Towers and profits

PENNY WISE

Kalpataru could see its revenues double due to the burgeoning demand for transmission towers.

A leading manufacturer of transmission towers, Kalpataru Power Transmission is likely to see strong growth in the next couple of years.

While the transmission business will be the key earnings driver, Kalpataru is utilising its strong positioning to branch out into other related sectors like power generation, oil & gas pipelines, civil construction and real estate to emerge as a diversified infrastructure player.

Powered by an aggressive management, and a more diversified business mix, the company deserves the premium valuation it enjoys over its peers, say analysts.

Currently, the stock trades at a premium to comparable companies like KEC International and Jyoti Structures. Reasons Pradeepkumar Dhamdhere, analyst, Anand Rathi Securities, "Given its aggressive management, good growth numbers, excellent operating performance and strong balance sheet, the premium is surely justified."

Kalpataru has experienced scorching growth. In a short span of five years, the company's revenues have grown five times. From Rs 150 crore in fiscal 01, revenues have steadily increased to Rs 840 crore in fiscal 06.

"We are confident of achieving our revenue target of Rs 1,500 crore for FY07," says Ajay Munot, executive director, Kalpataru Power Transmission.

Analysts project revenues at Rs 1,420 crore and profits at Rs 101 crore for this fiscal. They expect FY08 revenues and profits to be Rs 1,790 crore and Rs 130 crore respectively.

Thus far, Kalpataru has installed towers of over 4,00,000 tonnes spanning 6,500 km of transmission lines. While the transmission division constitutes 90 per cent of total revenues, real estate, biomass energy and infrastructure account for the rest.

Based in Gujarat, the company undertakes EPC contracts for Power Grid Corporation of India (PGCIL) and state electricity boards. It has taken up contracts in countries like Ethiopia, Algeria, Qatar and the Philippines.

Core focus

Going forward, too, transmission business should be the key driver for growth. In the next six years the transmission & distribution segment is likely to attract investments to the tune of Rs 2,50,000 crore of which Rs 70,000 crore will be brought in by PGCIL, Central Electricity Authority and other players towards the transmission line business. Of the above, projects worth Rs 25,000 crore are likely to be executed by private players such as Kalpataru.

In order to equip itself well to cater to the increasing demand for transmission towers, Kalpataru has increased its production capacity by 44 per cent to 84,000 MT. Currently, the company's plants boast 90 per cent capacity utilisation, the highest amongst its peers.

Its 26,000 MT export oriented undertaking at Gandhinagar caters to rising export requirements. In FY06, exports contributed 18 per cent of the revenues but the management is confident that the share will rise to 25 per cent this fiscal.

Inorganic growth

Even as its key business looks promising, Kalpataru is proactively pursuing other infrastructure related businesses to have a diversified pool of activities.

In second half of 2005, Kalpataru acquired 50 per cent stake in JMC Projects, which marked its foray into the construction of residential and commercial buildings, industrial structures, bridges, roads, software parks and power projects.

JMC Projects has an impressive clientele including the likes of Infosys, Wipro, Bajaj Auto, NHAI, Delhi Metro and Maruti, but suffered heavy losses due to its inability to pass on the rise in steel prices to customers owing to fixed price contracts.

However, there seems to be a turnaround in JMC Projects after Kalpataru took over the management reins. The management is gung-ho about its prospects in construction business as JMC Projects holds orders worth Rs 780 crore. Its revenues are expected to almost double to Rs 475 crore in FY07 as against the Rs 240 crore in FY06.

Pitching for pipelines

Kalpataru is also trying its luck in the oil and gas pipeline business. At present, India has only 15,000 km of these pipelines but over the next five years another 4,000 km of pipelines are likely to come up to meet the rising oil requirement.

The opportunity is vast for companies engaged in laying pipelines but analysts do not forecast a major increase in revenues from this segment for Kalpataru any time soon.

Though the company has bagged and executed projects for major players like BPCL and Gail, it will have to fight for its share in the presence of established players like Punj Lloyd and L&T, which may not be easy given that it is relatively inexperienced in the field.

Adding to the revenue basket

Kalpataru has also diversified into power generation using non-conventional energy sources like agricultural waste and crop residues (biomass) with a 7.8 MW plant in Padampur, Rajasthan.

In FY06, the plant generated revenues of Rs 18 crore. The company will soon commission a 7 MW project at Uniara, Rajasthan with an investment of Rs 30 crore.

Kalpataru has also got into installation of transformers, substations and electrification of villages. Its distribution business will benefit from the PGCIL's national grid programme for transfer of power from surplus eastern regions to deficit regions, apart from the rural electrification projects worth Rs 17,000 crore and the Accelerated Power Development and Reforms Programme (APDRP) for state electricity boards.

Strength in numbers

With orders of Rs 2,100 crore in its kitty, Kalpataru boasts of an order book-to-sales ratio of 2.5. The company has strong financials. It has recorded decent profitability even when peers reeled under margin pressure.

"Being the largest player in India, we are cost leaders and given our project management and operational skills we enjoy better margins," adds Munot. 
 

FINANCIALS
FY06 (Rs crore)	Kalpataru	KEC International	Jyoti  Structures
Net sales	840.38	1727.25	738.06
Operating profit	114.41	162.28	74.78
OPM	13.61	9.40	10.13
Net profit	66.53	49.31	27.67
NPM	7.92	2.85	3.75
P/E	25.60	20.37	25.10
P/E 07	19.30	12.28	13.09
P/E 08	14.60	9.48	8.40

The company has registered 130 per cent q-o-q growth in sales at Rs 303 crore in the June quarter. While operating profit has increased by 192 per cent at Rs 48 crore, net profit has registered a rise of 207 percent at Rs 29 crore. At the current price of Rs 785.4, the stock is valued at 25.6 times its FY06 earnings.

"I am upbeat on the company's growth prospects in transmission tower and construction segments, and expect the stock to trade at a premium to its competitors even in future," says Dhamdhere.