The overhang of the troubled power and infrastructure space, concerns on the presence of foreign currency borrowings at a time when the rupee is depreciating and market volatility has taken a toll on the stock of Kalpataru Power Transmission. From our earlier ‘buy’ recommendation in April at Rs 80, the stock has seen a 25 per cent fall till date. However, this fall seems to give a good entry point for long-term investors.
Gaining from International orders
Though the power sector has been affected by policy bottlenecks in recent times, presence in the power transmission space has helped Kalpataru, thanks to order flows from Power Grid Corporation (PGCIL) and abroad. Besides, with international orders constituting a little over half the order book, the company is a net forex earner, placing it in favourable light in current times.
A low debt-to-equity ratio of about 0.3 times and a reasonable interest cover of 2.4 times also stand the company in good stead. Finally, faster execution coupled with good order backlogs at its listed infrastructure subsidiary JMC Projects, is also a positive for the company. At the current market price of Rs 60, the stock trades at 5.3 times its expected earnings for FY14. Investors with an appetite for risk and a perspective of more than a year can buy the stock.
Better order flows
Kalpataru derives over 90 per cent of its 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 June 2013, its order book stands at Rs 7,300 crore. The current order backlog works out to 2.2 times its sales for the year-ended March 2013, placing the company on a strong wicket. In the domestic market, Kalpataru has been a beneficiary of the order flows from PGCIL during 2012-13. In the June quarter of this year too, it won an order worth Rs 330 crore from PGCIL. The company also won its second BOOT (Build-Own-Operate-Transfer) project — an order from the Madhya Pradesh Power Transmission Company, in addition to a Rs 500 crore order from Zambia.
The favourable mix of orders in the transmission segment provides scope for margin expansion in the coming quarters, from the current 9-10 per cent levels. For one, international orders currently constitute 58 per cent of the order book. These are typically more margin-accretive than domestic orders. A chunk of the international orders come from African and Central Asian countries which are expanding their transmission networks. This bodes well for continued order flows from abroad. This would also shield against a slowdown in orders from PGCIL back home.
Two, many orders are based on variable price contracts, reducing the risk of margin contraction due to increase in prices of raw material imports. 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 June quarter, net sales grew 27.5 per cent year-on-year to Rs 880 crore, thanks to better execution of projects. Finance costs moved up by 22 per cent to Rs 38 crore. Higher working capital requirement due to changed payment terms at PGCIL and a forex mark-to-market loss of Rs 7.7 crore on finance costs were the main reasons. Net profits grew at a strong 27 per cent to Rs 35 crore.