Kotak recommends Sunil Hit-Tech Engineers

Sunil Hi Tech Engineers Ltd (SHEL) is a niche player in the power sector that builds, maintains and refurbishes power plants. The company also sets up transmission and distribution (T&D) substations, control rooms and erects super structures for steel, cement, aluminum, refineries and gas-based plants.

Almost 60% of the current power capacity is to be added in next five years. The Government has also planned ultra mega power projects (UMPP) with a capacity of at lest 4000 MW each. More than 90% of the revenues of SHEL are from the power sector while the balance comes from steel and other activities like manufacturing of pressure parts for boilers. Typically, BOP work consists of 40% of the total cost per MW of the power plant. SHEL has been awarded three hydropower plants for an American company, that is, Dodson-Lindblom.

SHEL formed a subsidiary to manufacture boiler pressure parts for power plants up to 500 MW. This business has the potential to scale up to Rs.1 bn in three years. The company has already made joint bid for the BOP work for the Mundra UMPP.

At the current price of Rs.276, the stock is trading at 11.7x FY08E earnings and 9.3x FY09E cash earnings. The stock is trading at 6.0x EV/EBIDTA multiple and 1.0x EV/sales multiple based on FY09E estimates. Kotak expects the company to report RoE of 17.2% in FY09E. Initiate a BUY recommendation with a price target of Rs.400