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DIAMOND POWER INFRASTRUCTURE LTD
PRICE: RS.142 RECOMMENDATION: BUY
TARGET PRICE: RS.228 FY12E P/E: 4.9X
q Numbers are below our expectations mainly on account of slippage in
conductor and EPC projects revenues. The cables segment has performed
well. We understand that the demand in this segment has held well despite
the weakness in industrial and power sector capex. We see earnings
declining in FY12 on the back of lower conductor and EPC revenues
coupled with higher interest and depreciation (due to commissioning of
EHV cables plant).
q The company has completed type testing for EHV cables and approval is
awaited shortly. However, we expect meaningful contribution from
transmission tower manufacturing and EHV cables to take place in FY13.
q The stock is trading at very attractive valuations. We maintain BUY with
a target price of Rs 228 (Rs 264 earlier).
q Concerns: Deteriorating financial health of SEBs remains a key concern
for the stock.
Weak conductor volumes and subdued order backlog in EPC result
in degrowth in revenues
Revenue for the quarter declined 3% yoy on account of decline in conductor and
EPC segment. The ordering of conducors from the T&D utilities has been low in the
previous year due to delay in placing orders by PGCIL. In the EPC segment, the company
had consciously been selective in bidding for orders as the pricing was unremunerative.
The cables segment posted robust growth aided by capacity addition and sustained
demand from the power and industrial sector. DPIL has raised its LT cables capacity
from 8800 kms to 33000 kms and HT cables capacity from 2800 kms to 5600 kms
in Q4 FY10.
The company added 100 plus distributors for penetrating the retail segment of the
cables market. By virtue of this, it now has a pan india presence.
Maintained margins at healthy level despite material price inflation
Despite the all-round commodity price inflation especially in copper and aluminum,
the company managed to largely preserve margins. The company managed to secure
healthy margins in conductor segment on account of its focus on distribution
conductors (thinner compared to transmission conductors). Also, compared to larger
peers who are mainly into ACSR conductors, DPIL has a higher share of All Aluminum
Alloy Conductor ("AAAC"). Competitors in recent quarters (Sterlite Tech and
Apar Ind) have been reporting severe margin loss in conductors.
Employee costs rose sharply during the quarter on account of addition of employees
for its expansion projects.
Tax shield from Apex Transformers limits tax rate in FY12
The company's subsidiary Apex Transformers (which was under BIFR) has commenced
manufacturing of transformers in current fiscal. Apex has a capacity of
12500 MVA of power transformer and has accumulated losses of Rs 1.8 bn, which is
expected to provide tax shield to the company.
For the quarter, the company reported tax rate of 20% which was due to commencement
of operations at Apex Transformers.
Capital employed significantly up
Capital employed is up sharply as the company would have capitalized its investment
in the EHV cables plant which was commissioned during the quarter.
Other developments
n DPIL has commissioned Extra High Voltage Cables plant to manufacture 500 KV
cables. The plant has been supplied by Maillefer, France. Globally, there are only
seven manufacturers with capability to make upto 500 KV cables.
n The company has started trial production for the plant and expects to manufacture
33-66 KV cables and progressively move towards 220 KV and above EHV
cables. The plant is highly automated and foreign technicians are working on
imparting training to the plant personnel.
n The company is in the process of bidding for a 600 kms tender for EHV cables
from the transmission utility in Gujarat GETCO.
n The basic materials in EHV cables remain the same as for LT/HT cables ie copper,
Aluminum and XLPE (different grades for various KV ratings). The insulating
material is largely imported.
n The market demand in the EHV segment is rapidly gaining momentum with fast
rate of urbanization across the country. Due to environmental issues and right-ofway
constraints, construction of overhead tower and power lines are no longer
feasible in densely urbanized areas. Thus, the other alternative to transmit power
in cities is through EHV underground power transmission systems using power
cables. The EHV underground cable transmission system has advantages of lower
gestation period for implementation, free from land acquisition & right-of-way
problems, lower transmission losses, freedom of maintenance and lower lifetime-
cost.
n It is estimated that the demand for EHV cables in the country for the year 2008-
09 was Rs 4.0 bn and in year 2009-10 at Rs. 9.0 bn. The demand is expected to
continue to grow at a high rate.
n In the current fiscal, the company expects to generate revenues between Rs 500-
750 mn from the EHV cables segment.
n The company's transmission towers plant with a capacity of 48000 mtpa has
commenced commercial operations. The Company has recently received an order
of Rs 780 mn to supply tower materials for 400 KV Quad and twin lines aggregating
13531 MT to be supplied over the next 6 months. The tower segment
should contribute revenues between Rs 1.0-1.5 bn in FY12.
n In view of the competition and unfavourable payment terms, the company is
going slow on the EPC segment and is being selective in order bidding. This segment
is likely to post degrowth in the current fiscal.
n The gross block of the company stands at Rs 3.6 bn up due to capitalization of
towers and EHV cables manufacturing facility.
n Total borrowings stand at Rs 3.7 bn comprising of Rs 1.5 bn of long term borrowing.
The average cost of borrowing is 12.4%.
n Current order backlog stands at Rs 15 bn vs Rs 14.5 bn.
Earnings Revision - Downward revision due to
n Lower than expected numbers in first quarter
n Continued softness in demand for conductors and subdued EPC projects order
backlog
n Weakening in industrial capex as reflected by moderation in IIP trend
Valuation and Recommendation
n DPIL is trading at 4.9x FY12 earnings. On an EV/EBITDA basis, the stock is trading
at 4.5x FY12 EBITDA.
n We maintain BUY on DPIL with a revised price target of Rs 228 (Rs.264 earlier)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DIAMOND POWER INFRASTRUCTURE LTD
PRICE: RS.142 RECOMMENDATION: BUY
TARGET PRICE: RS.228 FY12E P/E: 4.9X
q Numbers are below our expectations mainly on account of slippage in
conductor and EPC projects revenues. The cables segment has performed
well. We understand that the demand in this segment has held well despite
the weakness in industrial and power sector capex. We see earnings
declining in FY12 on the back of lower conductor and EPC revenues
coupled with higher interest and depreciation (due to commissioning of
EHV cables plant).
q The company has completed type testing for EHV cables and approval is
awaited shortly. However, we expect meaningful contribution from
transmission tower manufacturing and EHV cables to take place in FY13.
q The stock is trading at very attractive valuations. We maintain BUY with
a target price of Rs 228 (Rs 264 earlier).
q Concerns: Deteriorating financial health of SEBs remains a key concern
for the stock.
Weak conductor volumes and subdued order backlog in EPC result
in degrowth in revenues
Revenue for the quarter declined 3% yoy on account of decline in conductor and
EPC segment. The ordering of conducors from the T&D utilities has been low in the
previous year due to delay in placing orders by PGCIL. In the EPC segment, the company
had consciously been selective in bidding for orders as the pricing was unremunerative.
The cables segment posted robust growth aided by capacity addition and sustained
demand from the power and industrial sector. DPIL has raised its LT cables capacity
from 8800 kms to 33000 kms and HT cables capacity from 2800 kms to 5600 kms
in Q4 FY10.
The company added 100 plus distributors for penetrating the retail segment of the
cables market. By virtue of this, it now has a pan india presence.
Maintained margins at healthy level despite material price inflation
Despite the all-round commodity price inflation especially in copper and aluminum,
the company managed to largely preserve margins. The company managed to secure
healthy margins in conductor segment on account of its focus on distribution
conductors (thinner compared to transmission conductors). Also, compared to larger
peers who are mainly into ACSR conductors, DPIL has a higher share of All Aluminum
Alloy Conductor ("AAAC"). Competitors in recent quarters (Sterlite Tech and
Apar Ind) have been reporting severe margin loss in conductors.
Employee costs rose sharply during the quarter on account of addition of employees
for its expansion projects.
Tax shield from Apex Transformers limits tax rate in FY12
The company's subsidiary Apex Transformers (which was under BIFR) has commenced
manufacturing of transformers in current fiscal. Apex has a capacity of
12500 MVA of power transformer and has accumulated losses of Rs 1.8 bn, which is
expected to provide tax shield to the company.
For the quarter, the company reported tax rate of 20% which was due to commencement
of operations at Apex Transformers.
Capital employed significantly up
Capital employed is up sharply as the company would have capitalized its investment
in the EHV cables plant which was commissioned during the quarter.
Other developments
n DPIL has commissioned Extra High Voltage Cables plant to manufacture 500 KV
cables. The plant has been supplied by Maillefer, France. Globally, there are only
seven manufacturers with capability to make upto 500 KV cables.
n The company has started trial production for the plant and expects to manufacture
33-66 KV cables and progressively move towards 220 KV and above EHV
cables. The plant is highly automated and foreign technicians are working on
imparting training to the plant personnel.
n The company is in the process of bidding for a 600 kms tender for EHV cables
from the transmission utility in Gujarat GETCO.
n The basic materials in EHV cables remain the same as for LT/HT cables ie copper,
Aluminum and XLPE (different grades for various KV ratings). The insulating
material is largely imported.
n The market demand in the EHV segment is rapidly gaining momentum with fast
rate of urbanization across the country. Due to environmental issues and right-ofway
constraints, construction of overhead tower and power lines are no longer
feasible in densely urbanized areas. Thus, the other alternative to transmit power
in cities is through EHV underground power transmission systems using power
cables. The EHV underground cable transmission system has advantages of lower
gestation period for implementation, free from land acquisition & right-of-way
problems, lower transmission losses, freedom of maintenance and lower lifetime-
cost.
n It is estimated that the demand for EHV cables in the country for the year 2008-
09 was Rs 4.0 bn and in year 2009-10 at Rs. 9.0 bn. The demand is expected to
continue to grow at a high rate.
n In the current fiscal, the company expects to generate revenues between Rs 500-
750 mn from the EHV cables segment.
n The company's transmission towers plant with a capacity of 48000 mtpa has
commenced commercial operations. The Company has recently received an order
of Rs 780 mn to supply tower materials for 400 KV Quad and twin lines aggregating
13531 MT to be supplied over the next 6 months. The tower segment
should contribute revenues between Rs 1.0-1.5 bn in FY12.
n In view of the competition and unfavourable payment terms, the company is
going slow on the EPC segment and is being selective in order bidding. This segment
is likely to post degrowth in the current fiscal.
n The gross block of the company stands at Rs 3.6 bn up due to capitalization of
towers and EHV cables manufacturing facility.
n Total borrowings stand at Rs 3.7 bn comprising of Rs 1.5 bn of long term borrowing.
The average cost of borrowing is 12.4%.
n Current order backlog stands at Rs 15 bn vs Rs 14.5 bn.
Earnings Revision - Downward revision due to
n Lower than expected numbers in first quarter
n Continued softness in demand for conductors and subdued EPC projects order
backlog
n Weakening in industrial capex as reflected by moderation in IIP trend
Valuation and Recommendation
n DPIL is trading at 4.9x FY12 earnings. On an EV/EBITDA basis, the stock is trading
at 4.5x FY12 EBITDA.
n We maintain BUY on DPIL with a revised price target of Rs 228 (Rs.264 earlier)
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