Kalpataru Power-Tempered growth on monsoon impact:: Religare

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Kalpataru Power Transmission Ltd
Tempered growth on monsoon impact


Kalpataru Power’s (KPP) Q2FY11 results were slightly below expectations as
revenues and margins in the transmission and distribution (T&D) segment were
affected by the heavy monsoons. Net revenue in the quarter for the group rose
14% YoY to Rs 6.3bn, as against Rs 6.7bn estimated. While T&D margins
declined, the infrastructure division was boosted by the closure of two major
projects in the quarter. The group’s order backlog stood at Rs 50bn, implying
almost flat order inflow growth, a challenge facing the industry in the last few
quarters. We maintain HOLD on KPP considering full valuations (P/E of
13.0/11.1 for FY11E/ FY12E), with a price target of Rs 200.




Margin contraction in T&D segment: The T&D segment reported a 180bps YoY
decline in EBIT margin owing to heavy monsoons in the quarter, which impacted
the progress of work. The monsoon impact was spread over 85 days versus 55
days last year. Revenue growth from the segment was also down 300bps
compared to Q1FY11.
Expect pickup in order inflow for H2: Order backlog at the end of the quarter
was Rs 50bn, implying almost flat order inflow growth. But, as per the
management call, KPP was the lowest bidder (L1) in 2 of the 14 tenders opened
by Power Grid (which are yet to be included in the order book). Also, KPP
expects to bag additional 4–5 tenders from PGCIL. This gives us reason to believe
that order inflows can pick up from H2FY11.
Upbeat signals from infra division: The infrastructure division reported a YoY
increase in EBIT margin mainly due to the closure of two large projects in the
quarter. The management has indicated that current high margins will be
sustained in future. It has also guided towards revenue growth of 15–20% YoY
for the consolidated group with upside potential in profitability.
Potential risk of increased raw material prices: Given the commoditised nature
of the business, there is always a risk due to price fluctuation in raw materials.
High labour cost can also dent profits. The management has also expressed the
need to increase the order book position for the pipeline business. At present, the
pipeline order book is at Rs 3bn which gives visibility only for the next three
quarters.
Maintain HOLD: We believe that all the potential upsides and risks are priced in.
We therefore maintain our HOLD rating on KPP, with a price target of
Rs 200.