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q We expect ordering from PGCIL, which had slowed down in past few
months to gain traction. Positive for Power conductor industry.
q Balance sheet has been strengthened considerably in the past quarter
through equity infusion thus bringing down the overall debt-equity ratio
to close to 0.6x. Company has already restructured debt to a much lower
cost of borrowings. Major capex of Rs 2.7 bn has almost completed.
q Stock correction presents good opportunity to BUY with a target price of
Rs 319, an upside of 45%.
PGCIL's spending plans indicate robust growth opportunity
n Given the expectations of accelerated pace of generation capacity additions with
120GW of projects under construction, we expect step-up in investments towards
transmission. CERC has recently approved setting up of nine high speed transmission
corridors (HSTCs). PGCIL is setting up these corridors, aimed at evacuating
electricity from 38 private sector players putting up an aggregate generation capacity
of ~42GW.
n For the XIIth five year plan starting 2012, PGCIL has indicated that as per its initial
estimates, the investment target could be double that of XIth plan (investment
plan of Rs 550 bn). Thus, we see healthy demand scenario for players engaged
in the conductors, transmission towers, transformers and cables business.
n Based on industry feedback, there has been delay in fresh ordering from PGCIL
as it moved from single envelope to two-envelope system (technical and commercial
qualification). This has slowed down order booking for players engaged
in T&D segment. However, there are indications that tender finalization should
start from Q4 FY11 onwards.
Update on capacity additions
The company is in the process of commercialization of 50000 tpa transmission towers
and EHV cables facility. It has already commissioned the transmission towers
plant and waiting for the galvanizing line to be completed for full commercial production
to commence. It has received some orders and expect trial production to
begin in the next fifteen days.
So far as the EHV cables is concerned, the company had earlier indicated that work
had been delayed for want of airport authority clearance for 100 mtr tower. However,
the company is now indicating that no clearance is needed as the height of
the tower/building is within the prescribed limits. Meanwhile the entire equipments
concerned with building of the plant have arrived from Finland and the company
expects to commission the plant by January 2011.
Since the EHV cable manufacturing has some level of technical sophistication, the
company would require technical approvals from reputed agencies. The company indicated
that for 400 KV and above there is a long-approval and testing process of
close to six months. Hence in the immediate term, the company plans to run operations
for making 150-200 kv cable orders for which approval process is not time-consuming.
We expect meaningful contribution from the EHV cables to come in FY11. The margins
on EHV cables is also expected to be much higher at around 16-22%.
Reduction in cost of borrowings
During the Q2 FY11, the company replaced its long term loan of Rs 1.3 bn financed
by a Consortium of Bank of India, Axis Bank and L&T Finance with a Long Term
loan from a major private sector bank for a Interest rate of 10.3% pa only down
from effective cost of 13.15% previously. The company has also repaid some other
high cost borrowings thus bringing down its overall debt to Rs 2.7 bn from Rs 3.1 bn
at the end of FY10.
Substantially strengthened balance sheet
Following the equity infusion through QIP and warrant conversion, the company has
a much improved balance sheet. Its debt-equity ratio stood at 1.1x at the end of
FY10, which has declined to 0.6x as of H1 FY11. The company has cash worth Rs
1.1 bn.
Stock correction presents investment opportunity
n DPIL has a healthy order backlog of Rs 17 bn up from Rs 14.5 bn in Q1 FY11.
n The DPIL stock has corrected close to 16% from its peak. At the current price,
the stock is trading at 7.4x and 6.1x FY11 and FY12 earnings respectively. On an
FY11 EV/EBITDA basis, the stock is trading at 5.8x.
n We maintain BUY on DPIL with an unchanged price target of Rs 319.
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