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The correction in the Kalpataru Power Transmission (Kalpataru) stock since the beginning of 2013 offers a good entry point for investors.
Strong order book and improving product mix, both in the standalone business and in its infrastructure subsidiary, JMC Projects, give good visibility to revenues over the next two years.
At the current market price of Rs 80, the stock trades at 5.5 times its estimated consolidated earnings for the financial year 2013-14. This is at a discount to KEC International, a peer trading at 6.1 times. Investors with a one-to-two year perspective can buy the stock.
Robust order inflows
Kalpataru derives over 90 per cent of its standalone revenues from transmission projects, and the rest from its small presence in the pipeline infrastructure (oil and gas) and biomass energy generation segments.
As of December 2012, the standalone order book stands at Rs 6,500 crore (Rs 6,100 crore for the year-ended March 2012).
The current order backlog works out to 2.1 times its sales (standalone) for the year-ended March 2012, placing the company on a strong wicket.
In the domestic markets, Kalpataru has been a key beneficiary of the healthy order flows from Power Grid Corporation during 2012-13.
In this period, transmission orders constituted about 45 per cent of total orders awarded by Power Grid. Of the Rs 6,900 crore awarded to the transmission segment, Kalpataru has bagged contracts for about Rs 1,260 crore, making it the biggest gainer after KEC International. Besides, the company has obtained orders from State electricity boards and international markets as well.
The favourable mix of orders in the transmission segment provides ample scope for margin expansion in the coming quarters, from the current 9-10 per cent levels. For one, international orders currently constitute 45-50 per cent of the order book.
Scope for better margins
These are typically more margin-accretive than domestic orders. A chunk of the international orders come from African and CIS countries which are expanding their transmission networks.
This bodes well for continued order flows from abroad. This would also help act as a shield against any slowdown in orders from Power Grid back home.
Two, about 70 per cent of the current order book is based on variable price contracts, reducing the risk of margin contraction in case of increase in prices of steel — the main raw material for the company.
Three, the recent spurt in ultra-high voltage transmission line orders is also expected to aid margins as the company expects the competitive intensity to be lower in this segment.
For the nine months ended December 2012, net sales grew by 17 per cent year-on-year to Rs 2,274 crore.
Net profits dropped to Rs 89 crore from Rs 109 crore in the year-ago period, predominantly due to increase in input costs (steel) and forex losses.
Support from subsidiary
The company’s subsidiary, JMC Projects, contributes about 40 per cent to consolidated revenues.
JMC is an infrastructure player, with a diverse order book covering roads, power, railway projects, besides industrial and residential buildings.
This diversity allows it to keep up order inflow. But owing to all-round sluggishness in the past few quarters, JMC’s December 2012 order book, at Rs 5,200 crore, is down slightly from the Rs 5,675 crore at end-March 2012.
About 40 per cent of the order book is in roads, with the Rohtak-Bawal toll road stretch set to turn operational in the June 2013 quarter.
Factories and buildings constitute 50 per cent of the book. To hedge the risk from a domestic slowdown and push up its margins from the current 4-5 per cent levels, JMC is targeting the international road space. It won its first road construction contract in Ethiopia for Rs 341 crore last month.
For the nine months ended December 2012, JMC’s net sales grew by 30 per cent Y-o-Y to Rs 1,774 crore. Growth slipped towards December on slower execution of some projects.
With higher cost of inputs such as cement and labour and a lack of clauses which allowed passing on these increases to clients, profits took a hit.
Net profits thus dropped 65 per cent to Rs 10 crore in the nine months to December ‘12.
However, JMC has now begun to build price escalation clauses into its contracts which could help margins improve over the medium term.
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