We recently took KPT?s management for investor meetings in the US. Following our meetings, we feel increasingly confident about the company?s ability to deliver on expectations and hence, we continue to believe that consensus has most likely bottomed. With the stock trading at about 7.0x FY12e PE, we reiterate our bullish view and highlight KPT as our preferred play amongst transmission EPC players.
The management stressed on their confidence in FY12 sales growth and guided for a growth of about 15-18% in the standalone business and about 35-40% in JMC. We believe that KPT will most likely outperform this guidance given their strong order book.
In spite of about 30% growth in revenues during FY07-11, earnings growth has been muted at about 2%, driven largely by the normalisation of margins and increasing investments into the business. However, management noted during the meetings that Ebitda margins have now normalised and the group is past its investment phase. Hence, top-line growth should profoundly reflect in the EPS growth and cash flows going forward.
Management highlighted that while competitive environment remains tough, the pricing pressure is easing off as aggressive bidders are finding it difficult to qualify for the projects even after being L1 (the lower bidder).
Management maintained its bullish view on the transmission outlook, noting that even if about 50% of the planned generation capacity is cancelled, the transmission capex (particularly from Power Grid) will still have to double in the XII Plan compared to the XI Plan. However, the power grid orders may remain weak for another quarter or two due to management changes currently undergoing at the firm.
After the Q4 earnings miss, we believe expectations have bottomed for KPT. However, with about 27% decline in the share price this year till date, the stock remains attractive at about 7.0x FY12e PE compared to the historical average of about 8.5x. Thus, we reiterate our overweight rating on the stock with a target price of R185 and highlight KPT as our preferred play amongst the EPC players.
?HSBC