Query Corner -sintex, Gati, Maruti, Reliance Mediaworks, McNally Bharat, Diamond Power Infrastructure, Century Enka: Business Line

Kotak Sec:: PDF link: Diamond Power Infrastructure, GE Shipping, IDFC, SBI, suzlon, Castrol,

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http://www.kotaksecurities.com/pdf/dmb/MorningInsight14022012.pdf


DIAMOND POWER  INFRASTRUCTURE LTD
RECOMMENDATION: BUY
TARGET  PRICE:  RS.195



GE SHIPPING COMPANY (GESCO)
RECOMMENDATION: ACCUMULATE
TARGET  PRICE:  RS.270


IDFC
RECOMMENDATION: BUY
TARGET  PRICE:  RS.165


STATE BANK OF  INDIA (SBI)
RECOMMENDATION: BUY
TARGET  PRICE:  RS.2381


SUZLON ENERGY LTD
RECOMMENDATION: REDUCE
TARGET  PRICE:  RS.21


CASTROL  INDIA LTD. (CIL)
RECOMMENDATION: REDUCE
TARGET  PRICE:  RS.451

Buy DIAMOND POWER INFRASTRUCTURE ; TARGET PRICE: RS.179:: Kotak Sec

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DIAMOND POWER INFRASTRUCTURE LTD
PRICE: RS.117 RECOMMENDATION: BUY
TARGET PRICE: RS.179 FY13E P/E: 4.4X
q Numbers are ahead of our expectations mainly led by the cables division.
Order book is healthy at Rs 17 bn. For the current fiscal, we believe
cables would be the main growth driver as the EPC projects and transformer
divisions continue to remain subdued.
q The stock is trading at very attractive valuations. We maintain BUY with
a target price of Rs 179 (Rs 173 earlier).
q Concerns: Deteriorating financial health of SEBs remains a key concern
for the stock.

Buy Diamond Power Infrastructure, :TARGET PRICE: RS.173: Kotak Sec,

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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.

BUY Diamond Power Infrastructure, TARGET PRICE: RS.228 :: Kotak Sec,

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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)

Diamond Power :Aggressive expansion :Emkay

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We were joined by Mr. Bhagwan Makhijani - VP & CFO and Mr. Jayesh Patel
- Senior Manager (Finance), Diamond Power, who shared their outlook on
the company.
Key Highlights
n Management updated us on their capacity expansion plans in their existing products/
segments and status on their new products i.e. Extra High Voltage (EHV) cables and
transmission line tower (TLT)
n On the capacity expansion side, DPL would be expanding its conductor capacity by
1,50,000 MTPA and medium voltage cables segment at a cost of Rs6.7bn over FY12-
FY13E. This capex would be funded through debt worth Rs 3.5bn and balance through
internal accruals, rights issues, structured products, etc.
n DPL has ventured into 2 new verticals viz. EHV cables of capacities upto 2,500 kms
and TLT upto 4,000 MVA.
n In EHV, DPL has received orders worth Rs 1.3bn, which would be executed over
FY12E. It has tied-up with a Chinese company, Wanma, which is globally the second
largest company in the EHV space. Company expects EBIDTA margins of 18-19%
n In TLT, DPL has received orders worth Rs 1.1bn, revenues from which will start in
FY12E. Company expects 7-8% from TLT segment.
n DPL guided for debt:equity of 1:1 for FY12E. Its current debt stands at Rs 4.4bn.
n The order backlog is quite healthy at Rs 16.5bn or 1.2x its FY11 revenues, which would
drive growth in FY12E-FY13E.
n Company has guided that its consolidated revenues would grow to Rs 25bn in FY12E
from Rs 15bn in FY11 and EBIDTA margins would be 13-13.5% for FY12E.
Valuations
DPIL is emerging as a complete solution provider in T&D across the KV range with
commissioning of EHV cables and TLT facilities. Driven by the secular growth phase of the
industry, coupled with capacities ready for production across the value chain, we expect
strong traction in business, going forward. At the CMP of Rs 159/share, the stock is trading
at 5.1x FY11earnings, 6.3x FY11 EV/EBITDA and 1.1x FY11 book value. Key risks - higher
competition (especially from Chinese and Korean players) and therefore, reduction in
returns on capex.

Buy DIAMOND POWER INFRASTRUCTURE:: TARGET: RS.264Kotak Sec,

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q DPIL has commissioned Extra High Voltage Cables plant (one of India's
first) to manufacture 500 KV cables. Globally, there are only seven manufacturers
with capability to make upto 500 KV cables.
q 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-of-way 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.
q DPIL is trading at 4.9x FY12 earnings. On an EV/EBITDA basis, the stock is
trading at 4.4x FY12 EBITDA. We maintain BUY on DPIL with an unchanged
price target of Rs 264

BUY Diamond Power Infrastructure -Continued momentum in order intake, Kotak Sec,

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DIAMOND POWER INFRASTRUCTURE LTD
 RECOMMENDATION: BUY
TARGET PRICE: RS.264
FY12E P/E: 4.4X
q Order booking in the current quarter has been strong in conductors but
the EPC segment has been a laggard. Management believes that prices
quoted by competitors are unremunerative and in view of this it has preferred
to be conservative in order booking.
q The company's transmission tower plant has started commercial production.
However, it does not have any external orders and currently it is
doing job-work for captive orders. The company is discussing tower supply
orders with customers. EHV cables plant is expected to get commissioned
in May 2011.
q In view of the delay in new production facilities (EHV cables and Transmission
Towers), we have revised our earnings estimates downwards.
Consequently, our DCF based target price stands revised to Rs 264 (Rs 319
earlier). Maintain BUY.
Continued momentum in order intake
Order intake from state as well as private utilities has been healthy during the quarter.
Amidst concerns that order intake is slowing down, the company has won orders
worth over Rs 2.6 bn in the current quarter. In addition to this, the company is expecting
Rs 1.0 bn order for 3600 kms for which it has already received Letter Of
Intent. This order is expected before the end of current fiscal. In the distribution conductor
side, the company has been selected by TNEB for supply of 36500 kms of
distribution conductor worth Rs 750 mn.

Diamond Power Infrastructure: 2011 Top Picks: Anagram

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Diamond Power Infrastructure

Diamond power infra is the only EPC player with major captive
facilities (80% of the project cost) which gives the company an
advantage (higher margins & lesser volatility, lower cost of carry)
over other EPC player who outsources 60 to 70% of the project
work. With adequate liquidity in place, and experience in T&D
over years DPIL will be able to monetise on $100 bn spend in
T&D sector. Moreover company has not only targeted to increase
top-line but has made constant efforts to improve and sustain
margins through backward integration (Conductors, EPC and
cables).