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Industrials
India
T&D – Tension and Despair. Recent meetings with T&D companies reveal a continued
lack of traction. Areva cited continued pressure (demand and overseas competition)
with the recent separation of circuit breakers from substation package scope (by PGCIL)
reducing entry barriers even further. Crompton may have a sedate FY2012E in domestic
power as well; the consumer segment may grow as capex is put in to leverage
opportunities. The only silver lining was from Kalpataru with PGCIL excluding nonperforming
vendors in recent bids.
Areva: Stays pessimistic; separating circuit breakers from substation lowers entry barriers
Key takeaways from our meeting with Areva management include (1) PGCIL has started to exclude
circuit breakers from substation package ordering – we believe this may reduce entry barrier for
non-T&D equipment manufacturing in bidding for substation execution business, (Siemens &
Areva have sizeable business in that area) (2) no respite from stiff Chinese/ Korean competition,
(3) Areva most impacted due to almost 100% exposure to Indian T&D; Siemens and Crompton
have overseas presence and consumer business etc. and (4) SEB business may be a poor bargain as
even though margins may be better but capital requirements are much higher.
Kalpataru – Silver lining - PGCIL excludes non-performing vendors; exp. over aggression
Key takeaways from our meeting with Kalpataru management included (1) PGCIL has recently
awarded projects to Kalpataru, KEC, L&T even though these were not L1; disqualified non
performing vendors even post opening the price bid based on previous track record, (2) building
railways EPC business in areas such as track laying etc. (~Rs80 bn p.a. opportunity - about 1/3rd of
NHAI roads in terms of scale), (3) cites challenge for labor ( interestingly originating from NREGS),
pricing pressure and exposure on commodity prices (overseas orders) as key challenges, and (4)
justifies higher working capital relative to peers on basis of complete in-house manufacturing
versus outsourcing in some peers; possibly gains on margins and execution timeline.
Crompton - domestic power likely sedate in FY12 also, consumer to grow on capex and opp.
Key takeaways from our meeting with Crompton management included (1) domestic power
segment remains troubled and considering delivery timeline of about nine months and current
order booking track record, FY2012E revenues growth in this segment may remain sedate; (2)
slightly more confident on margins with internal processes counteracting external pressures, (3)
share of exports business in standalone power segment has declined to about 40-45% in 9MFY11
from 50%+ earlier increasing exposure to domestic T&D sector. We note strong capex in growing
consumer and industrial businesses with capacity expansion/fresh capacity in household fans, CFLs,
appliances, pumps, industrial fans, drives, generators etc. The overseas subsidiary business would
also help revenue growth, but this is unlikely to be strong enough to support operating leverageled
margin expansion.
Prefer Crompton on diversified business, resilient consumer business, over seas business recovery
We reiterate our BUY rating on Crompton (TP: Rs310) based on (1) diversified business profile,
(2) resilient consumer-facing business, (3) strong cash flow generation characteristics, and (4)
recovery in overseas subsidiaries.
We retain our negative stance on ABB (REDUCE, TP: Rs660) and Siemens (REDUCE, TP: Rs735),
primarily based on sector level pricing pressures, company specific issues, volatility in operating
performance and very high valuations and growth expectations.
Key takeaways from the Areva management meeting
PGCIL excludes circuit breakers from substation package – reduces entry barrier for
non-T&D players
PGCIL recently modified its bidding criteria and has now excluded circuit breakers from the
scope of its substation package orders. PGCIl may have started ordering this equipment
separately as it does for transformers. This is likely to significantly reduce the entry barrier for
non-T&D equipment manufacturing players. Transformers, which form about 35% of the
total substation cost, were already excluded from PGCIL’s substation package tenders.
We believe this could lead to heightened competition from EPC players like Jyoti Structures,
KEC, Kalpataru Power, L&T etc.
No respite from stiff Chinese/ Korean competition
Areva management cited continued price pressure from international competition in the 765
kV equipment supply space. The management cited unrealistic pricing by Chinese/ Korean
vendors – quoting price bids at lower then Areva’s raw material cost itself. In such an
environment, sales growth seems very unlikely. Even if sales might grow in physical (MVA)
terms total revenue is unlikely to record a growth. This is also reflected in order inflows for
Areva where average size of the order has reduced to about Rs1.5 bn from about Rs2-2.5
bn earlier. The management continues to maintain a very cautious outlook given the pricing
pressures in the T&D segment.
Areva most impacted due to almost 100% exposure to Indian T&D; Siemens and
Crompton – limited impact
Areva is likely to be the most impacted by the competition/ pricing pressure as it has almost
100% of its revenues exposed to the domestic T&D segment. The next in line would be ABB
which has about 55-60% of total revenues exposed to the domestic T&D market.
Diversification of business and geographies has helped minimize the impact on Siemens and
Crompton. Power T&D segment contributes to about 40% of Siemens’ total revenues.
However, Siemens also books the revenues of execution of certain international T&D orders
(Kahramaa order in Qatar) through its Indian arm. Hence, actual exposure to Indian T&D
would be even lower.
For Crompton, standalone power segment contributed to only about 25% of the
consolidated revenues. Furthermore, about 40-45% of these revenues is from exports
business and hence actual contribution from the domestic T&D segment stands at only
about 15% of the consolidated revenues.
To focus on 400 kV and SEB/ private sector – international competition not present
Areva management cited that the company is likely to increase focus on PGCIL’s 400 kV and
the state/ private sector orders. International competition remains concentrated in PGCIL’s
765 kV product segment and hence incremental growth is likely to come from these other
segments. The company would aim towards getting more project-side business from the
state and private sector. However, the management also cited that progress in these
segments has remained relatively sedate so far. Private sector spend are yet to recover and
tractions remains slow so far. Even in SEBs, while there are large plans in the T&D space,
actual progress on the ground remains slow.
SEBs offer better margins than PGCIL and private sector albeit with payment delays
Areva management cited that SEBs offer better margin levels versus PGCIL or private sector
orders. However, delayed payments (due to procedural issues) lead to higher working capital
requirements. The management said that SEBs typically do not release payment in less than
150-200 days.
Crompton - domestic power remains troubled; confident of sustained margins
Crompton management said that the domestic power segment of the company remains
sedate with relatively flat revenues in FY2011. The management also cited that FY2012E
revenues also likely to remain sedate based on order inflow trends in FY2011. Furthermore,
share of exports business in standalone power segment has declined to about 40-45% in
9MFY11 from 50%+ earlier increasing exposure to domestic T&D sector. The management,
however, remains confident on maintaining margins at the consolidated level despite the
pricing pressures. Overseas subsidiary business would also help revenue growth, but the
growth extent unlikely to support operating leverage-led margin expansion.
Strong industrials and consumers business to support growth in FY2012E
Industrials and consumer business segments of Crompton would also help drive the growth
of the company in FY2012E. Crompton management has guided for about 16-18% growth
in standalone business in FY2012E and similar growth (10-12%) in the overseas subsidiaries.
The standalone growth would be led by 10-12% growth in the power segment, 18-20%
growth in industrials and 25%+ growth in consumers.
The company is planning several expansion plans in these segments primarily in fans, pumps,
motors and drives. We note strong capex in growing consumer and industrial businesses
with capacity expansion/fresh capacity in household fans, CFLs, appliances, pumps, industrial
fans, drives, generators etc.
Crompton not in substation segment, only product orders of PGCIL
We note that Crompton does not participate in the substation package space of PGCIL with
very low market share. Siemens, Areva and ABB are the leading domestic players in this
segment, with KEC, Jyoti also gaining traction in this segment in the recent past. Crompton
primarily participates in the equipment supply/ product orders of PGCIL. However, its market
share in total PGCIL awards has declined to about 8-10% in FY2011E so far from about 25-
28% in FY2009.
Prefer Crompton with on diversified business and overseas business recovery
We reiterate our BUY rating on Crompton based on (1) diversified business profile across
geographies and segments, (2) strong pick-up seen in overseas subsidiaries in the past
quarters, (3) relatively resilient consumer-facing businesses, (4) potential for strong near-term
revenue growth and margins in international subsidiaries on strong trend witnessed in 9M
and low base effect of 4QFY10, (5) strong cash flow generation characteristics, and (6)
potential upside from higher participation in substation package tenders.
Our target price of Rs310/share is comprised of (1) Rs300/share based on 19X March-12E
earnings (presently trading at 16.5X) and (2) Rs10/share for stake in Avantha Power.
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, and (2) slowerthan-
expected pick-up in international demand, (3) Euro area business (17% of business)
and Euro currency (translation), and (4) change in guard at the top.
Remain negative in Siemens and ABB
Our negative stance on ABB (REDUCE, TP: Rs660) and Siemens (REDUCE, TP: Rs735) is based
on pricing pressures, company specific issues, volatility in operating performance and very
high valuations and growth expectations.
Transmission line - Kalpataru meeting - PGCIL picks experience over aggression
PGCIL has recently awarded projects to Kalpataru, KEC, L&T even though these were not L1;
disqualified non-performing vendors post price bid, (2) railways EPC business – Track laying
etc. is about Rs80 bn p.a. opportunity (about 1/3rd of NHAI roads opportunity), (3) cites
challenges for labor (originating from NREGS), pricing pressure and exposure on commodity
prices (overseas orders) as key challenges, and (4) higher working capital relative to peers;
justifies on basis of complete in-house manufacturing versus outsourcing in some peers;
possibly gains on margins.
Key takeaways from the Kalpataru management meeting
PGCIL has recently awarded projects to Kalpataru, KEC, L&T, Gammon even though
these were not L1; disqualified non performing vendors post price bid
PGCIL has recently awarded three transmission line packages (worth Rs5.36 bn) to Kalpataru
as well as three orders to KEC worth Rs2.24 bn. The management also cited that orders
have also been placed on L&T (3 orders) and Gammon (however, these companies have not
yet declared the same as yet). These projects have been awarded to these main transmission
line contractors despite the fact that in none of these orders were they L1.
Kalpataru management cited that PGCIL disqualified several smaller players with aggressive
prices based on poor delivery track record (cited that disqualification was done post calling
for price bids). This would be a key positive for companies such as KEC, Kalpataru, Jyoti etc.
Railways EPC business – Track laying etc. is about Rs80 bn p.a. opportunity (about
1/3rd to ¼th of roads opportunity)
The company has recently ventured into the railways EPC business (similar to KEC; KEC was
initially present only in the railway electrification portion and now has recently expanded its
scope to complete railways infrastructure EPC). Kalpataru recently won four contracts to the
tune of Rs3.25 bn in this segment including (1) track renewal of 85 km from Bangladesh
Railways, (2) construction of second section of Kharagpur to Haldia railway line and (3) two
track laying projects from Eastern Railways and South-Eastern railways.
Cites challenge for skilled labor (originating from NREGS), pricing pressure and
exposure on commodity prices (overseas orders) as key challenges
Labor shortage interestingly accentuated by NREGS. Kalpataru management cited
even sourcing of unskilled labor remains an issue and NREGS scheme (guaranteeing
minimum employment in home district) of government may have accentuated the
challenge.
Unrealistic pricing by competition. Very sharp price cutting by competition, especially
in the domestic T&D sector remain another key challenge in the industry. Management
cited price cuts to the extent of 20-30% by competitor (new entrants) with an aim to try
and get a foothold into the industry.
Exposure to commodity price fluctuations in overseas orders. Kalpataru faces the
risk of exposure to commodity price fluctuations in overseas orders – no price variation
clause. Some commodities such as zinc and copper are hedged it is not possible for the
company to hedge steel. However, the management has cited that certain recent
international order wins (last two international order wins in Kenya and Congo worth
US$225 mn) have been awarded with a price variation clause. Most of the domestic
orders have price variation clause built in.
Higher working capital relative to peers; justifies on basis of complete in-house
manufacturing versus outsourcing in some cases
The T&D/ EPC business is typically a working capital intensive business, which is also seen
across other EPC players (construction companies, BGR etc). Kalpataru operates at net
working capital levels of about 150-175 days of sales (reported net working capital of 155
days of sale at end-FY2010). This is, however, higher than its peers such as KEC (77 days of
sales in FY2010) and Jyoti Structures (117 days of sales in FY2010). Part of the higher
working capital requirement versus KEC could be justified by the fact that almost 100% of
tower manufacturing is done by in-house factories for Kalpataru versus only about 60-70%
for KEC (working capital for outsourced manufacturing is not included in balance sheet).
Gains on execution and thus on margins - faster completion by even one month
could potentially add 200 bps to margins
One of the key reasons for opting for full in-house production is control over time lines. The
management cited that meeting an execution timeline is extremely important in the business
and even a one month faster completion of a project could add about 200 bps to the
project margins. The company has also aligned its incentive scheme for project managers to
the execution time lines (80% weightage of KPIs on project completion on/ before time).
Aims at broad EPC spectrum (70%), asset ownership (20%) and manufacturing (10%)
mix
The company is looking at establishing itself as a leading EPC player with presence in power,
railways, civil contracting (via a subsidiary – JMC) and oil & gas. By FY2013E, the company
aims to achieve 70% of its revenues from the EPC business, about 20% from asset
ownership business (currently executing a transmission line BOOT project and has two bio
mass energy generation plants) and remaining 10% from manufacturing.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
T&D – Tension and Despair. Recent meetings with T&D companies reveal a continued
lack of traction. Areva cited continued pressure (demand and overseas competition)
with the recent separation of circuit breakers from substation package scope (by PGCIL)
reducing entry barriers even further. Crompton may have a sedate FY2012E in domestic
power as well; the consumer segment may grow as capex is put in to leverage
opportunities. The only silver lining was from Kalpataru with PGCIL excluding nonperforming
vendors in recent bids.
Areva: Stays pessimistic; separating circuit breakers from substation lowers entry barriers
Key takeaways from our meeting with Areva management include (1) PGCIL has started to exclude
circuit breakers from substation package ordering – we believe this may reduce entry barrier for
non-T&D equipment manufacturing in bidding for substation execution business, (Siemens &
Areva have sizeable business in that area) (2) no respite from stiff Chinese/ Korean competition,
(3) Areva most impacted due to almost 100% exposure to Indian T&D; Siemens and Crompton
have overseas presence and consumer business etc. and (4) SEB business may be a poor bargain as
even though margins may be better but capital requirements are much higher.
Kalpataru – Silver lining - PGCIL excludes non-performing vendors; exp. over aggression
Key takeaways from our meeting with Kalpataru management included (1) PGCIL has recently
awarded projects to Kalpataru, KEC, L&T even though these were not L1; disqualified non
performing vendors even post opening the price bid based on previous track record, (2) building
railways EPC business in areas such as track laying etc. (~Rs80 bn p.a. opportunity - about 1/3rd of
NHAI roads in terms of scale), (3) cites challenge for labor ( interestingly originating from NREGS),
pricing pressure and exposure on commodity prices (overseas orders) as key challenges, and (4)
justifies higher working capital relative to peers on basis of complete in-house manufacturing
versus outsourcing in some peers; possibly gains on margins and execution timeline.
Crompton - domestic power likely sedate in FY12 also, consumer to grow on capex and opp.
Key takeaways from our meeting with Crompton management included (1) domestic power
segment remains troubled and considering delivery timeline of about nine months and current
order booking track record, FY2012E revenues growth in this segment may remain sedate; (2)
slightly more confident on margins with internal processes counteracting external pressures, (3)
share of exports business in standalone power segment has declined to about 40-45% in 9MFY11
from 50%+ earlier increasing exposure to domestic T&D sector. We note strong capex in growing
consumer and industrial businesses with capacity expansion/fresh capacity in household fans, CFLs,
appliances, pumps, industrial fans, drives, generators etc. The overseas subsidiary business would
also help revenue growth, but this is unlikely to be strong enough to support operating leverageled
margin expansion.
Prefer Crompton on diversified business, resilient consumer business, over seas business recovery
We reiterate our BUY rating on Crompton (TP: Rs310) based on (1) diversified business profile,
(2) resilient consumer-facing business, (3) strong cash flow generation characteristics, and (4)
recovery in overseas subsidiaries.
We retain our negative stance on ABB (REDUCE, TP: Rs660) and Siemens (REDUCE, TP: Rs735),
primarily based on sector level pricing pressures, company specific issues, volatility in operating
performance and very high valuations and growth expectations.
Key takeaways from the Areva management meeting
PGCIL excludes circuit breakers from substation package – reduces entry barrier for
non-T&D players
PGCIL recently modified its bidding criteria and has now excluded circuit breakers from the
scope of its substation package orders. PGCIl may have started ordering this equipment
separately as it does for transformers. This is likely to significantly reduce the entry barrier for
non-T&D equipment manufacturing players. Transformers, which form about 35% of the
total substation cost, were already excluded from PGCIL’s substation package tenders.
We believe this could lead to heightened competition from EPC players like Jyoti Structures,
KEC, Kalpataru Power, L&T etc.
No respite from stiff Chinese/ Korean competition
Areva management cited continued price pressure from international competition in the 765
kV equipment supply space. The management cited unrealistic pricing by Chinese/ Korean
vendors – quoting price bids at lower then Areva’s raw material cost itself. In such an
environment, sales growth seems very unlikely. Even if sales might grow in physical (MVA)
terms total revenue is unlikely to record a growth. This is also reflected in order inflows for
Areva where average size of the order has reduced to about Rs1.5 bn from about Rs2-2.5
bn earlier. The management continues to maintain a very cautious outlook given the pricing
pressures in the T&D segment.
Areva most impacted due to almost 100% exposure to Indian T&D; Siemens and
Crompton – limited impact
Areva is likely to be the most impacted by the competition/ pricing pressure as it has almost
100% of its revenues exposed to the domestic T&D segment. The next in line would be ABB
which has about 55-60% of total revenues exposed to the domestic T&D market.
Diversification of business and geographies has helped minimize the impact on Siemens and
Crompton. Power T&D segment contributes to about 40% of Siemens’ total revenues.
However, Siemens also books the revenues of execution of certain international T&D orders
(Kahramaa order in Qatar) through its Indian arm. Hence, actual exposure to Indian T&D
would be even lower.
For Crompton, standalone power segment contributed to only about 25% of the
consolidated revenues. Furthermore, about 40-45% of these revenues is from exports
business and hence actual contribution from the domestic T&D segment stands at only
about 15% of the consolidated revenues.
To focus on 400 kV and SEB/ private sector – international competition not present
Areva management cited that the company is likely to increase focus on PGCIL’s 400 kV and
the state/ private sector orders. International competition remains concentrated in PGCIL’s
765 kV product segment and hence incremental growth is likely to come from these other
segments. The company would aim towards getting more project-side business from the
state and private sector. However, the management also cited that progress in these
segments has remained relatively sedate so far. Private sector spend are yet to recover and
tractions remains slow so far. Even in SEBs, while there are large plans in the T&D space,
actual progress on the ground remains slow.
SEBs offer better margins than PGCIL and private sector albeit with payment delays
Areva management cited that SEBs offer better margin levels versus PGCIL or private sector
orders. However, delayed payments (due to procedural issues) lead to higher working capital
requirements. The management said that SEBs typically do not release payment in less than
150-200 days.
Crompton - domestic power remains troubled; confident of sustained margins
Crompton management said that the domestic power segment of the company remains
sedate with relatively flat revenues in FY2011. The management also cited that FY2012E
revenues also likely to remain sedate based on order inflow trends in FY2011. Furthermore,
share of exports business in standalone power segment has declined to about 40-45% in
9MFY11 from 50%+ earlier increasing exposure to domestic T&D sector. The management,
however, remains confident on maintaining margins at the consolidated level despite the
pricing pressures. Overseas subsidiary business would also help revenue growth, but the
growth extent unlikely to support operating leverage-led margin expansion.
Strong industrials and consumers business to support growth in FY2012E
Industrials and consumer business segments of Crompton would also help drive the growth
of the company in FY2012E. Crompton management has guided for about 16-18% growth
in standalone business in FY2012E and similar growth (10-12%) in the overseas subsidiaries.
The standalone growth would be led by 10-12% growth in the power segment, 18-20%
growth in industrials and 25%+ growth in consumers.
The company is planning several expansion plans in these segments primarily in fans, pumps,
motors and drives. We note strong capex in growing consumer and industrial businesses
with capacity expansion/fresh capacity in household fans, CFLs, appliances, pumps, industrial
fans, drives, generators etc.
Crompton not in substation segment, only product orders of PGCIL
We note that Crompton does not participate in the substation package space of PGCIL with
very low market share. Siemens, Areva and ABB are the leading domestic players in this
segment, with KEC, Jyoti also gaining traction in this segment in the recent past. Crompton
primarily participates in the equipment supply/ product orders of PGCIL. However, its market
share in total PGCIL awards has declined to about 8-10% in FY2011E so far from about 25-
28% in FY2009.
Prefer Crompton with on diversified business and overseas business recovery
We reiterate our BUY rating on Crompton based on (1) diversified business profile across
geographies and segments, (2) strong pick-up seen in overseas subsidiaries in the past
quarters, (3) relatively resilient consumer-facing businesses, (4) potential for strong near-term
revenue growth and margins in international subsidiaries on strong trend witnessed in 9M
and low base effect of 4QFY10, (5) strong cash flow generation characteristics, and (6)
potential upside from higher participation in substation package tenders.
Our target price of Rs310/share is comprised of (1) Rs300/share based on 19X March-12E
earnings (presently trading at 16.5X) and (2) Rs10/share for stake in Avantha Power.
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, and (2) slowerthan-
expected pick-up in international demand, (3) Euro area business (17% of business)
and Euro currency (translation), and (4) change in guard at the top.
Remain negative in Siemens and ABB
Our negative stance on ABB (REDUCE, TP: Rs660) and Siemens (REDUCE, TP: Rs735) is based
on pricing pressures, company specific issues, volatility in operating performance and very
high valuations and growth expectations.
Transmission line - Kalpataru meeting - PGCIL picks experience over aggression
PGCIL has recently awarded projects to Kalpataru, KEC, L&T even though these were not L1;
disqualified non-performing vendors post price bid, (2) railways EPC business – Track laying
etc. is about Rs80 bn p.a. opportunity (about 1/3rd of NHAI roads opportunity), (3) cites
challenges for labor (originating from NREGS), pricing pressure and exposure on commodity
prices (overseas orders) as key challenges, and (4) higher working capital relative to peers;
justifies on basis of complete in-house manufacturing versus outsourcing in some peers;
possibly gains on margins.
Key takeaways from the Kalpataru management meeting
PGCIL has recently awarded projects to Kalpataru, KEC, L&T, Gammon even though
these were not L1; disqualified non performing vendors post price bid
PGCIL has recently awarded three transmission line packages (worth Rs5.36 bn) to Kalpataru
as well as three orders to KEC worth Rs2.24 bn. The management also cited that orders
have also been placed on L&T (3 orders) and Gammon (however, these companies have not
yet declared the same as yet). These projects have been awarded to these main transmission
line contractors despite the fact that in none of these orders were they L1.
Kalpataru management cited that PGCIL disqualified several smaller players with aggressive
prices based on poor delivery track record (cited that disqualification was done post calling
for price bids). This would be a key positive for companies such as KEC, Kalpataru, Jyoti etc.
Railways EPC business – Track laying etc. is about Rs80 bn p.a. opportunity (about
1/3rd to ¼th of roads opportunity)
The company has recently ventured into the railways EPC business (similar to KEC; KEC was
initially present only in the railway electrification portion and now has recently expanded its
scope to complete railways infrastructure EPC). Kalpataru recently won four contracts to the
tune of Rs3.25 bn in this segment including (1) track renewal of 85 km from Bangladesh
Railways, (2) construction of second section of Kharagpur to Haldia railway line and (3) two
track laying projects from Eastern Railways and South-Eastern railways.
Cites challenge for skilled labor (originating from NREGS), pricing pressure and
exposure on commodity prices (overseas orders) as key challenges
Labor shortage interestingly accentuated by NREGS. Kalpataru management cited
even sourcing of unskilled labor remains an issue and NREGS scheme (guaranteeing
minimum employment in home district) of government may have accentuated the
challenge.
Unrealistic pricing by competition. Very sharp price cutting by competition, especially
in the domestic T&D sector remain another key challenge in the industry. Management
cited price cuts to the extent of 20-30% by competitor (new entrants) with an aim to try
and get a foothold into the industry.
Exposure to commodity price fluctuations in overseas orders. Kalpataru faces the
risk of exposure to commodity price fluctuations in overseas orders – no price variation
clause. Some commodities such as zinc and copper are hedged it is not possible for the
company to hedge steel. However, the management has cited that certain recent
international order wins (last two international order wins in Kenya and Congo worth
US$225 mn) have been awarded with a price variation clause. Most of the domestic
orders have price variation clause built in.
Higher working capital relative to peers; justifies on basis of complete in-house
manufacturing versus outsourcing in some cases
The T&D/ EPC business is typically a working capital intensive business, which is also seen
across other EPC players (construction companies, BGR etc). Kalpataru operates at net
working capital levels of about 150-175 days of sales (reported net working capital of 155
days of sale at end-FY2010). This is, however, higher than its peers such as KEC (77 days of
sales in FY2010) and Jyoti Structures (117 days of sales in FY2010). Part of the higher
working capital requirement versus KEC could be justified by the fact that almost 100% of
tower manufacturing is done by in-house factories for Kalpataru versus only about 60-70%
for KEC (working capital for outsourced manufacturing is not included in balance sheet).
Gains on execution and thus on margins - faster completion by even one month
could potentially add 200 bps to margins
One of the key reasons for opting for full in-house production is control over time lines. The
management cited that meeting an execution timeline is extremely important in the business
and even a one month faster completion of a project could add about 200 bps to the
project margins. The company has also aligned its incentive scheme for project managers to
the execution time lines (80% weightage of KPIs on project completion on/ before time).
Aims at broad EPC spectrum (70%), asset ownership (20%) and manufacturing (10%)
mix
The company is looking at establishing itself as a leading EPC player with presence in power,
railways, civil contracting (via a subsidiary – JMC) and oil & gas. By FY2013E, the company
aims to achieve 70% of its revenues from the EPC business, about 20% from asset
ownership business (currently executing a transmission line BOOT project and has two bio
mass energy generation plants) and remaining 10% from manufacturing.
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