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DIAMOND POWER INFRASTRUCTURE LTD
PRICE: RS.110 RECOMMENDATION: BUY
TARGET PRICE: RS.173 FY12E P/E: 4.6X
q We reiterate BUY on Diamond Power Infrastructure taking note of the
correction in stock price making valuations attractive for investors.
q We have further reduced our earnings forecast in view of weak Q1 FY12
numbers. We forecast a decline in earnings in FY12 on account of decline
in margins and higher depreciation and interest costs. We expect a turnaround
in the growth trajectory in FY13 as the EHV cables plant start
contributing in a meaningful way.
q Post our earnings revision, we revise target price to Rs 173 (Rs 228 earlier).
Dividend yield is attractive at 2.8%.
q Concerns: Deteriorating financial health of SEBs remains a key concern
for the stock.
Completed significant expansion in manufacturing infrastucture
in FY12
In the past 12-15 months, DPIL has expanded its HT cables manufacturing capacity
and has set up greenfield plants for making transmission towers and EHV cables.
The transmission towers plant is operational and is executing orders worth Rs 780
mn. The EHV cables plant is undergoing trial runs, which may last for 3-5 months. It
also entered into a Joint Venture with Utkal Galvanizers Limited to get orders for
220KV - 765 KV Transmission Lines. Thus, the company now has captive manufacturing
facility for most of the critical components that go into the T&D value chain.
Post this significant round of capacity augmentation, the company has adequate
room to cater to market demand.
Restructured loans to bring down the cost of funds. Also revamped
its board
During the previous fiscal, the company raised funds through QIP (Rs 1.4 bn) and
optimized its cost of borrowings by replacing the high cost loans. It replaced high
cost long term debts worth Rs. 1.5 bn from AXIS Bank and others (interest rate of
13.25 per cent) with funds from ICICI Bank (having an interest rate of 10.45 per
cent) and also repaid entire debt of Clearwater Capital Partners Ltd.
During FY11, the company inducted strategic investor into the company and also
initiated a revamp of board to induct highly respected professionals. The company
has nine directors on its board, out of which five are independent.
Expansion plans
The Company is working on further expansion of its existing conductor division to
expand its capacity from 50500 MT to 250000 MT and Medium Voltage facility both
amounting to an aggregate of Rs. 1.4 bn. These facilities are planned at the existing
location and will be completed by the year 2014.
Earnings Revision
We are reducing our earnings estimates for the company in view sluggish order book
growth, firm commodity prices and higher interest rates. Order backlog has remained
flat at Rs 15 bn.
Several concerns resulted in derating of stock
n Currently, the company derives close to 53% of its business from state utilities
(mainly SEBs). Deteriorating health of SEBs could potentially slow down spending
on T&D infrastructure upgradation.
n While the demand potential for power remains strong in India, power capacity
addition could slow down due to issue related to availability of coal and soft merchant
tariffs. This could also impact investments in the downstream T&D sector.
n While the debt/equity ratio of the company has declined in FY11 to 0.87x from
1.0x in FY10, the company's business remains capital intensive especially in
terms of working capital. For most orders, the company has to compete with
local players, which keeps margins under pressure.
n Tax payout remains low for the company partly due to accumulated losses at
subsidiary Apex Transformers.
Valuation and Recommendation
DPIL is trading at 4.6x FY12 earnings. Dividend yield is attractive and works out to
2.8%. We maintain BUY on DPIL with a revised price target of Rs 173, thus valuing
the stock at 7.3x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DIAMOND POWER INFRASTRUCTURE LTD
PRICE: RS.110 RECOMMENDATION: BUY
TARGET PRICE: RS.173 FY12E P/E: 4.6X
q We reiterate BUY on Diamond Power Infrastructure taking note of the
correction in stock price making valuations attractive for investors.
q We have further reduced our earnings forecast in view of weak Q1 FY12
numbers. We forecast a decline in earnings in FY12 on account of decline
in margins and higher depreciation and interest costs. We expect a turnaround
in the growth trajectory in FY13 as the EHV cables plant start
contributing in a meaningful way.
q Post our earnings revision, we revise target price to Rs 173 (Rs 228 earlier).
Dividend yield is attractive at 2.8%.
q Concerns: Deteriorating financial health of SEBs remains a key concern
for the stock.
Completed significant expansion in manufacturing infrastucture
in FY12
In the past 12-15 months, DPIL has expanded its HT cables manufacturing capacity
and has set up greenfield plants for making transmission towers and EHV cables.
The transmission towers plant is operational and is executing orders worth Rs 780
mn. The EHV cables plant is undergoing trial runs, which may last for 3-5 months. It
also entered into a Joint Venture with Utkal Galvanizers Limited to get orders for
220KV - 765 KV Transmission Lines. Thus, the company now has captive manufacturing
facility for most of the critical components that go into the T&D value chain.
Post this significant round of capacity augmentation, the company has adequate
room to cater to market demand.
Restructured loans to bring down the cost of funds. Also revamped
its board
During the previous fiscal, the company raised funds through QIP (Rs 1.4 bn) and
optimized its cost of borrowings by replacing the high cost loans. It replaced high
cost long term debts worth Rs. 1.5 bn from AXIS Bank and others (interest rate of
13.25 per cent) with funds from ICICI Bank (having an interest rate of 10.45 per
cent) and also repaid entire debt of Clearwater Capital Partners Ltd.
During FY11, the company inducted strategic investor into the company and also
initiated a revamp of board to induct highly respected professionals. The company
has nine directors on its board, out of which five are independent.
Expansion plans
The Company is working on further expansion of its existing conductor division to
expand its capacity from 50500 MT to 250000 MT and Medium Voltage facility both
amounting to an aggregate of Rs. 1.4 bn. These facilities are planned at the existing
location and will be completed by the year 2014.
Earnings Revision
We are reducing our earnings estimates for the company in view sluggish order book
growth, firm commodity prices and higher interest rates. Order backlog has remained
flat at Rs 15 bn.
Several concerns resulted in derating of stock
n Currently, the company derives close to 53% of its business from state utilities
(mainly SEBs). Deteriorating health of SEBs could potentially slow down spending
on T&D infrastructure upgradation.
n While the demand potential for power remains strong in India, power capacity
addition could slow down due to issue related to availability of coal and soft merchant
tariffs. This could also impact investments in the downstream T&D sector.
n While the debt/equity ratio of the company has declined in FY11 to 0.87x from
1.0x in FY10, the company's business remains capital intensive especially in
terms of working capital. For most orders, the company has to compete with
local players, which keeps margins under pressure.
n Tax payout remains low for the company partly due to accumulated losses at
subsidiary Apex Transformers.
Valuation and Recommendation
DPIL is trading at 4.6x FY12 earnings. Dividend yield is attractive and works out to
2.8%. We maintain BUY on DPIL with a revised price target of Rs 173, thus valuing
the stock at 7.3x.
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