Kalpataru Power Limited: KPL is a part of the Kalpataru Group. At present approximately 40% of its order book is from international markets. The company's strategy is to enter various business segments like T&D, Oil and Gas pipelines, Construction, Logistics etc. and hasten penetration.A strong order book, favorable industry outlook and lower input prices will drive Kalpataru Power's earnings in the coming years.
The first quarter results of FY11 have reported profit after tax (PAT) of Rs 36.8 crores as against Rs 32 crores (YoY). Also, it has approved sub-division of the Company's Equity Shares from a face value of Rs.10/- each to a face value of Rs.2/- each subject to approval of the shareholders. With PGCIL expected to issue orders worth Rs 350â€400 bn in the next two years, and more BOT projects coming up for bidding from the private sector a robust growth is expected in volumes as well as bottom line.
Economic Analysis
The Indian Economy has been growing at an annual rate of over 8% on an average for the period FY03-09. As a result, the provision for quality physical infrastructure like power has become a key focus area for the government. The State and Central Governments have played a dominant role in the growth of the power industry and also provide for most of the present capacity. Some of the major factors that define the economic strength/weakness of the Indian economy are as follows
Inflation
After nearly 15 straight months of double-digit food inflation, the government announced recently that food inflation had dipped to 9.67% for the week that ended on July 17 while at the same time India's headline inflation in July could be around 11 per cent, This increase in inflation has forced the Reserve Bank of India to introduce measures to tighten the monetary policy and remove liquidity out of the system by increasing repo and reverse repo rates. This might control inflation but at the same time it would lead to a liquidity crunch for projects with high investment requirements.
Budget Deficit (/Fiscal Deficit)
India has projected a budget deficit of 5.5 per cent for the fiscal year that ends in March 2011, down from a 16-year high of 6.9 per cent of GDP in the last fiscal year. Although this level of fiscal deficit is still not healthy the 1.4 percentage point reduction is a step in the right direction. Most of this decline can be contributed to the third generation mobile phone licenses and broadband access which brought around $23 billion to the state exchequer.
Consumer Sentiment
The Indian Economy is among the fastest economies of the world to have come out of the recessionary phase. Consumer confidence in the strong fundamentals of the economy has been a driving factor in this fast paced recovery process. Quoting AC Nielson's Global Consumer Confidence Survey: 'India ranks 2nd on the consumer confidence index in the world' . However, at the same time the personal finances sector has not yet completely recovered as is evident by reduction in the percentage of Indians who are optimistic about the state of their personal finances in the next 12 months. This has seen a reduction of by 3 percent points to 78 percent.
All the three indicators above seem to suggest that the Indian economy is still very vibrant and can be expected to grow at a healthy rate across different sectors in the medium to long term horizon.
Electricity Demand and Supply Gap
Inter Region Transmission Capacities
Inter Region Transmission Growth Plans
Year
2002
2005
2007
2010
2012
765kV
0
0
1100
2200
9200
400kV
1000
2400
7800
11400
16400
HVDC bi-pole
0
2000
2500
2500
6500
HVDC b-t-b
2000
3000
3000
3000
3000
HVDC mono
200
200
200
200
200
220kV
1850
1850
1850
1850
1850
TOTAL
5050
9450
16450
21150
37150
Industry Analysis
Transmission of electricity is defined as the bulk transfer of power over a long distance at high voltage, generally of 132kV and above. In India bulk transmission has increased from 3,708ckm in 1950 to more than 265,000ckm today. The transmission sectors are divided into five distinct regions Northern, North-Eastern, Eastern, Southern and Western regions. The Interconnected transmission system within each region is also called the regional grid.
Transmission presents immense opportunities for investments and is seen as a future high growth sector in India. The major reasons for this positive outlook are
The demand for transmission capacity is expected to increase dramatically, driven primarily by significantly increases in generation capacity (10,000-15,000 MW per year). An additional 60,000 circuit km of transmission network are expected to be added by 2012
An electricity market is beginning to develop in India. Two power exchanges are now operational. A large number of merchant power plants are being developed. Power from these plants will flow in multiple directions, Reliability and operation margins would need to be close to 25-30 per cent of the transmission capacity.
The government has targeted a 10 per cent growth in network length (at 220 kV and above) and 14 per cent growth in transformation capacity in the Eleventh Plan.
Development of the national grid is a government priority. This will require transfer of power from power-surplus regions to power-deficit regions creating new business options.
Ministry of Power has taken steps to increase private participation in power transmission. Joint ventures between the private sector and Power Grid
Corporation of India (PGCIL) are seen as the way forward. Quoting Economic Times "The government is expecting an investment of $300 billion to come in the XII Five-Year Plan in the power sector".
However, there are many other unresolved issues and concerns. These include transmission pricing, delinking of the load despatch function from transmission utilities, allocation of charges and losses, utility reluctance in enabling open access, etc.
Company Analysis
Kalpataru Power Transmission is one of India's leading companies in the design, testing, fabrication, erection and construction of transmission lines (up to 800 KV) and substation structures on a turnkey basis across India and overseas. The company is also a major player in the exports market and has sold tower parts to Mexico, Algeria, Malaysia, Philippines, Thailand, Syria and Australia. Tower fabrication facility and tower testing facility are located in Gujarat.
Business Segments
Infrastructure
Kalpataru Power Transmission is one of India's leading companies in the design, testing, fabrication, erection and construction of transmission lines.
Biomass Energy Division
KPL currently owns and operates two bio-mass based power plants totaling 14.8 MW in Rajasthan. The second plant at Ganganagar was commissioned in November 2006. The company sells power to Rajasthan Rajya Vidyut Nigam Ltd.
Logistic Segment
KPL acquired 80% stake in a warehousing company, Shree Shubham Logistics. It has invested Rs.800 mn in FY09 in scaling up this business. In the initial phase, the company
Construction Sector
Kalpataru Power carries on its construction business through JMC Projects. KPL bought 48.6% stake in JMC in FY05 at a cost of Rs100m. Later through equity infusion the stake of KPL in JMC went up to 53%.
Growth Plans
Increase in production capacity
Expansion of Geographies
Focus on PPP and BOOT model projects
Ratio Analysis
Growth Ratios
The turnover of the company shows a growth of 8% for the current year. However the PAT declined over the FY 09-10 year. This reduction in profit was primarily on account of competitive pricing pressure, volatile commodity prices, negative foreign currency variations and higher interest cost. However the year production capacity of the company has been increased from 84,000 MTs to 1,08,000 MTs. Also the average utilization was at an impressive level of 96%. All this implies that high growth can be expected.
Profitability Ratios
All the profitability ratios show a similar trend of expected growth started from the current fiscal year. These expectations are based on strong fundamentals and supportive economic environment.
Valuations Ratios
Although the P/E and P/E (cash) ratio for the firm are favorable vis-à-vis the respective industry averages a comparatively higher D/E ratio implies that most of the growth in profitability and revenue would be based on debt. This increased leverage might expose the firm to interest traps and a weaker financial position in the long run.
Recommendations
The stock is expected to outperform market and industry stocks in the time horizon of 2010-2012. At the current price levels it is advisable to BUY the stock.
