Remain overweight on Kalpataru Power

Written by fe Bureau | Updated: Oct 29 2011, 08:50am hrs
Kalpataru Power Transmission (KPTL) missed our standalone EPS estimate by c10%, driven largely by weak execution in Q2, which in our opinion was the only negative in the results. Otherwise, results were strong, beating our standalone Ebitda margin estimate by c90bps and our JMC EPS estimate by c27%. The order intake remained healthy and the order book increased to around R6,000 crore (c2x FY11 sales) at KPTL and R5,000 crore (c3.5x FY11 sales) at JMC Projects. The management noted that weakness in execution is temporary and was driven by 1) extended monsoons 2) delays in Right of Way (RoW) approvals and 3) delay in customer approvals on certain projects. Execution is likely to pick up in H2.

The management highlighted that the tender pipeline remains strong, with robust activity from all customers PowerGrid, State TransCos and International. In addition, the company highlighted that pricing has improved significantly in the PowerGrid orders. Management expects the standalone order book to grow to around R7,000 crore by the end of FY12.

In terms of revenue, management upped their guidance for consolidated sales growth to 25%+ from 20-25% earlier driven largely by improved execution at JMC, where sales growth is now expected to be c50% (c35%+ earlier). Due to weak first half, the management now expects standalone revenues to grow at c12% compared to earlier expectation of 10-15%. But notwithstanding this, margins are expected to remain strong this year and next, benefitting in our opinion from the rising contribution from the international projects.

We have marginally adjusted our FY12-13e EPS by around -1.5% to 3.0%. The stock remains attractive on our new numbers, trading at c6.3x FY12e PE and c5.0x FY13e PE compared to the historical average of c13.5x (12m forward PE in last five years) and an average trough multiple of c6.3x during 2008-09 crisis.

Current valuation implies that even if you give a modest multiple of c7.0x PE to our 12m forward estimates standalone EPS of R14.2 (FY12e: R12.8, FY13e: R15.6), you get all the other businesses JMC Projects, Shubham Logistics, BOOT projects & Real estate assets for free. Hence, we see a lot of value in the stock at this stage and reiterate our overweight rating with a target price of R165.

Our target price is derived from our preferred EVA valuation methodology and implies that 12 months from now, the stock should be trading at a 12m forward PE of c7.3x on 24m forward consolidated EPS of R22.3 vs current 12m forward PE of c5.7x.