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Power Equipment

India Equity Research | Power Equipment Sector Update

POWER TRANSMISSION TOWERS

What lies beneath


FY07 only a curtain raiser
Expansion of power transmission and distribution (T&D) capacity in India has fuelled growth February 26, 2008

of the power T&D EPC industry in the last two years of the Tenth Plan period (FY02-07).
Misal Singh
Historically, activity levels are much higher in the later years of five year plans. Power Grid +91-22-2286 4316
Corporation (PGCIL) is likely to invest INR 65 bn in FY08E (~INR 20 bn in Q4FY08E), ~INR misal.singh@edelcap.com
85 bn in FY09E, and ~INR 300 bn from FY10-12E to upgrade India’s power transmission Pawan Parakh
network. Hence, in the Eleventh Plan period, we are likely to see heightened activity in +91-22-4019 4995
pawan.parakh@edelcap.com
power T&D EPC industry from FY10-12E.

Africa and Middle East to supplement demand from PGCIL

Addition in generation capacity in Africa and Middle East will facilitate expansion of regional
transmission network. We believe capacity expansion in the African and Middle Eastern
power sectors will positively impact our coverage universe. The integration of regional grids in
the above geographies will supplement domestic demand and emerge as a large business
opportunity for domestic T&D companies, leading to strengthening of their order books.

Margins likely to decline

While demand for experienced and qualified power T&D EPC players is increasing,
competition is also on the rise simultaneously, which is likely to keep margins under
pressure. The industry posted peak margins in FY07, however, we believe the EBITDA
margins of ~12%, in line with global standards; are likely to be sustainable in the long term.

Working capital: Bane of the industry


RoCEs of the industry have improved from FY01, which, back then, had been driven down
by low margins and working capital turnover. We believe due to high working capital
requirement, companies in the power T&D EPC industry go in for frequent dilution. Working
capital requirements in the industry are governed by the business models and EPC
services offered across different companies. Of the top three players in the industry, KEC
International (KECI) has the highest working capital turnover, primarily due to its outsourced
business model while Jyoti Structures (JYS) has higher working capital requirement due to
higher component of sub stations business. Hence, we believe it is more susceptible to
dilution risks compared to KECI or Kalpataru Power Transmission (KPP).

Outlook and valuations: Positive; KPP is our top pick; downgrading JYS
While the revenue growth and profitability remains impressive across the industry we prefer
companies which have lower risk profile and superior working capital management.
International geographies are likely to grow at a high rate, however we believe they increase
the risk profile of the business due to fixed price contracts and exchange rate variations.
Hence, KPP is our top pick, as we believe it has an optimal revenue mix from domestic and
international geographies and sound working capital management. On our current
estimates KPP is trading at a P/E of ~13x and ~10x our FY09E and FY10E, respectively.
We maintain our ‘BUY’ recommendation on the stock. We like KECI primarily because it
has the highest RoCE’s driven by higher than industry working capital turnover. KECI is
trading at a P/E of ~16x and ~13x, while JYS is trading at a P/E of ~15x and ~11x our
FY09E and FY10E, respectively. We maintain our ‘BUY’ recommendation on KECI, while
we are downgrading JYS to ‘ACCUMULATE’.
1 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
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Power Equipment

AT A GLANCE
Company Price Revenues (INR mn) Working capital turnover (x) EPS (INR) P/E (x) RoCE (%)

(INR) FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E

Kalpataru Power Transmission 1,236 15,987 26,981 36,623 3.6 3.8 4.1 60.9 72.9 93.5 20.3 17.0 13.2 31.6 26.3 28.6

KEC International 710 20,406 26,786 36,305 11.7 8.3 7.4 27.8 33.6 44.4 25.6 21.2 16.0 37.1 42.3 44.1

Jyoti Structures 209 9,708 14,906 19,938 3.3 2.9 2.6 6.8 10.7 13.9 30.7 19.5 15.1 33.3 31.5 28.4
Power Equipment

Investment Rationale

FY07 only a curtain raiser


Expansion of power transmission and distribution (T&D) capacity in India has fuelled growth of
the power T&D EPC industry in the last two years of the Tenth Plan period (FY02-07); growth in
the power T&D EPC industry was below average in the initial years of the Tenth Plan period.

Fortunes of the power T&D EPC industry are governed by the capacity expansion plans of
Power Grid Corporation of India (PGCIL) to a large extent, as it is the central transmission utility
in India. PGCIL added more than twice the transmission capacity in FY07 compared to FY03,
which has directed the revenue growth pattern of the industry as demonstrated in table 1.

Table 1: Historical revenues and EBITDA growth


Average FY01-04 Average FY05-07
Revenues EBITDA Reven ues EBITDA
Company growth (%) growth (%) growth (%) growth (%)
Kalpataru Power Transmission 29.4 27.0 67.8 104.5
KEC International 15.8 NM 28.8 45.1
Jyoti Structures 4.1 0.4 51.2 74.8
Source: Edelweiss research

From FY05 onwards, the industry started posting robust growth with Kalpataru Power
Transmission (KPP) posting a revenue growth of ~81%, KEC (KECI) of ~18%, and Jyoti
Structures (JYS) of ~39% in FY07.

Table 2: Relative size of leading EPC transmission companies in FY07


(INR mn)
Capital
Company Revenues EBITDA employed
Kalpataru Power Transmission 15,987 2,563 7,453
KEC International 20,406 2,518 6,824
Jyoti Structures 9,708 1,254 4,325
Source: Edelweiss research

Historically, activity levels are much higher in the later years of five year plans. PGCIL is likely to
invest INR 65 bn in FY08E (~INR 20 bn in Q4FY08E), ~INR 85 bn in FY09E, and ~INR 300 bn
from FY10-12E to upgrade India’s power transmission network. Hence, in the Eleventh Plan
period, we are likely to see heightened activity in the sector in FY11E and FY12E.

Besides PGCIL, Damodar Valley Corporation (DVC) and various state electricity boards (SEBs)
also undertake transmission capacity expansion in India. However, their plans are less
dependable than PGCIL’s, as most of the SEBs are crunched for funds. Further, their poor
payment record does not make them preferred customers.

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Power Equipment

Table 3: Power transmission spend in Tenth and Eleventh Plans


(INR mn)
Xth plan XI th plan
Year to March 2003 2004 2005 2006E 2007E total 2008E 2009E 2010E 2011E 2012E total
Central sector 28,004 24,849 32,815 41,985 57,660 185,313 91,020 146,092 175,714 179,556 164,394 756,775
PGCIL 27,649 24,212 32,224 41,336 56,446 181,867 64,650 110,140 130,840 130,090 109,790 545,510
% change (12.4) 33.1 28.3 36.6 - 14.5 70.4 18.8 (0.6) (15.6)
Others 355.3 637.1 591 649.2 1213.7 3,446 26,370 35,952 44,874 49,466 54,604 211,265
% change 79.3 (7.2) 9.8 87.0 - 2,072.7 36.3 24.8 10.2 10.4
State sector 32,863 36,235 43,194 50,109 90,454 252,854 94,238 134,993 149,043 100,898 82,449 561,622
Northern region 8,008 8,559 12,191 14,932 15,361 59,050 21,291 20,409 24,322 22,042 17,076 105,139
% change 6.9 42.4 22.5 2.9 - 38.6 (4.1) 19.2 (9.4) (22.5)
Western region 3,597 3,997 3,708 3,554 15,951 30,806 15,576 33,315 52,685 37,825 22,431 161,832
% change 11.1 (7.2) (4.1) 348.8 - (2.3) 113.9 58.1 (28.2) (40.7)
Southern region 10,173 12,479 12,944 13,501 33,352 82,448 36,665 39,125 17,100 15,171 25,563 133,625
% change 22.7 3.7 4.3 147.0 - 9.9 6.7 (56.3) (11.3) 68.5
Eastern region 10,585 10,643 13,150 16,869 23,407 74,655 15,944 35,164 48,108 19,075 11,963 130,254
% change 0.5 23.6 28.3 38.8 - (31.9) 120.5 36.8 (60.4) (37.3)
North eastern region 501 557 1,201 1,253 2,384 5,896 4,762 6,980 6,829 6,785 5,415 30,771
% change 11.2 115.6 4.3 90.2 - 99.8 46.6 (2.2) (0.6) (20.2)
Total All India 60,868 61,084 76,009 92,094 148,113 438,167 185,258 281,085 324,757 280,453 246,844 1,318,397
Source: Central Electricity Authority, PGCIL

Besides transmission projects initiated by PGCIL and others, power T&D EPC companies are
also present in power distribution upgradation projects for which the nodal agencies are Power
Finance Corporation (PFC) and Rural Electrification Corporation (REC). Also, some distribution
upgradation projects are initiated by SEBs. The outlay for distribution upgradation projects is
~INR 800 bn, equally divided between rural electrification (Rajeev Gandhi Grameen Viduytikaran
Yojna) and Accelerated Power Development Reform Programme.

While power transmission EPC primarily involves transmission lines and substations, power
distribution EPC entails strengthening of the distribution network. Transmission lines entail tower
and conductor supplies, civil construction, engineering, and testing. Substation projects include
procurement of electrical equipment, civil construction, engineering, and testing.

Table 4: Capital expenditure break up for transmission and substation projects


Transmission line towers (%) 65.0
Tower supplies 19.5
Conductors 19.5
Civil construction 19.5
Engineering and testing 6.5
Substations (%) 35.0
Electrical equipments 22.8
Civil construction 8.8
Engineering and testing 3.5
Source: Edelweiss research

Given PGCIL’s capacity expansion plans, we have arrived at the likely spend on each of the
above components of power transmission EPC.

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Power Equipment

Table 5: Breakup of T&D spend


(INR mn)
XI th plan
Central sector 2008E 2009E 2010E 2011E 2012E total
PGCIL 64,650 110,140 130,840 130,090 109,790 545,510
Transmission line towers 42,023 71,591 85,046 84,559 71,364 354,582
Tower supplies 12,607 21,477 25,514 25,368 21,409 106,374
Conductors 12,607 21,477 25,514 25,368 21,409 106,374
Civil construction 12,607 21,477 25,514 25,368 21,409 106,374
Engineering and testing 4,202 7,159 8,505 8,456 7,136 35,458
Substations 22,628 38,549 45,794 45,532 38,427 190,929
Electrical equipments 14,708 25,057 29,766 29,595 24,977 124,104
Civil construction 5,657 9,637 11,449 11,383 9,607 47,732
Engineering and testing 2,263 3,855 4,579 4,553 3,843 19,093
Source: Edelweiss research

As is evident from table 5, revenue visibility in the sector is high and likely to remain so over the
long term. Quarterly volatility in order accretion is likely, however, the power situation in India is
so grim (per capita annual consumption of ~660 kwh) and the need to correct the same is so
crucial that we have seen increased emphasis on rectifying the situation from the government in
the first year of the Eleventh Plan itself.

High margins too good to last; RoCEs likely to improve


While demand for experienced and qualified power T&D EPC players is increasing,
simultaneously, competition is also on the rise.

Table 6: Key power T&D EPC companies


Name Factory location Capacity (MT)
Kalpataru Power Transmission* Gandhinagar 84,000
KEC International* Butibori and Jaipur 60,000
Jyoti Structures* Nasik and Raipur 96,000
Larsen & Toubro Pondicherry and Pitampura 60,000
Associated Transrail Baroda, Butibori 45,000
ICOMM Hyderabad 45,000
Hyundai Butibori 25,000
Amitasha Nagpur 24,000
Karamtara Tarapur 24,000
Maan Structures Jaipur 19,200
Emco* Baroda 20,000
Source: PGCIL, Edelweiss research

Besides the above players, there are also likely to be a few private companies catering to power
distribution EPC jobs being floated by SEBs. Increase in competition is likely to limit margin
expansion. The industry posted peak margins in FY07, but the same are unlikely to be repeated
in the medium to long term. However, the RoCEs are likely to improve given the improvement in
working capital turnover.

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Power Equipment

Table 7: RoCE trends over the years (%)


Average FY01- Average FY05- Average FY08E
Company 04 07 10E
Kalpataru Power Transmission 12.0 33.8 27.7
KEC International 1.8 23.7 43.3
Jyoti Structures 11.2 27.6 29.7
Source: Edelweiss research

Working capital: Bane of the industry


RoCEs of the power T&D EPC industry have improved from FY01, which, back then, had been
driven down by low margins and working capital turnover. The improvement in the operating
performance of the industry coincided with increase in PGCIL’s capital expenditure.

Of the top three players in the industry, KECI has the highest RoCE, primarily due to its distinct
business model. Since the company has a history of troubled labour relations, it outsources its
tower manufacturing capacities. The two key issues in an outsourced business model are that
outsourced tower manufacturing capacities need to be preapproved by PGCIL and the issue of
steel accounting, which implies higher wastes. However, we believe, over the years, KECI has
mastered this business model and hence, it is earning higher returns on its capital employed
than peers. The company also has higher working capital turnover than KPP and JYS, which is
driven by higher creditors/revenues compared to peers. We believe this is primarily driven by its
outsourced business model.

Table 8: Key performance ratios


RoCE (FY07)
Asset turnover Operating
EBIT / net PPE/ working capital/ Creditors/ Tax rate
Company RoCE (%) Revenues (%) Revenues (x) Revenues (x) Revenues (x) (%)
Kalpataru Power Transmission 27.7 16.2 13.7 35.2 29.8 26.5
KEC International 43.3 10.7 20.1 13.4 46.7 34.2
Jyoti Structures 29.7 12.3 5.8 38.7 26.9 36.2
Source: Edelweiss research

Due to high working capital requirement, JYS’s cash flow requirements are higher than the
others and hence, the cash flow situation of KPP and KECI is better than that of JYS. The same
is also reflected in JYS’s capital history, wherein it has gone in for frequent dilutions compared
to KPP or KECI.

Table 9: JYS—Capital history


(INR mn)
Year Remarks Equity capital % dilution
Opening capital for FY01 49.1 -
FY01 Right issue 49.1 99.9
FY04 Private placement 20.0 20.4
FY05 Private placement 20.0 16.9
FY07 ESOP 0.7 0.5
Conversion of warrants 7.0 5.1
New issue for cash 15.5 11.2
Source: Edelweiss research

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Power Equipment

Table 10: KPP—Capital history


(INR mn)
Year Remarks Equity capital % dilution
FY07 Opening capital for FY07 * 217.2
QIB placement 47.8 22.0
265.0
Source: Edelweiss research Note: * Adjusted for bonus issue in FY07

However, in a high growth environment, investors prefer to look at growth opportunities and
hence, revenue and PAT growth become key focus areas. We believe this is likely to be the
case in the power T&D EPC industry as well, as the industry is currently in a high growth phase
and JYS is likely to show higher growth than KPP and KECI and hence, negative cash flows due
to low working capital turnover are likely to be overlooked. However, we believe negative cash
flows make JYS more susceptible to dilution risks than KPP and KECI.

International geographies: Overview


Africa

The African market’s power generation capacity in FY07 was ~84 GW and demand growth in
the continent has significantly outpaced supply, leading to frequent blackouts and disruptions in
the country’s key mining sector. Growth in demand has been driven by the rising mining and oil
prospecting activities in the continent.

Chart 1: Electricity production in Africa in 2005

35,000

28,000

21,000

(MW)
14,000

7,000

-
Egypt

Morocco

Cameroon

Sudan
Republic of
South Africa

Algeria

Nigeria

Libya

Mozambique

Tunisia

Zimbabwe

Zambia

Ghana

Kenya

Cote d'Ivoire
Congo,

Source: Central Intelligence Agency, Edelweiss research

Power generation is concentrated majorly in the northern and southern parts of the continent.
South Africa contributes ~50% of the total electricity production in the continent And Eskom
(South Africa) dominates power generation in the region. It generates, transmits, and distributes
electricity to industrial, mining, commercial, agricultural, and residential customers and
redistributors and generates ~95% of electricity used in South Africa and ~45% of electricity
used in Africa. Among other countries, Egypt, Algeria, Nigeria, Morocco, and Libya are major
producers of electricity in the continent; they, together, contribute ~38% of the total electricity
produced in the continent.

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Power Equipment

As the generation capacity in the continent is concentrated, countries have formed pools (such
as South Africa Power Pool–SAPP; West African Power Pool–WAPP, among others) to build a
robust inter-regional power transmission system. These regional pools have planned a series of
priority projects in generation and transmission segments. Over 2004-06, SAPP commissioned
1,140 MW of new capacity.

Table 11: Generation capacity over 2004-06


Country Plant Capacity (MW)
Angola Capanda -1 260
Tanzania Ubongo 80
Zambia Kariba North 30
RSA Camden 380
Zambia Kariba North 30
RSA Camden 190
RSA Arnot 120
Swaziland Maguga 20
Zambia Kafue Gorge 30
1,140
Source: SAPP reports, Edelweiss research

The SAPP region’s available capacity in FY07 stood at ~41 GW. It is estimated that the South
African regional demand will grow by ~3.6% annually to ~57 GW in 2010.

Chart 2: SAPP capacity details

70,000

62,000

54,000

(MW)
46,000

38,000

30,000
FY05

FY06

FY07E

FY08E

FY09E

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

Capacity planned Capacity required Peak demand forecast

Source: Central Intelligence Agency, Edelweiss research

To bridge the demand-supply gap, SAPP is working on short term generation projects to be
commissioned before 2010 and long term generation projects to be implemented after 2010.
Under short term projects, it plans to commission ~13 GW over FY07-10.

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Power Equipment

Table 12: Generation capacity (MW) addition during 2007-10E


Country Capacity (MW)
Angola 343
Botswana 600
DRC 1,136
Lesotho 28
Malawi 104
Mozambique 912
Namibia 800
RSA 6,639
Swaziland 20
Tanzania 260
Zambia 1,350
Zimbabwe 1,315
13,507
Source: SAPP reports, Edelweiss research

Over the long term, SAPP will add ~32 GW of power generation capacity to bring the total
available capacity to ~82 GW. Outlay for this project stands at ~USD 43 bn over the next 8-10
years. Of the USD 43 bn, Eskom plans to spend ~USD 39 bn, which includes 70% in the power
generation space and the balance in transmission and distribution systems.

The total installed capacity in the western region is ~8 GW as in 2003. The per capita
consumption of electricity in the region is among the lowest in the world. Economic and
population growth, with ~70% of the population currently off grid, has led to a strong demand
for electricity. Power demand in the region is expected to grow at 7.6% annually till 2020.
WAPP has identified following projects for first phase of regional network development to be
executed over the next five years.

Table 13: WAPP priority projects


(USD mn)
Country Details No.of substations Value
Nigeria - Benin - Niger - B.Faso 330kV, 715 km 5 443
Aboadze-Prestea-Kumasi-Han in Ghana 330kV, TBDS 4 TBDS
Tunu-Han-Wa in Ghana TBDS 3 TBDS
Ghana - Cote d’Ivoire 225kV, 200 km 2 TBDS
Ghana - B.Faso - Mali TBDS TBDS TBDS
Bobo Dioulasso –Ouagadougou in B. Faso 225kV, 360 km 2 130
Laboa (CI) – Ferke (CI) –Sikasso (Mali)- Segou(Mali) TBDS TBDS TBDS
Aboadze - Volta in Ghana 330kV, 215 km 2 38
Ghana - Togo - Benin 330kV, 340 km 3 105
Benin - Nigeria 330kV, 70 km 2 40
Cote d’Ivoire - Ghana 225kV, 220 km 2 TBD
Source: WAPP, Edelweiss research Note: TBDS- To be determined by study

Middle East and North Africa (MENA)


The total installed power capacity in the MENA region stood at ~162 GW (as of end 2005),
representing ~4.5% of the world’s total installed capacity. Demand in the region is expected to
grow at ~7% annually for the next 8-10 years.

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Power Equipment

According to the World Energy Council, the Gulf Cooperation Council (GCC) region will require
100 GW of additional power over the next 10 years to meet the growing demand. As stated in
table 14, GCC countries plan to invest ~USD 36 bn for power generation projects by 2010. It is
expected that ~USD 57 bn will be spent over the next five to six years in the MENA region for
installing new capacity.

Table 14: Country-wise power generation capacity addition by 2010


(USD bn)
Countries Capacity (MW) Estimated cost
Saudi Arabia 20,000 15.0
UAE 6,600 5.1
Qatar 800 0.6
Oman 1,100 0.9
Lebanon 350 0.2
Kuwait 3,400 2.5
Jordan 750 0.4
Iran 20,000 10.0
Bahrain 1,200 0.9
54,200 35.6
Source: MEED, Edelweiss research

The GCC countries are in the midst of implementing a regional power grid project at an
estimated cost of ~USD 3 bn to be completed by the end of 2010. The states have established
the GCC Interconnection Authority, aimed at linking power grids of all the six GCC countries (viz.,
Saudi Arabia, Qatar, Bahrain, Kuwait, Oman, and UAE). The GCC Interconnection Grid will be
developed in three phases: First phase will form the north grid, interconnecting Kuwait, Saudi
Arabia, Bahrain, and Qatar. Thirteen contracts worth USD 1.25 bn will be awarded in this phase.
In the second phase, the south grid interconnection of the independent system in the UAE as
well as Oman will be completed. Third phase will interconnect the south and north grids, which
will complete the interconnection of the six Gulf states.

We believe the addition in generation capacity will facilitate expansion of regional transmission
network and inter regional capacity to transmit power. We expect the African and Middle
Eastern power sectors to have a positive impact on our coverage universe. The integration of
regional grids will emerge as a great business opportunity for domestic T&D companies, leading
to strengthening of their order books in case of any slow down in domestic (PGCIL majorly)
spending as had happened in H1FY08.

KEC already has a strong foothold in foreign markets compared to peers; KPP and JYS have
also increased exposure in the export market, with both the companies receiving key orders in
the following regions:

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Power Equipment

Table 15: Details of recent international orders


Agency Brief details Order value Company Country
(INR mn)
NamPower Contract for execution of approximately 650 km of 2,963 Jyoti Structures Namibia, Africa
350 kV HVDC transmission line.

Saudi Arabian Mining Turnkey job of 380 kV DC transmission lines of 123 2,600 KEC Saudi Arabia
Company (MA'ADEN) kms.

NamPower Turnkey job of 350 kV double circuit bipolar HVDC 1,400 KEC Namibia, Africa
transmission line of 306 kms.

GRTE Sonelgaz Turnkey job of laying 400 KV transmission line 1,550 Kalpataru Algeria, Africa
project

Ethiopian Electric Power Turnkey job for construction of 230 kV & 63 kV 1,580 Kalpataru Ethiopia& Djibouti,
Corporation & Electricity De transmission lines of Ethiopia-Djibouti power Africa
Djibouti interconnection
Source: Edelweiss research

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Power Equipment

Valuation

In the power T&D EPC space, KPP is our top pick, notwithstanding its disappointing Q3FY08 results.
We like the company due to its historical record, significant revenues coming from the Indian market,
diversified business model, and robust return ratios.

Table 16: Peer comparison


Company Price EPS P/E (x) RoCE (%)
(INR) FY07 FY08E FY09E FY10E FY07 FY08E FY09E FY10E FY07 FY08E FY09E FY10E
Kalpataru Power Transmission 1,236.0 60.9 72.9 93.5 120.4 20.3 17.0 13.2 10.3 31.6 26.3 28.6 30.2
KEC International 710.0 27.8 33.6 44.4 56.0 25.6 21.2 16.0 12.7 37.1 42.3 44.1 43.5
Jyoti Structures 209.1 6.8 10.7 13.9 18.5 30.7 19.5 15.1 11.3 33.3 31.5 28.4 29.4
Source: Edelweiss research

If we look at five year total returns to shareholders (TRS), KPP has performed better than peers; also
its three years’ TRS have been better than JYS and KECI. However, one year TRS for KPP are low,
primarily due to the share price reaction to poor Q3FY08 results.

Chart 3: Company-wise yearly CAGR returns

Jan 03-08

Jan 05-08

Jan 06-08

Jan 07-08

- 50 100 150 200


CAGR returns (%)
KEC Jyoti Structures Kalpataru

Source: Edelweiss research

Kalpataru Power Transmission

Kalpataru Power Transmission (KPP) did not incur losses in FY01 or FY02, even when the rest
of the industry posted losses. Its margins have always been higher than the industry average.

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Power Equipment

Chart 4: KPP—Share price triggers

2,500 25,000
Kalpataru Power Transmission BSE SENSEX
2,000 20,000
QIB pla c e m e nt
1:1 bo nus (INR 3.5 bn)
a nno unc e m e nt
1,500 15,000

(Sensex)
Ac qn o f J M C

(INR)
pro je c ts
B io m a s s po we r pla nt
1,000 10,000
o f 7.8 M W
c o m m e nc e s o pe ra tio n

500 5,000

- -

Apr-02

Aug-02

Jan-03

Jun-03

Nov-03

Apr-04

Aug-04

Jan-05

Jun-05

Nov-05

Mar-06

Aug-06

Jan-07

Jun-07

Nov-07
Source: Edelweiss research

Apart from power T&D EPC, KPP has presence in power generation EPC, EPC for pipelines,
and also in the construction sector through JMC Projects. It is also entering the power
generation utility space, wherein it has bagged a ~150 MW hydel power plant order. KPP is also
likely to bid for power transmission BOT projects.

To fund expansion, the company has announced plans of raising INR 5 bn capital. While we
believe KECI and JYS also offer substantial upsides, KPP is our favourite bet in the sector. On
our current EPS estimates of ~INR 94 and ~INR 120, the stock is trading at a P/E of ~13x and
~10x for FY09E and FY10E, respectively. We believe the stock offers upsides from current
levels, and maintain our ‘BUY’ recommendation.

Chart 5: KPP—P/E band

2,000 20x
18x

1,600 16x
14x
1,200 12x
10x
(INR)

800 8x

400

0
Apr-03 Nov-03 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07

Source: Edelweiss research

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Power Equipment

Key risks
Slowdown in the scale up of the EPC business pipeline.

KEC International
KEC International (KECI) has made stupendous progress compared to the turbulent years of
FY01 and FY02. We like the company’s business model. It has successfully initiated the
outsourcing concept in the industry and this business model has resulted in superior working
capital turnover for the company. Further, by virtue of being active in the international geography,
the company procures equipment from locations close to its project sites. However, rupee
appreciation is likely to negatively impact its revenue growth.

Chart 6: KECI—Share price triggers

1,000 25,000
Shareholders approve arrangement
between RPGT and NITEL
800 20,000
Strong
Q3FY07
600 15,000

(Sensex)
(INR)

400 10,000

200 5,000
KEC INTERNATIONAL BSE SENSEX
- -
Mar-06

May-06

Aug-06

Oct-06

Dec-06

Mar-07

May-07

Aug-07

Oct-07

Dec-07
Source: Edelweiss research

On our current EPS estimates of ~INR 44 and ~INR 56, the stock is trading at P/E of 16x and
13x for FY09E and FY10E, respectively. KECI aims to be the leading power T&D EPC contractor
in the world, with presence in Africa, Central Asia, and the US. While operations in the
international market are risky due to fixed price contracts, we believe KECI is better placed than
JYS or KPP to handle the complexities of the international market due to its long standing
record in the international market. We maintain our BUY recommendation on the stock.

Key risks
Adverse movement in rupee and commodity inflation.

Jyoti Structures
We like Jyoti Structures (JYS) as it is more of an India power T&D EPC play compared to KPP
or KECI. Hence, the company offers higher scope for growth at a lower risk profile. However,
we are concerned about the company’s negative cash flows in the foreseeable future as it goes
for further expansion. Also, JYS is looking at growth opportunities outside India, more precisely
Africa and the Middle East, which increases the company’s risk profile, even as it increases
revenue visibility. Further, JYS has to frequently raise capital due to negative cash flows, which
increases the risk of dilution in the future. Due to lower working capital turnover, JYS also has
lower RoCEs than KPP and KECI.

14
Power Equipment

Chart 7: JYS—Share price triggers

350 25,000
Jyoti Structures BSE SENSEX S AF ve nture
a nno unc e m e n
280 20,000
Inve s tm e nt by M o rga n
S ta nle y a nd De uts c he
210 15,000

Sensex
Duba i J V

(INR)
a nno unc e m e nt
140 10,000
P vt pla c e m e nt Invs t by R e lia nc e
(~20% dilutio n) Ene rgy

70 5,000

0 -

Apr-02

Aug-02

Jan-03

Jun-03

Nov-03

Apr-04

Aug-04

Jan-05

Jun-05

Oct-05

Mar-06

Aug-06

Jan-07

Jun-07

Oct-07
Source: Edelweiss research

On our current EPS estimates of ~INR 14 and ~INR 19, the stock is trading at a P/E of 15x and
11x for FY09E and FY10E, respectively. We do not expect any significant re-rating from current
levels over the medium term. We are downgrading our recommendation to ‘ACCUMULATE’
from ‘BUY’.

Chart 8: JYS—P/E band

350 27x
24x
21x
280
18x

210 15x
(INR)

12x
140
9x

70

0
Apr-03 Dec-03 Aug-04 Apr-05 Dec-05 Aug-06 Apr-07 Dec-07

Source: Edelweiss research

Key risks
Lower-than-expected margins and higher-than-expected working capital requirement in
international geographies.

15
Power Equipment
India Equity Research | Power Equipment Company Update

JYOTI STRUCTURES INR 209

Two steps ahead, one step back ACCUMULATE


Pure play on power T&D EPC space
Jyoti Structures (JYS) is a pure play on the power T&D EPC space, unlike KEC and KPP— February 26, 2008

the former has significant international presence and the latter concentrates on various
Misal Singh
business verticals besides power T&D EPC. Hence, we believe for investors keen to play +91-22-2286 4316
the power T&D story in India, JYS can be the preferred choice. misal.singh@edelcap.com

Pawan Parakh
High growth will compensate negative cash flows +91-22-4019 4995
pawan.parakh@edelcap.com
JYS has negative operating cash flows due to higher working capital requirement. We
prefer companies with positive operating cash flows and hence, we believe, JYS runs the
risk of frequent dilution. However, revenue visibility continues to point towards high revenue
and PAT growth over the long term.

Dilution plans scrapped for now


The company plan’s to raise ~ INR 4 bn through a mix of equity, debt, and quasi-debt
instruments has been withdrawn. Now, JYS plans to raise ~25% of the initially estimated
capital through debt, while further dilution will likely be done at a later date. Hence we have
maintained the expanded capital base leading to equity dilution in our calculations till further
Reuters : JYTS.BO
clarity emerges on the requirement in funds. We believe, going ahead, JYS’s working
Bloomberg : JYS IN
capital is likely to come under further pressure as the company has few orders from the
Middle East geography where the payment terms are a bit more stringent.
Market Data
52-week range (INR) : 328 / 152
Outlook and valuations: Dilution concerns persist; downgrading to ‘ACCUMULATE’
Share in issue (mn) : 81.1
JYS has a robust order book (~2x its FY08E revenues) which provides good revenue
M cap (INR bn/USD mn) : 17.3 / 435.8
visibility. However, its high working capital requirement increases the dilution risk going
Avg. Daily Vol. BSE/NSE (‘000) : 171.3
forward. On our current EPS of INR 14 and INR 19, the stock is trading at P/E of 15x and
11x FY09E and FY10E, respectively. We do not expect any significant re-rating from
current levels over the medium term. We are downgrading our recommendation to Share Holding Pattern (%)
‘ACCUMULATE’ from ‘BUY’.
Promoters : 27.0
MFs, FIs & Banks : 16.9
FIIs : 27.8
Others : 28.3

Financials
Year to March FY07 FY08E FY09E FY10E
Revenue (INR mn) 9,708 14,906 19,938 25,955
Rev. growth (%) 39.1 53.5 33.8 30.2
EBITDA (INR mn) 1,254 1,918 2,493 3,193 360 800
Net profit (INR mn) 545 989 1,228 1,637
295 600
Basic shares outstanding (mn) 81 88 88 88
('000)
(INR)

Adjusted diluted EPS (INR) 6.8 10.7 13.9 18.5 230 400
EPS growth (%) 98.7 57.6 29.5 33.3
P/E (x) 30.7 19.5 15.1 11.3 165 200
EV/ EBITDA (x) 15.8 10.3 8.0 6.2
ROAE (%) 27.7 22.2 19.4 21.5 100 -
ROACE (%) 33.3 31.5 28.4 29.4 Feb-07 Aug-07 Feb-08

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
16
Power Equipment

Pure play on power T&D EPC space


PGCIL is likely to invest INR 65 bn in FY08E (~INR 20 bn in Q4FY08E), ~INR 85 bn in FY09E, and
~INR 300 bn from FY10-12E to upgrade India’s power transmission network. We note that the
activity level increases in the later years of five year plans. Hence, JYS’s revenue growth profile is
likely to be substantially higher in the last two-three years of the Eleventh Plan period.

Table 1: JYS—Revenue growth vis-a-vis PGCIL’s capex


Year to March FY04 FY05 FY06 FY07 FY08E
PGCIL capex (INR mn) 24,212 32,224 41,336 56,446 64,650
growth (%) 33.1 28.3 36.6 14.5
JYS revenue (INR mn) 2,983 4,245 6,978 9,708 14,906
growth (%) 42.3 64.4 39.1 53.5
Source: Edelweiss research

High growth to compensate negative cash flows


Power T&D EPC companies generally have negative operating cash flows. We believe, JYS will
rank lower than peers on this metric, as its working capital turnover is lower than peers. Further,
while JYS and KPP have almost similar metrics on the current asset side, lower creditor/revenues
of JYS, reduce its working capital turnover. We believe this is likely due to higher contribution from
sub station business for JYS.

Table 2: JYS—Key operational parameters


(INR mn)
RoCE tree FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08E FY09E FY10E
Operating working capital/Revenues (%) 55.2 42.7 36.2 30.2 34.6 32.9 38.7 38.0 38.0 38.0
Receivables/Revenues (%) 36.9 31.3 46.2 50.5 43.3 35.6 37.4 38.3 38.3 38.3
Inventories/Revenues (%) 19.9 14.9 15.6 17.6 21.6 17.4 7.9 7.9 7.9 7.9
Other current assets/Revenues (%) 19.6 19.5 14.6 15.9 12.7 9.1 9.3 9.3 9.3 9.3
Loans and advances/Revenues (%) 15.7 15.0 14.3 11.0 10.7 7.4 11.0 11.0 11.0 11.0
Creditors/Revenues (%) 36.9 37.9 54.5 64.8 53.6 36.7 26.9 28.4 28.4 28.4
Source: Edelweiss research

JYS has negative operating cash flows due to higher working capital requirement, and hence,
we believe JYS runs the risk of frequent dilution. The company had recently planned to raise
~ INR 4 bn through a mix of equity, debt, and quasi-debt instruments which was withdrawn to
be done at a later date.

Table 3: JYS—Fund raising details


(INR mn)
Particulars No of shares/ warants Rate Amount
Pref warrants * 4,200,000 NM 1,000
Shares 7,605,000 287 2,183
FCCB 985
Total 4,168
Source: Edelweiss research Note: * Edelweiss estimates
After scrapping its fund raising plans, JYS now plans to raise ~25% of the initially estimated
capital through debt. We believe, going ahead, JYS’s working capital is likely to come under
further pressure as the company has few orders from the Middle East geography where
payment terms are stringent.

17
Power Equipment

Lower returns due to higher tax rate


JYS has lower RoCEs than KPP and KECI due to higher tax rate and lower working capital
turnover. The company’s pre tax RoCE was almost at level with KPP in FY07, however, higher
tax rate depressed the same.

Table 4: JYS—RoCE tree


RoCE tree FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08E FY09E FY10E
RoCE (%) 13.6 1.3 12.5 17.5 20.9 28.6 33.3 31.5 28.4 29.4
EBIT/Revenues 9.8 0.8 7.5 8.8 8.7 10.0 12.3 12.4 12.0 11.9
Direct costs/Revenues (%) 67.6 77.8 76.0 60.9 64.7 61.1 60.6 60.0 59.5 57.5
Employee costs/Revenues (%) 5.0 5.3 4.6 3.8 3.4 2.7 2.7 2.8 2.8 2.8
Other expenses/Revenues (%) 16.1 14.9 10.4 25.3 22.2 25.6 23.8 24.4 25.3 27.4
Revenues/Capital employed (x) 1.4 1.7 1.7 2.0 2.4 2.9 2.7 2.5 2.4 2.5
Operating working capital/Revenues (%) 55.2 42.7 36.2 30.2 34.6 32.9 38.7 38.0 38.0 38.0
Receivables/Revenues (%) 36.9 31.3 46.2 50.5 43.3 35.6 37.4 38.3 38.3 38.3
Inventories/Revenues (%) 19.9 14.9 15.6 17.6 21.6 17.4 7.9 7.9 7.9 7.9
Other current assets/Revenues (%) 19.6 19.5 14.6 15.9 12.7 9.1 9.3 9.3 9.3 9.3
Loans and advances/Revenues (%) 15.7 15.0 14.3 11.0 10.7 7.4 11.0 11.0 11.0 11.0
Creditors/Revenues (%) 36.9 37.9 54.5 64.8 53.6 36.7 26.9 28.4 28.4 28.4
Net PPE/Revenues (%) 17.8 14.2 15.8 14.0 10.4 7.8 5.8 4.5 4.0 3.7
Cash tax rate on EBIT (%) 14.8 241.3 31.0 23.4 32.2 36.5 36.2 36.5 36.5 36.7
Source: Edelweiss research

Outlook and valuations: Dilution concerns persist; downgrading to ‘ACCUMULATE’

Chart 1: JYS—Share price triggers

350 25,000
S AF ve nture
Jyoti Structures BSE SENSEX
a nno unc e m e n
280 20,000
Inve s tm e nt by M o rga n
S ta nle y a nd De uts c he
210 15,000

Sensex
Duba i J V
(INR)

a nno unc e m e nt
140 10,000
P vt pla c e m e nt Invs t by R e lia nc e
(~20% dilutio n) Ene rgy

70 5,000

0 -
Apr-02

Aug-02

Jan-03

Jun-03

Nov-03

Apr-04

Aug-04

Jan-05

Jun-05

Oct-05

Mar-06

Aug-06

Jan-07

Jun-07

Oct-07

Source: Edelweiss research

We believe JYS’s order intake is likely to increase from Q4FY08E onwards, given sharp uptick in
order flow from PGCIL as well as increase in distribution order flow. We do not have concerns
on the revenue visibility front; in fact, it is one of the key factors in power T&D EPC companies
and one of the main reasons why companies have re-rated over the past two years. However,
we are concerned about JYS’s negative operating cash flows due to high working capital
requirement. We believe the working capital requirement is likely to increase further given the
company’s entry in international geographies. On our current EPS estimates of ~INR 14 and
~INR 19, the stock is trading at a P/E of 15x and 11x for FY09E and FY10E, respectively. We
do not expect any significant re-rating from current levels over the medium term. We are
downgrading our recommendation to ‘ACCUMULATE’ from ‘BUY’.

18
Power Equipment

Company Description

Incorporated in 1975, JYS is a leading turnkey/EPC player, providing solutions in the field of high
voltage power transmission lines and substations. The company has uniquely positioned itself to pre-
qualify for transmission lines up to 800 KV, substations up to 400 KV, and distribution projects. JYS is
amongst the very few companies in the world capable of executing turnkey jobs that involve setting up
both transmission lines and substations. The company has three business segments—power
transmission towers, rural electrification and substations. Power transmission contributes ~60%,
substations contribute about 15% and rural electrification contribute the rest to the revenues.

Investment Theme

India’s inter-regional power transmission capacity is likely to increase from ~11,500 MW currently to
~16,450 MW at the end of the tenth plan (FY07-end) and to ~37,150 MW at the end of the eleventh
plan (FY12-end). Progress on planned power T&D infrastructure upgradation is driving the current
phase of growth. Further, we expect an investment of ~INR 1,400 bn for the expansion of the
transmission infrastructure during the eleventh plan. Consequently, the addressable market for the
power transmission tower industry from this opportunity is likely to increase manifold over the eleventh
plan period. We believe JYS, with its execution capabilities, is well-placed to leverage this opportunity.

Key Risks

Since power T&D investments are executed by state utilities, any change in the political environment
can potentially impact the pace of execution in the industry, which in turn, could impact the timing of
revenue growth. Additionally, the customer concentration risk is high in this business, which affects the
bargaining power of transmission tower companies adversely.

19
Power Equipment

Financial Statements (Consolidated)

Income statement (INR mn)


Year to March FY06 FY07 FY08E FY09E FY10E
Income from operations 6,978 9,708 14,906 19,938 25,955
Direct costs 4,261 5,882 8,946 11,858 14,937
Employee costs 185 267 410 548 714
Other expenses 1,784 2,306 3,632 5,039 7,112
Total operating expenses 6,230 8,454 12,987 17,445 22,763
EBITDA 748 1,254 1,918 2,493 3,193
Depreciation and amortisation 48 58 77 92 110
EBIT 700 1,195 1,841 2,401 3,082
Interest expenses 258 329 405 533 568
Other income 21 8 4 3 2
Profit before tax 462 875 1,440 1,871 2,516
Provision for tax 185 325 539 700 942
Extraordinary items (0) (5) 40 - -
Associate income - - 47 58 62
Reported profit 276 545 989 1,228 1,637
Adjusted net profit 277 550 949 1,228 1,637
Basic shares outstanding 69.1 80.7 88.3 88.5 88.5
Diluted shares outstanding 80.8 80.8 88.5 88.5 88.5
Face value 2 2 2 2 2
Dividend per share 0.4 0.6 1.0 1.2 1.6
Dividend payout (%) 11.1 8.9 8.9 8.9 8.9

Common size metrics- as % of net revenues


Year to March FY06 FY07 FY08E FY09E FY10E
Operating expenses 89.3 87.1 87.1 87.5 87.7
Depreciation 0.7 0.6 0.5 0.5 0.4
Interest expenditure 3.7 3.4 2.7 2.7 2.2
EBITDA margins 10.72 12.92 12.9 12.5 12.3
Adjusted net profit margins 4.0 5.7 6.4 6.2 6.3

Growth metrics (%)


Year to March FY06 FY07 FY08E FY09E FY10E
Revenues 64.4 39.1 53.5 33.8 30.2
EBITDA 82.2 67.7 53.0 29.9 28.1
PBT 155.1 89.3 64.6 29.9 34.5
Net profit 140.0 98.7 72.5 29.5 33.3
EPS 140.0 98.7 57.6 29.5 33.3

20
Power Equipment

Balance sheet (INR mn)


As on 31st March FY06 FY07 FY08E FY09E FY10E
Equity capital 138 161 177 177 177
Share warrants 15 0 0 0 0
Reserves & surplus 1,063 2,597 5,593 6,700 8,174
Shareholders funds 1,216 2,758 5,770 6,877 8,351
Secured loans 1,203 1,515 1,500 2,600 3,000
Unsecured loans 406 80 80 80 80
Borrowings 1,609 1,595 1,580 2,680 3,080
Sources of funds 2,825 4,353 7,350 9,557 11,431
Gross block 853 936 1,125 1,336 1,611
Depreciation 322 375 452 543 654
Net block 531 561 674 793 957
Capital work in progress 15 2 - - -
Total fixed assets 546 563 674 793 957
Investments 166 185 185 185 185
Inventories 1,213 763 1,172 1,568 2,041
Sundry debtors 2,487 3,635 5,703 7,629 9,931
Cash and equivalents 38 92 1,196 1,479 1,029
Loans and advances 517 1,065 1,635 2,187 2,847
Other current assets 633 905 1,390 1,859 2,420
Total current assets 4,889 6,461 11,096 14,721 18,268
Sundry creditors and others 2,558 2,607 4,234 5,663 7,372
Provisions 141 196 318 426 555
Total CL & provisions 2,699 2,803 4,552 6,089 7,926
Net current assets 2,190 3,658 6,544 8,632 10,341
Net deferred tax (78) (77) (77) (77) (77)
Others 1 23.85 23.85 23.85 23.85
Uses of funds 2,825 4,353 7,350 9,557 11,431
Book value per share (BV) (INR) 18 34 65 78 94

Cash flow statement (INR mn)


Year to March FY06 FY07 FY08E FY09E FY10E
Net profit 276 545 989 1,228 1,637
Add: Depreciation 48 58 77 92 110
Add: E.O.adjustments (0) (5) 40 - -
Add: Deferred tax 9 (1) - - -
Gross cash flow 333 598 1,106 1,320 1,747
Less: Dividends 31 48 88 109 145
Less: Changes in W. C. 626 1,141 1,298 1,336 1,598
Operating cash flow (324) (592) (280) (126) 4
Less: Change in investments 79 19 - - -
Less: Capex 137 70 189 211 275
Free cash flow (539) (681) (470) (337) (271)

21
Power Equipment

Ratios
Year to March FY06 FY07 FY08E FY09E FY10E
ROAE (%) 25.6 27.7 22.2 19.4 21.5
ROACE (%) 28.6 33.3 31.5 28.4 29.4
Current ratio 1.8 2.3 2.4 2.4 2.3
Debtors (days) 130 137 140 140 140
Fixed assets t/o (x) 14.1 17.5 24.1 27.2 29.7
Average working capital t/o (x) 3.7 3.3 2.9 2.6 2.7
Average capital t/o (x) 2.9 2.7 2.5 2.4 2.5
Net debt/Equity 1.0 0.7 0.2 0.1 0.2
Gross debt/Equity 1.3 0.8 0.4 0.3 0.4

Valuations parameters
Year to March FY06 FY07 FY08E FY09E FY10E
Adjusted diluted EPS (INR) 3.4 6.8 10.7 13.9 18.5
Y-o-Y growth (%) 140.0 98.7 57.6 29.5 33.3
Diluted CEPS (INR) 4.0 7.5 11.6 14.9 19.7
P/E (x) 61.1 30.7 19.5 15.1 11.3
Price/BV(x) 11.9 6.1 3.2 2.7 2.2
EV/Sales (x) 2.9 2.0 1.3 1.0 0.8
EV/EBITDA (x) 26.5 15.8 10.3 8.0 6.2

22
Power Equipment
India Equity Research | Power Equipment Company Update

KALPATARU POWER TRANSMISSION INR 1,236

Waiting in the wings BUY


Changing business mix to lower risk profile
February 26, 2008
Kalpataru Power Transmission (KPP) is present in power T&D EPC, pipeline EPC, power
generation, logistics, and intends to get into private BOT transmission projects as well. We
Misal Singh
believe, over the long term, KPP is likely to graduate to a company with a business mix of +91-22-2286 4316
EPC and assets from a purely EPC company. We believe this will lower the risk profile of misal.singh@edelcap.com

the business and thus impact valuations positively. Pawan Parakh


+91-22-4019 4995
pawan.parakh@edelcap.com
The winning edge: Higher margins and cash flows
KPP is the front runner in the power T&D EPC sector. The company has higher margins
than the industry, superior cash flows, and higher working capital turnover. We firmly
believe in the power T&D EPC business, working capital management is the key factor on
which hinges the long term success of a company. We are comfortable with KPP’s
business model which has positive operating cash flows compared to other domestic
power T&D EPC companies.

Gas pipeline: Leveraging on project management skills


India has less than 15,000 km of oil and gas pipeline. Industry expects around 18,000 km
of pipeline to be built in the next five-six years to meet the growing crude oil and natural Reuters : KAPT.BO
gas demand. We believe the order intake in the gas pipeline business in likely to increase Bloomberg : KPP IN
with roll outs planned by the Gas Authority of India (GAIL) in the near term.
Market Data
Outlook and valuations: Positive, maintain ‘BUY’
52-week range (INR) : 2,039 / 957
We believe, KPP’s Q3FY08 results were an aberration, primarily due to slowdown in Share in issue (mn) : 26.5
execution in distribution orders due to inspection delays by a few select utilities. The M cap (INR bn/USD mn) : 32.7 / 841.4
company is a leading contractor in the power sector and has higher capital efficiency than Avg. Daily Vol. BSE/NSE (‘000) : 35.3
its peers and the growth scenario for KPP in the medium to long term is on a fundamentally
strong footing. On our consolidated EPS estimates of ~INR 94 and ~INR 120, the stock is
trading at P/E of ~13x and ~10x FY09E and FY10E earnings, respectively. We continue to Share Holding Pattern (%)
maintain our ‘BUY’ recommendation on the stock. Promoters : 63.7
MFs, FIs & Banks : 19.8
FIIs : 8.1

Others : 8.4
Financials
Year to March FY07 FY08E FY09E FY10E
Revenue (INR mn) 15,987 26,981 36,623 48,522
Rev. growth (%) 90.2 68.8 35.7 32.5
EBITDA (INR mn) 2,563 3,480 4,526 5,855 2,200 300
Net profit (INR mn) 1,630 2,070 2,683 3,494
1,800 225
Shares outstanding (mn) 26 27 27 27
('000)
(INR)

EPS (INR) (adjusted for split) 60.9 72.9 93.5 120.4 1,400 150
EPS growth (%) 98.8 19.8 28.3 28.7
P/E (x) 20.3 17.0 13.2 10.3 1,000 75
EV/ EBITDA (X) 13.3 9.8 7.5 5.8
ROAE (%) 25.0 24.0 23.7 24.0 600 -
Feb-07 Aug-07 Feb-08
ROACE (%) 31.6 26.3 28.6 30.2
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
23
Power Equipment

Changing business mix to lower risk profile


KPP is present in power T&D EPC, pipeline EPC, power generation, logistics, and intends to get
into private BOT transmission projects as well. We believe, over the long term, KPP is likely to
graduate to a company with a business mix of EPC and assets from a purely EPC company. We
do not expect this to happen immediately, but we definitely see the trend. The change in the
business mix is likely to lower the company’s risk profile as purely EPC businesses generally have
a higher risk profile. It recently bid for a hydel power project in Himachal Pradesh, has embarked
into the logistics business, and participated in the bidding of WRSS transmission project along
with Tata Power, which was eventually won by Reliance Energy. We believe all these initiatives
point to the change that we are drawing attention to.

The winning edge: Higher margins and cash flows


Disappointing Q3FY08 results not withstanding, KPP remains the front runner in the power T&D
EPC sector. The company has higher margins than the industry, superior cash flows, higher
working capital turnover resulting in robust RoCEs, and has been ahead of the industry in
diversifying into different businesses. We believe the company’s management is proactive and in
the past has demonstrated superior management skills, which has resulted in KPP being ahead of
the curve.

Table 1: KPP—RoCE tree


RoCE tree FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08E FY09E FY10E
RoCE (%) 10.1 10.0 13.6 14.5 26.9 38.6 35.9 25.5 28.0 29.6
Pre tax RoIC (%) 10.3 10.0 13.4 14.2 26.0 38.0 43.2 33.5 36.2 37.2
EBIT/Revenues (%) 8.8 10.4 9.6 8.6 10.7 14.3 16.2 14.6 14.1 13.8
Direct costs/Revenues (%) 75.1 63.8 53.2 56.7 53.9 54.6 50.6 53.3 53.4 54.2
Employee costs/Revenues (%) 4.9 6.5 4.8 4.1 4.4 4.6 4.7 4.7 4.7 4.7
Other expenses/Revenues (%) 9.5 17.3 31.2 29.2 30.1 25.4 27.3 26.4 26.9 26.6
Revenues/Capital employed (x) 1.1 1.0 1.4 1.7 2.5 2.7 2.2 1.7 2.0 2.1
Operating working capital/Revenues (%) 66.9 95.9 58.5 43.4 30.3 29.4 35.2 35.2 35.2 35.2
Receivables/Revenues (%) 45.8 69.8 47.4 33.4 22.6 16.5 10.4 10.4 10.4 10.4
Inventories/Revenues (%) 24.9 44.8 32.5 26.4 23.7 35.4 35.2 35.2 35.2 35.2
Other current assets/Revenues (%) 4.6 6.5 3.7 10.7 9.3 9.7 11.5 11.5 11.5 11.5
Loans and advances/Revenues (%) 9.7 10.5 8.1 4.2 6.6 8.0 7.9 7.9 7.9 7.9
Creditors/Revenues (%) 18.3 35.7 33.2 31.2 31.9 40.1 29.8 29.8 29.8 29.8
Net PPE/Revenues (%) 19.3 19.7 20.8 17.3 13.1 18.1 13.7 10.8 7.8 5.7
Cash tax rate on EBIT (%) 19.3 24.3 30.1 18.3 32.4 29.5 26.5 27.4 26.8 27.0
Source: Edelweiss research

KPP’s higher RoCEs over the cycle are a result of better margins and lower working capital
compared to JYS. Further, lower tax rate also results in higher RoCEs. Due to superior RoCEs
and business model compared to the industry, KPP has historically traded at a premium to
other companies in the sector. The changing business profile, which in effect complements the
EPC business, is likely to result in KPP getting superior valuations compared to the past. Hence,
we expect the current mispricing to correct as investors gain confidence as further clarity
emerges post Q4FY08 results.

24
Power Equipment

Gas pipeline: Leveraging on project management skills


India has less than 15,000 km of oil and gas pipeline. Industry expects around 18,000 km of
pipeline to be built in the next five-six years to meet the growing crude oil and natural gas
demand. KPP is currently working on the Bina Wadinar pipeline worth ~INR 2.3 bn and the
Reliance Gas Transportation Infrastructure pipeline worth ~INR 240 mn. We believe the order
intake in the gas pipeline business in likely to increase with roll outs planned by the Gas
Authority of India (GAIL) in the near term.

Outlook and valuations: Positive; maintain ‘BUY’


Chart 1: KPP—Share price triggers

2,500 25,000
Kalpataru Power Transmission BSE SENSEX
2,000 20,000
QIB pla c e m e nt
1:1 bo nus (INR 3.5 bn)
a nno unc e m e nt
1,500 15,000

(Sensex)
Ac qn o f J M C
(INR)

pro je c ts
B io m a s s po we r pla nt
1,000 10,000
o f 7.8 M W
c o m m e nc e s o pe ra tio n

500 5,000

- -
Apr-02

Aug-02

Jan-03

Jun-03

Nov-03

Apr-04

Aug-04

Jan-05

Jun-05

Nov-05

Mar-06

Aug-06

Jan-07

Jun-07

Nov-07
Source: Edelweiss research

KPP is our top pick in the power T&D EPC segment. We believe the company’s Q3FY08 results
were an aberration, primarily due to slowdown in execution in distribution orders due to
inspection delays by a few select utilities. The company is a leading contractor in the power
sector and has higher capital efficiency than peers. Further, we continue to like KPP’s
expansion plans in project management and utilities space in the power sector as further
diversification is likely to reduce the risk profile of its business model, which otherwise is
primarily driven by expansion in the power transmission and distribution segment. On our
consolidated EPS estimates of ~INR 94 and ~INR 120, the stock is trading at P/E of ~13x and
~10x FY09E and FY10E earnings, respectively. We continue to maintain our ‘BUY’
recommendation on the stock.

25
Power Equipment

Company Description

KPP designs, fabricates, erects, constructs, and commissions power transmission lines and sub station
structures on a turnkey basis in India and overseas. It is also in the business of laying pipelines and
construction of biomass power plants.

Investment Theme

India’s inter-regional power transmission capacity is likely to increase from ~11,500 MW currently to
~16,450 MW at the end of the Tenth Five Year Plan (FY07-end) and to ~37,150 MW at the end of the
Eleventh Plan (FY12-end). Progress on planned power T&D infrastructure upgradation is driving the
current phase of growth. We expect an investment of ~INR 2,475 bn for the expansion of the
transmission infrastructure during the Eleventh Plan. Consequently, the addressable market for the
power transmission tower industry from this opportunity is likely to be ~INR 250 bn over the Eleventh
Plan period. We believe KPP is well placed to leverage from the opportunity. Further, KPP’s pipeline
business is relatively easily scalable and going forward it is likely to become a strong player in the
pipeline business.

Key Risks

Power T&D investments are executed by state utilities, which, in turn, are mandated by the government.
Hence, any change in the political environment can potentially impact the pace of execution in the
industry, thus impacting the timing of revenue growth. Additionally, customer concentration risk is high
in the business and this in turn impacts the bargaining power of transmission tower companies.

26
Power Equipment

Financial Statements (Consolidated)

Income statement (INR mn)


Year to March FY06 FY07 FY08E FY09E FY10E
Income from operations 8,404 15,987 26,981 36,623 48,522
Direct costs 6,188 8,037 16,648 22,821 30,597
Employee costs 389 777 1,494 2,075 2,770
Other expenses 517 4,609 5,359 7,200 9,300
Total operating expenses 7,094 13,424 23,501 32,097 42,667
EBITDA 1,310 2,563 3,480 4,526 5,855
Depreciation and amortisation 88 182 368 472 574
EBIT 1,222 2,381 3,112 4,054 5,281
Interest expenses 310 284 483 608 700
Other income 33 123 274 288 313
Profit before tax 944 2,220 2,902 3,734 4,894
Provision for tax 279 590 833 1,052 1,400
Reported profit 665 1,630 2,070 2,683 3,494
Adjusted net profit 665 1,630 2,070 2,683 3,494
Less MI 17 137 204 303
Reported net profit after MI 665 1,613 1,932 2,479 3,191
Shares outstanding 10.9 26.5 26.5 26.5 26.5
Face Value 10 10 10 10 10
Dividend per share 10.0 7.5 7.5 7.5 7.5
Dividend payout (%) 16.3 12.2 9.6 7.4 5.7

Common size metrics- as % of net revenues


Year to March FY06 FY07 FY08E FY09E FY10E
Operating expenses 84.4 84.0 87.1 87.6 87.9
Depreciation 1.0 1.1 1.4 1.3 1.2
Interest expenditure 3.7 1.8 1.8 1.7 1.4
EBITDA margins 15.6 16.0 12.9 12.4 12.1
Net profit margins 7.9 10.1 7.2 6.8 6.6

Growth metrics (%)


Year to March FY06 FY07 FY08E FY09E FY10E
Revenues 55.1 90.2 68.8 35.7 32.5
EBITDA 107.0 95.7 35.8 30.1 29.4
PBT 117.2 135.2 30.7 28.7 31.1
Net profit 131.7 142.4 18.5 19.8 18.9
EPS 131.7 98.8 19.8 28.3 28.7

27
Power Equipment

Balance sheet (INR mn)


As on 31st March FY06 FY07 FY08E FY08E FY10E
Equity capital 109 265 265 265 265
Reserves & surplus 1,571 6,178 7,770 10,171 13,036
Shareholders funds 1,679 6,443 8,035 10,436 13,301
Minority interests 625 708 1,052 1,329
Secured loans 2,328 3,954 3,539 3,539 3,539
Unsecured loans 0 32 356 656 1,156
Borrowings 2,328 3,986 3,896 4,196 4,696
Sources of funds 4,007 11,053 12,639 15,684 19,326
Gross block 1,594 3,915 4,733 5,733 6,833
Depreciation 354 817 1,174 1,646 2,220
Net block 1,240 3,098 3,559 4,087 4,613
Capital work in progress 284 51 0 0 0
Total fixed assets 1,524 3,149 3,559 4,087 4,613
Goodwill on consolidation 0 83 83 83 83
Investments 294 1,392 1,397 1,397 1,397
Inventories 1,387 1,890 2,369 3,169 4,159
Sundry debtors 2,973 6,999 9,347 12,670 16,772
Cash and equivalents 166 1,367 1,731 2,139 2,538
Loans and advances 1,482 1,458 1,985 2,677 3,532
Other current assets 1,747 2,072 2,703 3,487
Total current assets 6,009 13,463 17,502 23,358 30,488
Sundry creditors and others 3,402 6,096 8,829 11,887 15,558
Provisions 361 780 915 1,196 1,539
Total CL & provisions 3,763 6,875 9,745 13,083 17,097
Net current assets 2,246 6,587 7,758 10,275 13,391
Net deferred tax (58) (158) (76) (76) (76)
Others 1 0 (82) (82) (82)
Uses of funds 4,007 11,053 12,639 15,684 19,326
BV per share (INR) (adjusted for split) 155 243 303 394 502

Cash flow statement (INR mn)


Year to March FY06 FY07 FY08E FY09E FY10E
Net profit 665 1,630 2,070 2,683 3,494
Add: Depreciation 88 182 368 472 574
Add: Misc expenses written off 0 1 82 - -
Add: Deferred tax 3 100 (82) 0 0
Gross cash flow 757 1,913 2,438 3,155 4,068
Less: Dividends 124 228 228 228 -
Less: Changes in W. C. 656 1,393 483 1,478 1,933
Operating cash flow (23) 292 1,727 1,449 2,135
Less: Change in investments 193 1,098 5 - -
Less: Capex 899 2,088 767 1,000 1,100
Free cash flow (1,115) (2,894) 955 449 1,035

28
Power Equipment

Ratios
Year to March FY06 FY07 FY08E FY09E FY10E
ROAE (%) 39.6 25.0 24.0 23.7 24.0
ROACE (%) 39.1 31.6 26.3 28.6 30.2
Current ratio 1.6 2.0 1.8 1.8 1.8
Debtors (days) 129 160 126 126 126
Fixed assets t/o (x) 5.5 5.1 7.6 9.0 10.5
Average working capital t/o (x) 4.5 3.6 3.8 4.1 4.1
Average capital t/o (x) 2.7 2.2 2.4 2.8 3.0
Net debt/Equity 0.7 0.2 0.1 0.1 0.1
Gross debt/Equity 1.4 0.6 0.5 0.4 0.4

Valuations parameters
Year to March FY06 FY07 FY08E FY09E FY10E
EPS (INR) (adjusted for split) 30.6 60.9 72.9 93.5 120.4
Y-o-Y growth (%) 131.7 98.8 19.8 28.3 28.7
CEPS (INR) (adjusted for split) 69.4 68.4 86.8 111.3 142.1
P/E (x) 40.4 20.3 17.0 13.2 10.3
Price/BV(x) 8.0 5.1 4.1 3.1 2.5
EV/Sales (x) 4.0 2.1 1.3 0.9 0.7
EV/EBITDA (x) 25.9 13.3 9.8 7.5 5.8

29
Power Equipment
India Equity Research | Power Equipment Company Update

KEC INTERNATIONAL INR 710

At the fore front BUY


Play on global power T&D EPC space EPC February 26, 2008
Substantial investments have been planned in emerging markets, primarily Africa and
Middle East, in the power T&D EPC space. KEC International (KECI), with significant Misal Singh
+91-22-2286 4316
presence in Africa, Central Asia, and the Middle East, apart from India, is likely to be one of misal.singh@edelcap.com
the beneficiaries of the global power T&D expansion.
Pawan Parakh
+91-22-4019 4995
pawan.parakh@edelcap.com
Strong project management capabilities
KECI has executed projects in diverse terrains—across Kazakhstan, Saudi Arabia, Iraq,
and Afghanistan. While this kind of project profile does raise the risk profile of the business,
we believe, over the years, KECI has acquired the necessary skills to manage projects in
difficult terrains. It is currently working on ~60 projects simultaneously, which denotes its
superior project management capabilities.

Diversifying into EPC for railways

In the Eleventh Plan, Indian Railways has an ~INR 430 bn outlay for expanding capacity.
KECI has pre qualifications from Indian Railways as the company was earlier been involved
in setting up infrastructure for it. KECI has recently bagged two railway electrification Reuters : KECL.BO

projects from Northern and Central Railways. We believe entry into EPC for railways is likely Bloomberg : KECI IN

to further raise revenue visibility for the company.


Market Data

Outlook and valuations: Positive; maintain ‘BUY’ 52-week range (INR) : 922 / 478

We continue to remain positive on KECI on the back of strong revenue growth visibility. Share in issue (mn) : 49.3

Further, merger with National Information Technologies Ltd (NITEL) gives KECI presence in M cap (INR bn/USD mn) : 35.0 / 897.9

the high-growth telecom towers market. The company is currently trading at a premium to
Avg. Daily Vol. BSE/NSE (‘000) : 56.5
KPP and JYS, which was not the case historically. At our current EPS estimates of ~INR 44
and ~INR 56 the stock is trading at a P/E of ~16x and ~13x for FY09E and FY10E,
respectively. We believe scope for valuation re-rating is unlikely from current levels. Share Holding Pattern (%)
However, the growth story remains encouraging. We continue to maintain our ‘BUY’
Promoters : 34.6
recommendation on the stock.
MFs, FIs & Banks : 34.8
FIIs : 15.1
Others : 15.5
Financials
Year to March FY07 FY08E FY09E FY10E
Revenue (INR mn) 20,406 26,786 36,305 43,890
Rev. growth (%) 18.1 31.3 35.5 20.9
EBITDA (INR mn) 2,518 3,474 4,435 5,335 1,000 500
Net profit (INR mn) 1,046 1,656 2,192 2,764
850 375
Shares outstanding (mn) 38 49 49 49
('000)
(INR)

EPS (INR) 27.8 33.6 44.4 56.0


700 250
EPS growth (%) 112.3 20.9 32.4 26.1
P/E (x) 25.6 21.2 16.0 12.7 550 125
EV/ EBITDA (X) 15.3 11.1 8.7 7.2
ROAE (%) 45.6 43.9 38.4 35.7 400 -
ROACE (%) 37.1 42.3 44.1 43.5 Feb-07 Aug-07 Feb-08

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
30
Power Equipment

Play on global power T&D EPC space


KECI has significant presence in Africa, Central Asia, and the Middle East, apart from India. It has
executed orders in ~40 countries and is currently working on ~60 projects simultaneously. Exports
contribute to ~65% of the merged entity’s order backlog. These numbers point to the vast scale
on which the company operates. With substantial investments planned in the power transmission
space in emerging markets, KECI is one of the best placed domestic players to leverage on the
same. We believe the company offers a good opportunity for investors looking to play the global
power story.

Table 1: KECI’s and RPG Transmission’s consolidated order backlog over past six quarters
KEC International & RPGT (INR bn)
Qtr ended International Domestic Total
Jun-06 21 11 32
Sep-06 23 11 33
Dec-06 20 13 33
Mar-07 23 12 35
Jun-07 25 12 37
Sep-07 37 15 52
Dec-07 30 20 50
Source: Edelweiss research

Strong project management capabilities

KECI has executed projects in diverse terrains—across Kazakhstan, Saudi Arabia, Iraq, and
Afghanistan. While this kind of project profile does raise the risk profile of the business, we believe,
over the years, KECI has acquired the necessary skills to manage projects in difficult terrains.
Further, the company outsources its tower supplies requirements, unlike JYS and KPP. Hence,
KECI’s creditors/revenues are higher than others in the industry. Consequently, its working capital
requirement per unit of revenue is lower, which results in higher RoCE.

Table 2: KECI—RoCE tree


RoCE tree FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08E FY09E FY10E
RoCE (%) (2.1) (5.0) 3.9 10.3 13.5 20.5 37.1 42.3 44.1 43.5
EBIT/Revenues (%) 0.0 (9.6) 4.9 10.8 8.9 7.8 10.7 11.6 11.2 11.2
Direct costs/Revenues (%) 66.2 69.3 70.2 57.8 71.9 75.5 71.4 70.5 70.7 69.4
Employee costs/Revenues (%) 12.2 10.3 6.5 6.8 6.2 4.8 4.7 5.1 5.2 5.3
Other expenses/Revenues (%) 22.7 26.3 16.0 23.4 12.2 10.2 11.6 11.4 11.8 13.2
Revenues/Capital employed (x) 0.5 0.5 0.8 1.0 1.5 2.6 3.5 3.6 4.0 3.9
Operating working capital/Revenues (%) 122.2 128.1 73.9 62.8 32.1 2.3 13.4 16.3 15.0 15.0
Receivables/Revenues (%) 105.8 108.2 80.2 72.1 68.6 39.4 44.3 45.5 41.7 41.7
Inventories/Revenues (%) 7.8 6.4 6.0 6.2 8.7 7.2 7.4 8.1 7.5 7.5
Loans and advances/Revenues (%) 69.4 81.8 55.8 53.4 40.3 9.4 8.4 9.9 9.1 9.1
Creditors/Revenues (%) 60.7 68.2 68.2 68.9 85.5 53.6 46.7 47.3 43.3 43.3
Net PPE/Revenues (%) 28.2 27.5 26.4 18.3 12.7 24.8 20.1 15.7 11.6 8.8
Cash tax rate on EBIT (%) 100.0 (23.3) 51.8 5.3 35.9 34.6 34.2 33.3 33.1 32.0
Source: Edelweiss research

31
Power Equipment

Diversifying into EPC for railways

In the Eleventh Plan, Indian Railways has an ~INR 430 bn outlay for expanding capacity. The
basic skill set that KECI brings to the table is project management capability, the mainstay for
securing contracts from Indian Railways. Further, KECI has pre qualifications from Indian
Railways as the company has earlier been involved in setting up infrastructure for it. The
company has recently bagged two railway electrification projects from Northern and Central
Railways. The diversification will also lend KECI the opportunity to participate in the dedicated
freight corridor (DFC) plan of Indian Railways, the outlay for which is ~INR 350 bn.

Upside from telecom business


Merger with NITEL gives KECI presence in the high-growth telecom towers market. NITEL
provides EPC solutions in building communication networks and owns 384 telecom towers in
four clusters of Mizoram, Meghalaya, and Chattisgarh. Simply put, it is a play on telecom
infrastructure in India. We believe the domestic telecom infrastructure sector is undergoing a
high growth phase, with the country’s teledensity expected to increase from ~15.7% currently
to 32.7% in FY10E.

Aggressive order accretion

In the past two quarters, KECI has had a higher order accretion than peers. This can be
attributed to the company’s significant presence in international markets compared to peers,
who are more active in the domestic market. Higher order accretion in 9mFY08 lends KECI
higher revenue visibility compared to JYS and KPP. Key order wins in the past few quarters are
given below.

Table 3: KECI—Key orders received


Order value
Agency Brief details (INR mn) Country
PGCIL Turnkey contract for supply and construction of 400 kV DC 569 India
transmission line
PGCIL Turnkey contract for supply and construction of 132 kV SC 407 India
and DC transmission line
Saudi Arabian Mining Company (MA'ADEN) Turnkey job of 380 kV DC transmission lines of 123 kms. 2,600 Saudi Arabia

NamPower Turnkey job of 350 kV double circuit bipolar HVDC 1,400 Namibia, Africa
transmission line of 306 kms.
TRANSCO Turnkey job of 400 kV DC and quad circuit transmission lines 3,910 Abu Dhabi
of 173 kms.
SONELGAZ Turnkey job of 380 kV DC transmission lines of 123 kms. 2,460 Algeria

Afghanistan's Ministry of Energy & Water Turnkey construction of 2 X 110 kV transmission lines over l00 NA Afghanistan
kms; 4 sub stations and; 8 power distribution systems of 20
kV each.

Rajasthan Rajya Vidyut Prasaran Nigam Ltd Turnkey job of 400 kV DC circuit transmission line of 220 kms. 915 Rajasthan

Source: Edelweiss research

32
Power Equipment

Outlook and valuations: Positive; maintain ‘BUY’


Chart 1: KECI—Share price triggers

1,000 25,000
Shareholders approve arrangement
between RPGT and NITEL
800 20,000
Strong
Q3FY07
600 15,000

(Sensex)
(INR)
400 10,000

200 5,000
KEC INTERNATIONAL BSE SENSEX
- -
Mar-06

May-06

Aug-06

Oct-06

Dec-06

Mar-07

May-07

Aug-07

Oct-07

Dec-07
Source: Edelweiss research

KECI’s stock started moving upwards after the merger with RPG Transmission and NITEL was
proposed. We believe the merger is positive as it will provide KECI added visibility in the
domestic power T&D and railway electrification segments. Hence, we believe the valuation
expansion post the merger is logical. KECI is currently trading at a premium to KPP and JYS,
which was not the case historically. At our current EPS estimates of ~INR 44 and ~INR 56 the
stock is trading at a P/E of ~16x and ~13x for FY09E and FY10E, respectively. We believe
scope for valuation re-rating is unlikely from current levels, however, we remain positive on the
stock given the revenue visibility and growth profile. We continue to maintain our ‘BUY’
recommendation on the stock.

33
Power Equipment

Company Description

KECI was incorporated in 1945 as Kamani Engineering Corporation by the RPG group. It is in the
business of designing and manufacturing power transmission towers and telecom infrastructure.
Nearly, ~60% of KECI’s revenues come from the international market. The company’s order backlog
was ~INR 42 bn, with ~890% contributed by transmission projects, and ~10% by distribution
projects at the end of Q3FY08.

Investment Theme

The Middle Eastern and North African (MENA) power sectors installed power generation capacity of
~151GW in FY05. It is estimated that the regional power demand will grow 6% annually till 2010, to
increase the total installed power generation capacity to ~230GW. On the power T&D side, Gulf
Cooperation Council (GCC) countries are currently working on the first phase of the Gulf Electricity
Interconnection Grid that is likely to cost INR 53 bn and is expected to be completed by mid-2008.
We view the MENA power T&D upgradation in positive light for our coverage universe. Additionally,
the US market size is likely to grow to ~INR 450 bn over the next four years. KECI is the most active
player in the MENA and US market in our coverage universe and is likely to be positively affected by
the up-gradation in the power T&D infrastructure in the MENA and US markets.

Key Risks

Power T&D investments are executed by state utilities, which in turn, are mandated by the
government. Hence, any change in the political environment can potentially impact the pace of
execution in the industry, thus impacting the timing of revenue growth. Additionally, the customer
concentration risk is high in the business, which in turn, impacts the bargaining power of
transmission tower companies.

34
Power Equipment

Financial Statements

Income statement (INR mn)


Year to March FY06 FY07 FY08E FY09E FY10E
Income from operations 17,272 20,406 26,786 36,305 43,890
Direct costs 13,047 14,564 18,876 25,684 30,474
Employee costs 838 955 1,370 1,896 2,306
Other expenses 1,765 2,370 3,066 4,289 5,775
Total operating expenses 15,650 17,888 23,312 31,869 38,555
EBITDA 1,623 2,518 3,474 4,435 5,335
Depreciation and amortisation 269 334 358 387 410
EBIT 1,353 2,184 3,117 4,048 4,925
Interest expenses 593 593 637 781 880
Other income 4 7 4 5 2
Profit before tax 765 1,599 2,484 3,272 4,048
Provision for tax 272 552 827 1,080 1,284
Reported profit 493 1,046 1,656 2,192 2,764
Adjusted net profit 493 1,046 1,656 2,192 2,764
Shares outstanding 38 38 49 49 49
Face Value 10 10 10 10 10
Dividend per share 1.2 4.5 6.2 7.3 9.0
Dividend payout (%) 9.2 16.2 18.4 16.5 16.1

Common size metrics- as % of net revenues


Year to March FY06 FY07 FY08E FY09E FY10E
Operating expenses 90.6 87.7 87.0 87.8 87.8
Depreciation 1.6 1.6 1.3 1.1 0.9
Interest expenditure 3.4 2.9 2.4 2.2 2.0
EBITDA margins 9.4 12.3 13.0 12.2 12.2
Net profit margins (adjusted) 2.9 5.1 6.2 6.0 6.3

Growth metrics (%)


Year to March FY06 FY07 FY08E FY09E FY10E
Revenues 40.4 18.1 31.3 35.5 20.9
EBITDA 35.7 55.2 37.9 27.7 20.3
PBT 13.0 109.0 55.4 31.7 23.7
Net profit (adjusted) 16.6 112.3 58.3 32.4 26.1
EPS 16.5 112.3 20.9 32.4 26.1

Cash flow statement (INR mn)


Year to March FY06 FY07 FY08E FY09E FY09E
Net profit 493 1,046 1,656 2,192 2,764
Add: Depreciation 269 334 358 387 410
Add: Deferred tax 201 89 - - -
Gross cash flow 964 1,470 2,014 2,580 3,174
Less: Dividends 52 198 301 398 502
Less: Changes in W. C. (3,536) 2,087 1,507 979 1,012
Operating cash flow 4,448 (815) 206 1,203 1,661
Less: Change in investments (669) 1 3 - -
Less: Capex 1,967 140 962 350 80
Free cash flow 3,150 (957) (760) 853 1,581

35
Power Equipment

Balance sheet (INR mn)


As on 31st March FY06 FY07 FY08E FY09E FY10E
Equity capital 377 377 493 493 493
Preference capital 130 130 117 117 117
Reserves & surplus 1,365 2,213 4,207 6,002 8,264
Shareholders funds 1,872 2,720 4,818 6,612 8,874
Secured loans 3,325 3,863 3,349 3,589 3,589
Unsecured loans 1 1 1 1 1
Borrowings 3,326 3,864 3,351 3,590 3,590
Sources of funds 5,198 6,584 8,168 10,202 12,464
Gross block 4,499 4,676 5,661 6,011 6,091
Depreciation 269 600 1,450 1,811 2,248
Net block 4,230 4,076 4,211 4,199 3,843
Capital work in progress 60 23 0 0 0
Total fixed assets 4,290 4,099 4,211 4,199 3,843
Investments 205 206 209 209 209
Inventories 1,249 1,506 2,179 2,717 3,284
Sundry debtors 6,803 9,041 12,191 15,145 18,310
Cash and equivalents 636 214 49 1,116 2,724
Loans and advances 1,619 1,717 2,656 3,321 4,015
Total current assets 10,307 12,478 17,076 22,299 28,333
Sundry creditors and others 9,266 9,539 12,669 15,726 19,012
Provisions 136 370 495 615 744
Total CL & provisions 9,402 9,908 13,164 16,341 19,756
Net current assets 905 2,569 3,912 5,958 8,577
Net deferred tax (201) (290) (165) (165) (165)
Uses of funds 5,198 6,584 8,168 10,202 12,464
Book value per share (BV) (INR) 50 72 98 134 180

Ratios
Year to March FY06 FY07 FY08E FY09E FY10E
ROAE (%) 19.3 45.6 43.9 38.4 35.7
ROACE (%) 20.5 37.1 42.3 44.1 43.5
Current ratio 1.1 1.3 1.3 1.4 1.4
Debtors (days) 144 162 166 152 152
Fixed assets t/o (x) 4.0 5.0 6.4 8.6 11.4
Average working capital t/o (x) 5.4 11.7 8.3 7.4 6.0
Average capital t/o (x) 2.6 3.5 3.6 4.0 3.9
Net debt/Equity 1.3 1.3 0.6 0.3 0.1
Gross debt/Equity 1.8 1.4 0.7 0.5 0.4

Valuations parameters
Year to March FY06 FY07 FY08E FY09E FY10E
EPS (INR) 13.1 27.8 33.6 44.4 56.0
Y-o-Y growth (%) 16.5 112.3 20.9 32.4 26.1
CEPS (INR) 20.2 36.6 40.8 52.3 64.3
P/E (x) 54.3 25.6 21.2 16.0 12.7
Price/BV(x) 14.3 9.8 7.3 5.3 3.9
EV/Sales (x) 2.2 1.9 1.4 1.1 0.9
EV/EBITDA (x) 23.7 15.3 11.1 8.7 7.2

36
Power Equipment

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: research@edelcap.com

Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Shriram Iyer Head Research shriram.iyer@edelcap.com +91 22 2286 4256

Coverage group(s) of stocks by primary analyst(s): Power:


Apar Industries, Emco, Jyoti Structures, Kalpataru Transmission, KEI Industries, KEC International, ABB, BHEL, Crompton Greaves, L & T, Siemens,
Transformers and Rectifiers, Tehhno Electric, Thermax, Voltas, Voltamp Transformer

Jyoti Structures Kalpataru Transmission

350 2050
300 1800
Buy
(INR)

250 Buy Buy 1550

(INR)
Buy
Buy
200 Buy 1300 Buy
Buy
150 1050
100 800
Feb-07
Mar-07

Apr-07

May-07

Jun-07

Jul-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08
Aug-07

Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07

Aug-07
Sep-07
Oct-07

Nov-07
Dec-07

Jan-08
Feb-08
KEC International Recent Research

950 Date Company Title Price (INR) Recos


830
07-Feb-08 Kalpataru A one off, growth story 1,389 Buy
710 Power on track;
(INR)

Buy
Transmission Result Update
590 Buy
Buy 1-Feb-08 KEC Leading the pack 702 Buy
470 International Result update

350 1-Feb-08 Elecon Flat results; but strong 200 Buy


Feb-07
Mar-07

Apr-07
May-07

Jun-07
Jul-07

Aug-07

Sep-07

Oct-07
Nov-07

Dec-07

Jan-08

Feb-08

Engineering order book; Result update

29-Jan-08 Larsen & Moving from strength to 3,770 Buy


Toubro strength; Result update

37 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Power Equipment

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: research@edelcap.com

Distribution of Ratings / Market Cap Rating Interpretation


Edelweiss Research Coverage Universe
Rating Expected to
Buy Accumulate Reduce Sell Total
Buy appreciate more than 20% over a 12-month period
Rating Distribution* 112 44 11 1 188
Accumulate appreciate up to 20% over a 12-month period
* 14 stocks under review / 6 rating withheld
Reduce depreciate up to 10% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn

Market Cap (INR) 88 74 26 Sell depreciate more than 10% over a 12-month period

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38 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.