The Hindu Business Line : Kalpataru Power Transmission: Buy

Price variable contracts in the domestic market have helped the company hedge against volatile prices of raw materials such as steel, aluminium and zinc, resulting in better price realisation.

Superior return on equity
Pipeline contracts to drive growth
Order book healthy at Rs 2,000 crore

Structured to meet rising demand with minimal outsourcing.

Healthy order-book, consistently high margins compared to peers and a foray into the lucrative pipeline contracting business energise Kalpataru Power Transmission's (Kalpataru) earnings growth prospects.

Strong financials, with revenues growing 40 per cent per annum and post-tax earnings at 52 per cent, over the past five years reflect the company's sustained growth.

At the current market price, the stock trades at 14 times its expected per share earnings for FY-07. This is at a discount to peers such as Jyoti Structures and KEC International. Investment in Kalpataru can be considered with a three-year perspective.

Kalpataru is a turnkey player in design, fabrication, construction and erection of transmission lines and sub-station structures.

With its entry into the biomass power generation segment and, now, into pipeline infrastructure, the company has slowly diversified its business model without diluting its core competence in the transmission segment. The order book of Rs 2,000 crore (as of March 2006) is comprised largely of projects in the transmission and distribution segment.

Superior operating profit margins

For the quarter ended June 2006, Kalpataru's operating profit margin (OPM) was 16 per cent. This is far ahead of similar companies, which have margins at around 10 per cent. Price variable contracts in the domestic market have helped the company hedge against volatile prices of raw materials such as steel, aluminium and zinc, resulting in better price realisation.

The various power development measures are likely to generate business, and leave a number of players facing capacity crunch. This may result in outsourcing of work such as tower structurals, resulting in a decline in the OPM.

Kalpataru recently expanded capacity to 84,000 tpa and operated at 75 per cent capacity in FY-06. This leaves scope for the company to ramp up in-house production and outsource less of its requirements.

Such a move may keep the company's margins higher than competitors'.

Foray into infrastructure

Kalpataru, with its international consortium partner, has bagged a gas pipeline contract from GAIL. In the infrastructure segment, pipeline contracts typically offer lucrative margins.

With brightened prospects of gas availability, this segment appears to have revenue potential and may be a long-term growth driver. The company also has a 49.9 per cent strategic stake in JMC Projects, a civil construction company.

sThis company has only over the last year cleaned up its balance-sheet and appears to be turning around, and it may offer Kalpataru a foothold to qualify in the infrastructure space.

Opportunity galore

The Government's ambitious programme for rural electrification with planned investments of Rs 1,70,000 crore up to 2012, has thrown open opportunities in this space. Kalpataru has won orders from Power Grid Corporation and State electricity boards, aggregating Rs 560 crore.

To make further gains, the company formed a new division in January 2005 to handle rural electrification projects.

Kalpataru's revenues for the June quarter jumped 126 per cent and profits more than trebled.

The return on equity at over 40 per cent is also far superior to peers such as RPG Transmission and Jyoti Structures that are in the 25-30 per cent range.

Risks

While domestic contracts carry price variable clauses, Kalpataru's export revenues, which account for close to 20 per cent, are mostly in the nature of fixed price contracts.

Any jump in raw material prices can, therefore, affect margins from this segment.

Any foray into other infrastructure segments, such as roads, may see severe competition from established players and can erode returns.

More Stories on : Stocks | Recommendation | Power

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page