Kalpataru Power Transmission - Going gets tough; visit note, Hold:: Edelweiss,

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Kalpataru Power Transmission (KPP IN, INR 103, Hold)

We met the management of Kalpataru Power (KPP) and returned convinced that the pain in T&D is unlikely to ease in a hurry. The execution has been affected by Row (Right of Way) and labour issues to an extent. There was a clear denial of the merger between KPP and JMC in the near term. We continue to remain cautious on KPP and maintain ‘HOLD’ with a target price of INR109.

T&D ordering healthy, execution, profitability remain hurdles

Traction in transmission tower ordering remains healthy with an expected double digit growth in new orders in FY12E of which PGCIL accounts for almost 50%. The management has also pointed to a healthy ordering traction in key overseas markets like US, MENA etc. However, the execution in domestic market is expected to remain weak owing to land issues and deferrals in generation projects. Also, the management hinted at competition in the tower EPC space & pipeline business to be a key concern even as it guided for stable operating margins for FY12E and FY13E. The management also made clear its intentions to enter Railways and water including the waste water treatment business via inorganic route in the near to medium term.

JMC Projects on a strong growth patch; may need equity infusion

With a JMC order book of INR50bn (~75% of which has PV clause/materials built in), the company is not rushing in to bag new orders given the higher competitive intensity. Across its four BOOT projects and four new incremental projects, the company is looking at an IRR threshold of ~16%. With a portfolio of BOOT projects worth `INR25bn in roads, we believe that JMC will require an incremental funding of >~INR5bn towards an equity funding for these projects.

Outlook and valuations: Cautious; maintain ‘HOLD’

Delay in execution is likely to hurt revenue growth during H2FY12. Increase in competitive intensity is likely to keep margins under pressure over the long run. We continue our cautious stance on the company and maintain ‘HOLD/ Sector Performer’ recommendation/ rating with a target price of INR109.