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Kalpataru Power + Crompton Greaves

February 21, 2008

HSBC in a report has retained OUTPERFORM rating on Kalpataru Power, while IndiaInfoline recommends a HOLD on Crompton Greaves.

Kalpataru Power:
Kalpataru Power management has a solid history of execution and growth in engineering, procurement and construction (EPC) transmission towers. It has built its strong position in civil construction through JMC Projects and in pipeline laying business. Kalpataru holds a 52% stake in JMC Projects, which has an order backlog of INR21bn. We introduce our consolidated forecasts.

Expect margins in transmission lines to ease off in FY08e and in the pipeline laying business, in FY09e. Therefore EBITDA stands reduced with margin outlook and cut our stand-alone EPS forecasts by 10%/27% to INR62.7/INR70.4 respectively for FY08e/09e.

What is the Trigger for OUTPERFORM ?
The catalyst for the stock to perform well could be order flows in the pipeline business or progress in new business initiatives (power distribution franchise, logistics). Risks include failure of build-own-operate / build own operate transfer infrastructure projects, which could lead to de-rating.

New target price of INR1,565 is the mid-point of DCF value of INR 1,595 (down from INR 1,810 due to lower growth and margins) and PE value of INR1,535 (down from INR1,836).

Crompton Greaves:
Crompton Greaves is set to benefit from an expanded product portfolio in one of the fastest growing sectors power T&D. Operating leverage in the domestic business and turnaround of overseas acquisitions would drive margin expansion. Entry into distribution asset owning business opens up future growth opportunities.

Crompton’s large portfolio of industrial motors would enable it to exploit the upsurge in industrial capex, which we estimate will rise by 175% over FY07-12. Increasing urbanisation, rural electrification and continued growth in housing would translate into strong growth for the consumer division.

EBITDA margins will expand from 8.6% in FY07 to 10.8% in FY10ii, driven by operating leverage in the domestic business and turnaround of recent overseas acquisitions.

Crompton is expected to report an EPS of Rs 10.3 for FY08 and Rs 14.7 for FY09. Existing investors can hold the stock for a target price of Rs 380.

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