Investor's Eye: Update - Kalpataru Power Transmission, Fertilisers; MF - Sharekhan's top equity mutual fund picks

 

Investor's Eye [March 07, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE Kalpataru Power Transmission Recommendation: Buy Price target: Rs125 Current market price: Rs84 Bags large orders, revenue visibility improves Key points Bags large orders worth Rs1,810 crore, 15% of the existing order book  Kalpataru Power & Transmission Ltd (KPTL) has bagged few orders worth Rs1,810 crore. This includes three orders worth Rs800 crore won by KPTL (the stand-alone entity) and two orders worth Rs 1,010 crore secured by JMC Projects. These new orders account for around 15% of the company's existing order book, which is valued at Rs11,700 crore. We believe, on an average the transmission line projects would have an execution period of around 20-22 months while the other projects would have an execution period of around 24-30 months.  We believe the new transmission line projects would continue to earn an operating profit margin (OPM) of 10-11%, in line with the OPM of the current projects; however, the pipeline projects should notch a margin below 10%. In case of JMC Projects, both the new projects should earn margins better than the existing margin of the company.  Most of the long-term projects to start contributing to KPTL's earnings soon; RoE likely to improve: KPTL has invested in several projects and most of these would start contributing revenues and earnings from the next year. The company is planning to invest around Rs650 crore in the form of equity (Rs 460 crore is already invested) in the long-term projects that are not contributing revenues yet, except in the transmission line build-own-operate-transfer (BOOT). The total equity to be invested in these projects would account for around 25% of the current net worth of the company. Hence, this would improve KPTL's overall return on equity (RoE).  KPTL's new transmission plant having fabrication and galvanising processes with a capacity of 55,000 metric tonne (MT) at Raipur has commenced commercial operations. With this, KPTL's total manufacturing capacity has increased to over 160,000MT. The Thane real estate project is complete and is likely to get an occupancy certificate soon. The transmission line BOOT project started contributing in FY2013 (annual revenues of Rs54 crore) and is expected to record an internal rate of return of 16%. We expect the first road BOOT project, Rohtak-Bawal, to commence in Q1FY2014 while the Agra-Aligarh (road BOOT) project is expected to get commissioned in Q3FY2014. Further, the Nagpur-Wainganga project (another road BOOT project) is expected to commence by Q2FY2015. The company expects all its BOOT projects to generate internal rate of returns in the range of 15-17%; this would help improve the overall return ratio (RoE) of the company.  View and valuation: We expect the adjusted profit after tax (PAT) of the consolidated entity to grow by 16-17% year on year (YoY) on a sales growth of 18.0-13.5% YoY in FY2014 and FY2015. We believe the current addition to the order book would support its revenue and earnings visibility. The stock currently trades at 6x FY2014E and 5x its FY2015E earnings, and 5x FY2014E and 4x FY2015E EBITDA. We retain our price target at Rs125 (based on the sum-of-the-parts method) and maintain our Buy rating on KPTL.    SECTOR UPDATE Fertilisers A steep decline in non-urea fertiliser sales Key points Fertiliser sales remained subdued in February 2013: During February 2013, the aggregate sales of fertilisers (by 15 leading manufacturers) saw a steep decline of 27% as compared with the same period of the last year. The sales of fertilisers were lower mainly because of poor sales of non-urea fertilisers. In February 2013, the production and import of diammonium phosphate (DAP), NPK (nitrogen, phosphorus and potassium) and muriate of potash (MOP) fertilisers declined drastically due to a lower demand following a drought-like condition in many parts of India. The production of DAP and complex fertilisers also declined drastically on account of uneven rainfall in some parts of the country which also affected the demand. The demand for urea remained flat during the month as compared with the same period of the last year. Sales of fertilisers lacklustre on YTD basis: The total fertiliser sales have declined by 14% in the year till date (YTD) as compared with the same period of the last year. A steep decline in the demand for non-urea and lower import of DAP and complex fertilisers have led to the drop in fertiliser sales on YTD basis. The sales of DAP, MOP and complex fertilisers are lower by 25%, 15% and 37% respectively whereas the sales of urea have declined marginally by 1% on account of a lower demand and plant shutdowns for maintenance work. Outlook: The fertiliser sector has seen severe demand destruction in recent times. We believe the demand destruction may have bottomed out. The demand for non-urea fertilisers, which had dropped sharply 25-30%, may revive now as the prices of non-urea fertilisers may come down and a good to normal monsoon in this Kharif season along with a higher minimum support price for crops across the board may improve the purchasing power of farmers. The demand recovery will be positive for the fertiliser sector and so we have a positive view on the sector. We prefer stocks like Chambal Fertilisers and Chemicals, Coromandel International, Gujarat State Fertilisers and Chemicals, and Rama Phosphates which are looking attractive after the recent price correction.   MUTUAL GAINS Sharekhan's top equity mutual fund picks Large-cap funds Mid-cap funds Multi-cap funds ICICI Prudential Focused Bluechip Equity Fund SBI Emerg Buss Fund Reliance Equity Opportunities Fund Franklin India Bluechip HDFC Mid-Cap Opportunities Fund SBI Magnum Global Fund 94 Birla Sun Life Frontline Equity Fund - Plan A IDFC Sterling Equity Fund  - Reg UTI Opportunities Fund SBI Magnum Bluechip Fund Franklin India Prima Fund BNP Paribas Equity Fund Tata Pure Equity Fund Sundaram Select Midcap - Reg Tata Ethical Fund Indices Indices Indices BSE Sensex BSE MID CAP BSE 500 Tax saving funds Thematic funds Balanced funds Axis Long Term Equity Fund Birla Sun Life India GenNext Fund ICICI Prudential Balanced Franklin India Taxshield Reliance Media & Entet Fund HDFC Balanced Fund BNP Paribas Tax Advantage Plan UTI India Lifestyle Fund Canara Robeco Balance IDFC Tax Advantage (ELSS) Fund - Reg L&T India Special Situations Fund Tata Balanced Fund Sundaram Taxsaver - (Open Ended Fund) - Reg ICICI Prudential Service Industries Fund FT India Balanced Fund Indices Indices Indices CNX500 S&P Nifty Crisil Balanced Fund Index   Fund focus SBI Magnum Blue Chip Fund-Growth   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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