL estimates).
KPTL has a presence in this sector and has laid 1,800 km of pipelines over
the last five years. It has secured large projects from Bharat Oman
Refinery, GAIL, HPCL-Mittal Energy JV and OIL India in recent years.
Although the segment contribution in the order book is currently low at
7.5% in Q3FY11, we believe the segment holds attractive growth
prospects given the scale of investment planned. The management is also
eyeing opportunities in the international markets in addition to executing
projects across the full value chain of the oil & gas pipeline business
(upstream and downstream).
Diversified infra exposure through subsidiary JMC Projects…
Through its listed subsidiary, JMC Projects, KPTL has an exposure
towards opportunities in the civil construction space in factories &
building, power, roads & bridges and railways sectors. With an order book
of | 4,300 crore, JMC Projects enjoys strong sales visibility (book-to-bill
ratio of 3.4x). Fuelled by the robust growth of domestic infrastructure
spending, the company’s order book has grown to | 4300 crore in
Q3FY11 (vs. | 1,162 crore in FY07).
JMC Projects has been awarded toll-road concessions by NHAI in
Haryana. The project was secured by the JV of JMC and Srei
Infrastructure (51:49, respectively) in March 2010, to construct a four-lane
highway in the Rohtak-Bawal section in Haryana under NHDP-III. The
project cost is | 1000 crore with a concession period of 27 years,
including the construction period of three years. The EPC portion of the
project is placed with JMC and is included in the current order backlog.
The JV has achieved financial closure of the project to the tune of | 820
crore. The remaining will be contributed in the form of equity wherein the
share of JMC would be pegged at | 60 crore.
Exhibit 13: Project details of BOOT project
Rhotak- Bawal Project
Highway & NHDP Phase NH-71 & NHDP III
Length 83 Kms
Total Project cost | 995 crore
Debt Funding | 820 crore
Equity Funding | 175 crore
JMC 's stake in JV 51%
Source: Company, ICICIdirect.com Research
The management is bullish on the growth prospects of this business and
expects to achieve 25-30% topline growth in FY11E-FY12E and margin
expansion. The margins are expected to expand driven by the higher
diversity of the company’s order book (as opposed to mainly the factories
and building sector earlier – that had low margins).
…and further diversification through logistics subsidiary
KPTL has a small presence in the logistics sector through its subsidiary,
Shri Shubham Logistics Ltd (SSLL). In FY10, SSLL accounted for ~3% of
the consolidated revenues. We believe SSLL has robust growth and
margin expansion potential. In addition to the 190,000 MT storage area
spread across 12 locations in Gujarat and Rajasthan, SSLL has signed an
agreement with Rajasthan State Warehousing Corporation (RSWC) to
manage the latter’s 38 warehouses across the state (total capacity of
405,000 MT). Thus, SSLL will get access to RSWC’s large warehousing
facilities at relatively low capex. Additionally SSLL plans to set up
warehouses in Madhya Pradesh and Maharashtra.
According to management estimates, SSLL is expected to clock revenues
of | 150 crore in FY11E (vs. | 88 crore in FY10) and generate positive PBT
margins of 5% (vs. –6% in FY10). For 9MFY11, SSLL clocked revenues of
| 90 crore while PBT and PAT stood at | 2 crore and | 1.6 crore,
respectively
Risks and concerns
Lower profitability due to rupee appreciation
KPTL’s profitability is exposed to fluctuations in foreign currency due to
the high share of overseas projects in the overall order book (~40%).
Margin contraction due to higher commodity prices
With ~20-25% of the order book on a fixed price basis, the company’s
margins are susceptible to volatility in commodity prices. In FY10, steel
and zinc accounted for ~45% of the total raw material expenses.
High working capital requirements
KPTL has high working capital requirements (42.5% of net sales in FY10)
due to high share of government projects in the order book (back
payment and high proportion of retention money). Majority of borrowings
constitute working capital loans. Hence, a higher-than-expected rise in
interest rates would result in higher interest expenses and lower
profitability.
Increased competition
The company’s margins could come under pressure due to higher
competition in the sector. KPTL’s competitions (domestic and
international) have in the past bid aggressively for PGCIL and state utilities
projects.
Other risks
Since the projects undertaken by KPTL have a relatively long gestation
period, risk of lower-than-expected revenues exists from execution
delays. Factors that can result in delays include unavailability of skilled
manpower, external factors like right of way, natural calamities, change in
government regulations, etc.
Valuations
At the CMP of | 135/share, the stock is trading at 11.3x and 9.8x FY11E
and FY12E earnings, respectively. With reasonable sales visibility,
continued traction in domestic and international orders and higher capex
by domestic oil & gas companies, we estimate standalone revenues and
PAT will grow at a 15% and 14% CAGR, respectively, over FY11E-13E.
We have valued the stock at | 147/share. We are initiating coverage on
the stock with ADD rating.
We have valued the core business at | 133 per share (80% weight to
FY12E with a multiple of 10x and 20% weight to FY12E book value at 1x)
and also added | 14/share arising out of JMC’s stake (67%). The SOTP
target works out to | 147/share. We have ascribed lower earnings multiple
to KPTL as the present macro headwinds and recent dilution that the
company has done will be RoE dilutive in the medium term.
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