1 January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 1 KEC International Initiating Coverage ‘Power’ packed growth ahead... KEC International (KEC) is a global player in the Power Transmission and Distribution (T&D) network. KEC, which recently enjoyed a good inflow of domestic orders primarily from Power Grid Corporation (PGCIL), is well poised to bag more orders from the domestic markets. Further, KEC derives close to 63% of its Revenue from its overseas operations and is expected to clock good growth in this space as well. Thus, KEC is set on a high growth path on the back of healthy Order Book position, stable Margins (registered in spite of a volatile commodity and currency markets) and diversification into the Railways and Telecom Segments, where the government is set make substantial investments. At Rs373, the stock is trading at 10.2x FY2010E and 7.8x FY2011E Earnings. We Initiate Coverage on the stock with a Buy recommendation and Target Price of Rs477. Substantial investments in the Power T&D Sector to spur growth of EPC players: The Eleventh Plan has earmarked Rs1,40,000cr and Rs3,09,000cr for the T&D Segments, respectively, which translates into an immense opportunity for the players in the Segment over the next three years. Further, with Infrastructure remaining the key focus area to achieve economic recovery, we expect execution of the power projects to gain momentum over the last three years of the Plan period which would generate more orders for the T&D players. Strong Order Book provides good Revenue visibility: KEC's Order Book as of FY2009 stood at Rs5,163cr or 1.5x its FY2009 Sales. During 4QFY2009, the company registered healthy Order inflows of Rs1,500cr; thus, KEC posted a 27% CAGR in its Order Book over FY2006-09. We expect the company to bag more orders from PGCIL, which has plans to spend around Rs20,000cr on transmission lines during FY2010-12. Diversification into Railways and Telecom Sectors a major positive: KEC has forayed into the Telecom and Railway Sectors. Although these Divisions currently account for a mere 6.2% of the company's Total Revenues, future prospects of the Segments are very bright. Pertinently, KEC is L1 for the Rs5,000cr Telecom order from BSNL to be allotted in the next two months. We believe that if KEC secures this order, the same will nearly double its Order Book, and we have not factored the same in our estimates. KEC also plans to enter tracking, signaling and platform construction works in the Railway Segment. V Srinivasan Tel: 022 - 4040 3800 Ext: 330 E-mail: [email protected]Source: Company, Angel Research Key Financials (Standalone) Y/E March (Rs cr) FY2008 FY2009 FY2010E FY2011E Net Sales 2,814 3,427 3,978 4,666 % chg 37.9 21.8 16.1 17.3 Net Profit 172.2 116.3 181.2 235.2 % chg 64.6 (32.5) 55.8 29.8 OPM (%) 12.6 8.8 10.2 10.7 EPS (Rs) 34.9 23.6 36.7 47.7 P/E (x) 10.7 15.8 10.2 7.8 P/BV (x) 3.7 3.3 2.6 2.0 RoE (%) 34.8 20.8 25.5 25.6 RoCE (%) 29.7 22.9 26.7 27.9 EV/Sales (x) 0.8 0.7 0.6 0.5 EV/EBITDA (x) 6.7 7.7 5.8 4.7 Shareholding Pattern (%) Promoters 41.8 MF / Banks / Indian FIs 40.9 FII / NRIs / OCBs 5.3 Indian Public / Others 12.0 BSE Code 532714 NSE Code KEC Reuters Code KECL.BO Bloomberg Code KECI@IN BSE Sensex 14,522 Nifty 4,314 Abs. 3 m 1yr 3yr Sensex (%) 61.3 (3.8) 45.3 KEC (%) 169.4 (25.2) 28.6 Stock Info Sector Transmission Towers Market Cap (Rs cr) 1,841 Beta 0.7 52 Week High / Low 510 / 109 Avg Daily Volume 31801 Face Value (Rs) 10 BUY Price Rs373 Target Price Rs477 Investment Period 12 months Girish Solanki Tel: 022 - 4040 3800 Ext: 319 E-mail: [email protected]
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1January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 1
KEC InternationalInitiating Coverage
‘Power’ packed growth ahead...KEC International (KEC) is a global player in the Power Transmission and Distribution(T&D) network. KEC, which recently enjoyed a good inflow of domestic orders primarily fromPower Grid Corporation (PGCIL), is well poised to bag more orders from the domesticmarkets. Further, KEC derives close to 63% of its Revenue from its overseas operationsand is expected to clock good growth in this space as well. Thus, KEC is set on a highgrowth path on the back of healthy Order Book position, stable Margins (registered in spiteof a volatile commodity and currency markets) and diversification into the Railways andTelecom Segments, where the government is set make substantial investments. At Rs373,the stock is trading at 10.2x FY2010E and 7.8x FY2011E Earnings. We Initiate Coverageon the stock with a Buy recommendation and Target Price of Rs477.
Substantial investments in the Power T&D Sector to spur growth of EPC players:The Eleventh Plan has earmarked Rs1,40,000cr and Rs3,09,000cr for the T&D Segments,respectively, which translates into an immense opportunity for the players in the Segmentover the next three years. Further, with Infrastructure remaining the key focus area to achieveeconomic recovery, we expect execution of the power projects to gain momentum over thelast three years of the Plan period which would generate more orders for the T&D players.
Strong Order Book provides good Revenue visibility: KEC's Order Book as ofFY2009 stood at Rs5,163cr or 1.5x its FY2009 Sales. During 4QFY2009, the companyregistered healthy Order inflows of Rs1,500cr; thus, KEC posted a 27% CAGR in its OrderBook over FY2006-09. We expect the company to bag more orders from PGCIL, which hasplans to spend around Rs20,000cr on transmission lines during FY2010-12.
Diversification into Railways and Telecom Sectors a major positive: KEC hasforayed into the Telecom and Railway Sectors. Although these Divisions currently accountfor a mere 6.2% of the company's Total Revenues, future prospects of the Segments arevery bright. Pertinently, KEC is L1 for the Rs5,000cr Telecom order from BSNL to be allottedin the next two months. We believe that if KEC secures this order, the same will nearlydouble its Order Book, and we have not factored the same in our estimates. KEC also plansto enter tracking, signaling and platform construction works in the Railway Segment.
2January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 2
KEC International
Transmission Towers
Company Background
KEC International (KEC) a part of the US $3bn RPG Group is primarily involved in the executionof EPC projects in the Power Transmission and Distribution (T&D) space. The company is aglobal player in the field of T&D network, having presence in more than 40 countries acrossSouth Asia, Middle East Africa and Central Asia. KEC's overall business consists of twogeographical segments, viz. South Asian and International. Besides, the company has fourfunctional divisions, namely Transmission, Distribution, Railways and Telecom. On theTransmission front, KEC's portfolio of services includes designing, engineering and testing oftransmission towers. In Distribution, the company has executed various Sub-station projectsboth in the domestic as well as international markets including a plethora of activities fromdesigning to installation of the Sub-stations. The company's manufacturing and tower testingfacilities are situated at multiple locations in India. The company has a good track record ofsuccessfully executing projects in difficult terrains around the world. In fact, KEC is one of thefew players in India capable of constructing 1,200kv D/C test lines.
KEC in alliance with POWER Engineers, Inc, USA has formed a joint venture (JV), KEC PowerIndia Pvt. Ltd (KPIL), which undertakes complete designing of Sub-stations for both thedomestic and international markets. KPIL is staffed to provide detailed design engineering forcomplete green-field Sub-stations or upgrades to existing Sub-stations. Apart from the T&Dspace, KEC is also present in the Railways and Telecom Sectors. The company, which has astrong presence in railway electrification, intends to be a total solution provider in the Rail EPCbusiness. KEC, which entered the Telecom space following merger of National InformationTechnologies (NITIE), is primarily involved in the manufacture of telecom towers. The company'sclientele in this segment includes names such as BSNL and GTL. Apart from the supply anderection of telecom towers, the company is also in the Telecom Asset Management business,wherein it collects monthly rentals from various telecom players for the sites that have beenleased to them. These sites (around 376 numbers) were allotted to KEC as a part of the USOfund and are majorly located in the states of Chhattisgarh, Mizoram and Meghalaya.
Source: Company, Angel Research
Exhibit 1: Segment-wise Revenue break-up, as % of Sales (FY2009)
(Rs1,849cr, 54%)
(Rs840cr, 25%)
(Rs526cr, 15%)
(Rs182cr, 5%) (Rs30cr, 1%)
Transmission - International business Transmission - South Asia business
Distribution business Telecom business Railways business
KEC is a global player in thefield of T&D network, havingpresence in more than 40countries across South Asia,Middle East Africa andCentral Asia
Apart from the T&D space,KEC is also present in theRailways and TelecomSectors
3January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 3
KEC International
Transmission Towers
The company currently has three manufacturing facilities located at Jabalpur, Jaipur and Nagpur.These facilities combined are capable of manufacturing 1,51,000MT of towers annually. Thecompany also has an additional 60,000MT of contracted capacity taking its total towermanufacturing capacity to 2,10,000MT per annum. KEC is also involved in tower testing andhas the capability to test towers up to 1,200KV. The company has two tower testing facilitieslocated at Jaipur and Navi Mumbai. It has state-of-the-art design facilities equipped with thelatest software and has completed over 2,214 tower tests till date. During FY2009, the companyincurred capex of Rs104cr towards de-bottlenecking, addition of telecom towercapacity and a new tower testing capacity. The company’s transmission tower manufacturingcapacity expanded by 38,000MT in FY2009. The company is looking at incurring additionalcapex of Rs40-50cr during FY2010 towards de-bottlenecking and strengthening itsexecution capability for big ticket projects.
Industry OverviewThe Power Sector is one of the fastest growing sectors in India and has witnessed considerablegrowth since the time of independence. Going ahead too, the sector is expected to be a keydriver of the country's economic growth. However, the country's demand for power has alwaysoutstripped its supply as the sector has been beset by issues related to generation,transmission & distribution. While very high level of technical and commercial losses and lackof commercial approach in management of utilities has led to unsustainable financialoperations, inadequacies in distribution networks too have had its effect in derailing theinvestment in the sector.
The Electricity Act 2003 was drawn up to consolidate the laws concerning the generation,transmission, distribution and trading of power. The Act aimed at resolving a number of issuesthat hampered growth of the Power Sector. Some of the key provisions of the Act includedgranting of open access of power to customers, unbundling of State Electricity Boards (SEB)and protection of consumer interests. The central government has also framed the NationalElectricity Policy (NEP), which enumerates the guidelines for accelerated development of thePower Sector, providing electricity to all areas and protecting the interests of the consumersand other stakeholders.
The Power Sector is expectedto be a key driver of thecountry's economic growth
Exhibit 2: Tower Testing FacilitiesParticulars Navi Mumbai JaipurTower Width 20mtr x 20mtr 14mtr x 14mtrTower Height 65mtr 46mtrUplift per leg 500MT 175MTOverturning Moment 20,000MT mtr 500MT mtrNo. of Load Points 30 17Load Per point 50MT 25MT
Source: Company, Angel Research
The company has total towermanufacturing capacity of2,10,000MT per annum
4January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 4
KEC International
Transmission Towers
Transmission
The uneven manner in which India's energy resources are distributed, has necessitated theformation of National Power Grid to transmit power from resource rich to deficit states andfacilitate scheduled/unscheduled exchange of power. The Power Ministry proposes to set up anintegrated National Power Grid in the country by FY2012 with an inter-regional power transfercapacity of around 37,700MW. Pertinently, investments in the T&D Segment in the previousFive Year plans have lagged investments in the Generation Segment. This in turn impacted theenergy delivery/supply system and resulted in periodic grid instability, higher AT&C losses andlower electricity intensity. Nonetheless, it may be noted that the Government of India has realisedthat the country must have a sound power Transmission infrastructure to complement the hugeincrease in generation capacity that has been planned for the Eleventh plan. Therefore, thegovernment had chalked out a substantial outlay of Rs4,49,000cr for developing the country'sT&D infrastructure during the Plan period.
The Power Ministry proposesto set up an integratedNational Power Grid in thecountry by FY2012 with aninter-regional power transfercapacity of around 37,700MW
Generation
India's Power Generation capacity currently stands at 1,48,265MW having grown from a mere1,700MW in FY1950. The Eleventh Plan envisages augmenting the country's Power generationcapacity by 78,577MW. However, it may be noted here that actual capacity addition during thefirst two years of the Eleventh Plan period was 12,717MW and fell short of the 27,396MWcapacity addition planned for FY2008-09. There have been execution delays of the Powergeneration projects due to a variety of reasons including issues concerning landacquisition, delay in procurement of equipment and non-availability of fuel.
The Eleventh Planenvisages augmenting thecountry's Power generationcapacity by 78,577MW
5January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 5
KEC International
Transmission Towers
Open Access still a distant dream
Despite six years since the enactment of the Electricity Act, not much has been achieved inrespect to Open Access to consumers. The Act had envisaged a major policy change by way ofOpen Access, which entailed allowing a consumer with electricity requirement of above 1MW tochoose any electricity supplier other than the authorised distribution licensee. A major issuehindering implementation of Open access is the level of cross-subsidy and other chargesapplicable to the Open Access consumers. The concept has also been bogged down by issuessuch as resistance by incumbent licensees who stand to lose on account of migration of bluechip customers, and have hence been opposing the passage of this proposal. The slow progressof Open Access can also be attributed to the scepticism shown by the customers in choosingalternative supplies.
Transmission Tower Industry
Activities of the Transmission Tower industry includes the manufacture of transmission towersand carrying out EPC work related to the installation of the transmission towers, lines andsubstations. The Segment derives its revenues mainly from transmission line projects, ruralelectrification projects and projects under the Accelerated Power Development and ReformProgramme (APDRP) and other central schemes. However, with PGCIL and the different StateElectricity Boards (SEBs) being the major domestic customers of this Segment, the enormouslosses incurred by the SEBs reflected in the past financial performance of the Segment. But,the Segment has registered substantial growth since FY2003 after suffering huge losses duringFY2001-02. The revival of the Segment in FY2003 coincided with the enactment of theElectricity Act 2003, which sought to reform India's Power Sector.
Exhibit 5: Current Status of Open Access (MW)Open Access sought 83,507Open Access provided 23,179Open Access scheme finalised and under issuance 11,127Open Access under process 49,201
Source: Powerline, Angel Research
A major issue hinderingimplementation of Openaccess is the level of cross-subsidy and other chargesapplicable to the Open Accessconsumers
The Segment derives itsrevenues mainly fromtransmission line projects,rural electrification projectsand projects under the APDRPand other central schemes
6January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 6
KEC International
Transmission Towers
Investment Argument
Substantial investment in T&D Sector to spur growth of T&D EPC players
Historically, the Power Transmission Segment in India has not received the attention it deservesdue to successive Planning Commissions focusing primarily on the Power GenerationSegment. Although globally, every Rupee invested in Generation is matched by an equalinvestment in the T&D Segments, in case of India it has been different, with only 50% of thecapex on generation being incurred towards T&D capex. However, in recent times,emphasis is being laid on improving the country's T&D infrastructure due to the realisation thata robust and adequate power Transmission network is essential to complement growth of thePower Generation Segment. In line with this, the Eleventh Plan has earmarked an outlay ofRs1,40,000cr and Rs3,09,000cr for the T&D Segment respectively, out of the proposed totalcapex of Rs10,64,000cr for the entire Power Sector.
Source: Company, Angel Research
Exhibit 6: T&D Segment—Proposed Eleventh Plan Outlay (Rs cr)
Of the T&D Segment outlay, while the Centre is expected to incur capex of Rs75,000cr towardsthe Transmission Segment, balance capex of Rs65,000cr would be incurred by the States.Further, 50% of the total investment in the Transmission Sector would be incurred towardssetting up Transmission Lines, while the balance 50% would be spent on Sub-stations.
615,000309,000
140,000
Generation Distribution Transmission
The Eleventh Plan hasearmarked an outlay ofRs1,40,000cr and Rs3,09,000crfor the T&D Segmentsrespectively, out of theproposed total capex ofRs10,64,000cr for the entirePower Sector
7January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 7
KEC International
Transmission Towers
Exhibit 7: Eleventh Plan—Transmission Capacity TargetsCapacity at the end of Targeted capacity at the
Investments in the Distribution Segment are expected to be dominated by the Centre fundedschemes such as Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) and rural electrificationschemes (executed by State governments). Currently, projects to the tune of Rs25,987cr havebeen sanctioned under the RGGVY of which Rs13,566cr has been released by the RuralElectrification Corporation (REC) to the respective states. With the T&D EPC players expectedto bag around 20% of the value of the sanctioned projects, their combined Order Book isexpected to witness an inflow of Rs5,200cr over the next 3-4 years.
Strong Order Book with steady inflow provides high Revenue visibility
KEC has an Order Book of Rs5,163cr, which is 1.5x its FY2009 Revenues. Pertinently, in spiteof the slowdown in inflow of International orders (accounted for 63% of FY2009 Top-line), KECcontinued to bag good amount of orders from the domestic market, resulting in an increase inthe share of domestic orders in it's Total Order Book. Thus, contribution of KEC's domesticOrder Book increased to 50% in FY2009 from 30% in FY2008. During 4QFY2009, the companyregistered domestic Order inflows of Rs1,500cr wherein it received Rs1,026cr worth of ordersfrom PGCIL. KEC also received Rs326cr worth of Distribution orders under the RGGVY Schemeduring the quarter. Notably, KEC's Order Book is dominated by orders from theTransmission Segment, while in terms of geography the company's South Asian Segmentcontributes 50% of its current Order Book. Overall, KEC posted 27% CAGR in its Order Bookover FY2006-09.
Currently, projects to the tuneof Rs25,987cr have beensanctioned under the RGGVY
KEC's Order Book isdominated by orders from theTransmission Segment, whilein terms of geography thecompany's South AsianSegment contributes 50% ofits current Order Book
8January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 8
KEC International
Transmission Towers
Going ahead, we expect the company to register steady inflow of orders and expect thecapacity addition to gather steam over FY2010-12E, these being the last three years ofEleventh Plan period. We expect healthy Order inflow to continue over the next 2-3 years on theback of increased domestic orders from majors like PGCIL and other state utilities.
Continued Orders from PGCIL to drive domestic growth
Going ahead, over FY2009-12E, a significant portion of T&D investment is expected to beincurred in projects targeted to strengthen the national grid and is estimated to constitute closeto 42% of the Rs40,000cr capex to be incurred by PGCIL during the aforesaid period. Further,these projects are expected to witness lesser delays as compared to the Generation-linkedTransmission projects. Regards KEC, owing to its superior execution skills and excellent trackrecord, it is well poised to bag more orders from PGCIL going ahead.
Source: Company, Angel Research
Exhibit 8: Order Book Breakup (%)
76.2
22.90.6 0.3
Transmission Distribution Railway Telecom
50.0
15.0
20.0
14.0 1.0
We expect healthy Orderinflow to continue over thenext 2-3 years
National grid strengtheningprojects that are not prone tomuch delays are estimated toconstitute close to 42% of theRs40,000cr capex to beincurred by PGCIL
Source: Company, Angel Research
Exhibit 9: Growth in Order Book (Rs cr)
4,164
5,163
6,252
7,057
3,978
4,427
5,0675,471
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY2008 FY2009 FY2010E FY2011E
Order Book Order Intake
South Asia Middle East Africa Central Asia Australasia
9January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 9
KEC International
Transmission Towers
Overseas Orders to improve despite the ongoing economic slowdown
We expect KEC to bag good amount of international orders despite the ongoing economicslowdown. The Middle East is one of the major markets for KEC accounting for close to 15% ofits overall Revenues. The high scale of infrastructure development activities taking place in thisregion is throwing up more opportunities for players in the Power T&D EPC space. As theeconomies of Middle East are dependent on crude oil exports, crude prices have a major bearingon the budgetary allocation for the infrastructure projects. During 2HFY2009, KEC had facedsome slowdown in Order inflow from these countries because of the substantial fall in the crudeoil prices from historic highs of $147/bbl. However, rebounding of crude oil prices to $70/bbl, hasbrought back some stability to the Middle East economy. Thus, Order inflow from this region isexpected to be robust going ahead. Similarly, demand from the African region (20% of KEC'sFY2009 Revenues) is also expected to be good since the infra projects in this region areprimarily need based and funded by international agencies such as World Bank and AfricanDevelopment Bank, which ensure payment security too.
As per industry sources, the Middle East and African countries are expected to spend morethan $14.5bn and $13.1bn respectively, in the Power T&D Sector over the next five years. In fact,the T&D Segment is expected to account for around 50% of the investments in theElectricity Sector. KEC, a global player in the T&D space, has a strong footing in many of thesecountries and is expected to benefit the most of the emerging opportunities.
The rebounding of crude oilprices to $70/bbl is expectedto result in robust order inflowfrom this region going ahead
Source: Company, Angel Research
North AmericaUSD 66.5 billion
Other EuropeUSD 88 billion
Middle EassUSD 14.5 billion
Central AsiaRussia - USD 22.5 Billion
Baltic Ring - USD 2.1 billionOthers - USD 23 billion
South AmericaUSD 22 billion
South AsiaUSD 26.4 billion
ChinaUSD 76 billion
South East AsiaUSD 16 billion
North AfricaUSD 5.4 billion
ANZUSD 8.6 billion
East AfricaUSD 716 million
Southern AfricaUSD 5.8 billion
Eastern EuropeUSD 19 billion
West AfricaUSD 1.2 billion
North AmericaUSD 66.5 billion
Other EuropeUSD 88 billion
Middle EassUSD 14.5 billion
Central AsiaRussia - USD 22.5 Billion
Baltic Ring - USD 2.1 billionOthers - USD 23 billion
South AmericaUSD 22 billion
South AsiaUSD 26.4 billion
ChinaUSD 76 billion
South East AsiaUSD 16 billion
North AfricaUSD 5.4 billion
ANZUSD 8.6 billion
East AfricaUSD 716 million
Southern AfricaUSD 5.8 billion
Eastern EuropeUSD 19 billion
West AfricaUSD 1.2 billion
Exhibit 10: Opportunities in International Market
10January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 10
KEC International
Transmission Towers
Diversification into Railway and Telecom Sectors a major positive
KEC has also forayed into the Telecom and Railway Sectors. Although these divisions currentlyaccount for only 6% of the company's Total Revenues, future prospects of these Segments arevery bright.
Telecom
KEC forayed into the Telecom business post the merger of NITEL, a group company, with itselfin FY2008. In the Telecom Segment, KEC is primarily focused on building communicationnetworks that entails laying copper fibre networks, telecom tower sites and installation of GSMand CDMA equipment. At the time of the merger, NITEL had bagged a Rs100cr order from theUSO Fund for setting up 376 telecom towers in Chattisgarh, Meghalaya and Mizoram on BuildOwn and Operate (BOO) basis. The award of projects under the second phase of USO fundedprojects involving installation of 11,000 more towers is expected to throw up huge opportunitiesfor KEC.
At the current juncture, KEC is at L1 position for bagging the Rs5,000cr order from BSNL forsetting up telecom infrastructure, which are to be allotted over the next two months. We believethat if the company secures this order, it will nearly double its Order Book. Pertinently, we havenot factored in the same in our numbers. According to management, to increase India'stele-density, an additional 1,50,000 telecom towers are required to be installed over the nextthree years.
Railways
Since KEC's foray into the Segment till-date, it has electrified 5,000km of Indian Railway tracks.The company intends to be a total solution provider in the Railway EPC Segment and provideconstruction services in infrastructure, track electrification and signaling. The Eleventh Plan hasa total outlay of a substantial Rs2,30,000cr for the Indian Railways excluding the investment ondedicated freight corridor. Of the total investments planned, projects worth Rs25,000cr hasbeen earmarked for works involving signaling, renewal of railway tracks, electrification of railwaylines, etc. In addition to the above, outlay for the dedicated freight corridor is Rs28,000cr andtenders for the same are expected to be floated in CY2009.
At the current juncture, KECis at L1 position for baggingthe Rs5,000cr order from BSNLfor setting up telecominfrastructure, which will beallotted over the next twomonths
The Eleventh Plan has a totaloutlay of a substantialRs2,30,000cr for the IndianRailways
11January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 11
KEC International
Transmission Towers
Financial Overview
Robust Top-line growth
KEC clocked an impressive 25.7% CAGR in Top-line over FY2006-09 on the back of theincrease in investment in the Power Generation and T&D Sectors. On account of the decline incrude oil prices and global liquidity concerns, KEC's international order inflow was hamperedduring 2HFY2009. On the domestic front however, the company continued to bag orders fromplayers like PGCIL, state transmission utilities and RGGVY. Going ahead, although KEC'sinternational operations would continue to be a major contributor to its Total Revenues, weexpect the share of domestic operations to increase. We expect the company's domestic orderinflow to remain strong on the back of the government's thrust on the development of the PowerSector, its diversified business model and well-spread geographical presence. Thus, overFY2009-11E, we expect the company's Top-line to post a CAGR of 16.7% to Rs4,666cr.
Margins to improve following significant decline in commodity prices
KEC's EBITDA Margins were under severe pressure during FY2009 due to the high commodityprices witnessed in the first half of the year. Pertinently, international orders (fixed priced)account for 63% of the company's Revenues and did not provide room for passing on theincrease in the material costs. Thus, KEC's Operating Profit declined by 15.2% to Rs300cr inFY2009. However the substantial decline in the prices of steel and other metals in the 2HFY2009is expected to boost the company's Margins going ahead. The price of steel, a key raw materialused by the company, has declined by over 60% since its peak in August 2008. Hence, weexpect the company's Operating Profits to post a CAGR of 28.7% to Rs497.4cr overFY2009-11E on account of the 189bp improvement in Operating Margins.
Over FY2009-11E, we expectthe company's Top-line to posta CAGR of 16.7% to Rs4,666cr
We expect the company'sOperating Profits to post aCAGR of 28.7% to Rs497.4crover FY2009-11E on accountof the 189bp improvement inOperating Margins
12January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 12
KEC International
Transmission Towers
Bottom-line to witness a strong 38.7% growth
During FY2009, KEC's PAT declined by 32.5% to Rs116cr on the back of low Operating Profits.The company's Net Profit Margin (NPM) fell by a substantial 276bp to 3.4% yoy in FY2009.Margins contracted during the year primarily on account of a steep increase in the cost of rawmaterials. Interest costs also increased during the year following the surge in Interest rates.Fluctuations in the forex rates also had a major bearing on the company's Profitability. In FY2009,the company booked forex losses of Rs93.7cr as against the Rs12.3cr forex gains registered inFY2008. Going ahead, we estimate the company's NPM to increase by 164bp overFY2009-11E. We estimate KEC's NPM to primarily improve on the back of the increase inOperating Margins (OPM) and lower Interest rates. Overall, we estimate KEC's Bottom-line topost a CAGR of 38.7% over FY2009-11E to Rs235cr.
Maintaining high Asset-Turnover Ratio
KEC has managed to maintain a high Asset-Turnover Ratio on account of its high efficiency.The company also outsources the manufacturing of towers for faster completion of projects.Annually, the company has been outsourcing the manufacture of towers to the extent of 30,000MT.The company’s strategy of getting its work outsourced has enabled it to maintain highAsset-Turnover Ratio.
Exhibit 13: Margin Trend
Source: Company, Angel Research
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY2008 FY2009 FY2010E FY2011E
Net Sales (Rs cr, LHS) OPM (%, RHS) NPM (%, RHS)
13January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 13
KEC International
Transmission Towers
Key Downside Risks
Delay in execution of Power projects
India has a poor track record of achieving timely execution of the power generation projects.Commencement of generation have not been met been due to delay in land acquisition, deliveryof equipment and obtaining fuel linkages. Further, the power transmission projects which arelinked to generation are bound to suffer when the generation projects fail to take-off on time.More such delays will adversely impact the order inflows of transmission tower companies,which in turn will have a negative impact on future revenues.
Volatility in Raw Material Prices and Forex movements
The company receives a major portion of its revenue from international operations, which are onfixed price basis. Hence, its Bottom-line is bound to suffer if there is an abnormal increase in theraw material costs. The company has however initiated various measures including hedging andappointment of special teams to track material prices to protect margins. Similarly any adversemovement in forex rates too would have a negative bearing on the company's profitability.
High Working Capital requirements
The transmission tower industry is working capital intensive in nature due to its dependence onState Electricity Boards (SEB's). The contracts of the SEB's include some stringent clausessuch as retention of money and performance guarantee till the date of expiry of the warrantyperiod of the tower. The companies are now working on reducing their working capital intensityand their cash conversion cycle is getting smaller. KEC has been managing its working capitalefficiently as it generally receives advance payment from its customers.
KEC, over the years, has enjoyed high RoEs in excess of 25%. However, the company's RoEfor FY2009 stood at 20.8% well-below its performance in the previous years. Going ahead, weexpect the company to improve its RoE to 25.6% in FY2011 on account of better Profitability.
14January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 14
KEC International
Transmission Towers
Outlook and Valuation
The Eleventh Plan has proposed huge capex for the T&D Sector. This is expected to throw upsubstantial opportunities for the players in T&D EPC space over the next 3 years. We expectthese companies to witness good growth as orders from the government and Public Sectorutilities are expected to be robust despite the economic slow-down. PGCIL alone is expected toaward orders worth Rs20,000cr to the EPC players space over the next 3 years. KEC whichreceived Rs1,024cr worth of orders from PGCIL is well placed to bag more orders going aheadon account of its superior execution skills and excellent track record. On the distribution sidetoo, we expect the company to enjoy growth fuelled by central schemes such as RGGVY andother rural electrification programmes. The company's overseas operations too is expected toclock good growth on account of the recovery in Middle East due to rebound of the crude oilprices. The company also enjoys a good revenue visibility on account of a strong order book.Further, the company's presence in the high potential and evolving Railways and the TelecomSectors makes it a diversified EPC play. At Rs373, the stock is trading at 10.2x FY2010E and7.8x FY2011E Earnings. Historically, KEC has been trading at above 8-12x its two-year forwardEarnings. We Initiate Coverage on the stock with a Buy recommendation and TargetPrice of Rs477, implying a Target P/E multiple of 10x FY2011E Earnings which is in linewith its historical valuation.
15January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 15
KEC International
Transmission Towers
Annexure I
APDRP
The Accelerated Power Development Reforms Programme (APDRP) was launched in FY2003for implementation in the 10th Plan as additional central assistance to the states forstrengthening and up gradation of sub-transmission and distribution systems of high-densityload centres like towns and industrial areas. The main objectives of the programme were toreduce AT&C loss, reduction of commercial loss and to improve quality and reliability of powersupply. As the objective of the programme was not fully accomplished in Tenth Plan, theprogramme has been extended to the 11th plan as well at an outlay of Rs51,570cr.
The APDRP projects are classified into two stages, wherein the first stage involves projects forestablishing Base Line data and IT applications for energy accounting/ auditing and IT basedconsumer services etc. The government of India will provide 100% Loan for the first stage, whichshall be converted into grant after establishment of the required Base-Line data system within astipulated time frame
For the second stage, which involves the setting up of projects, the GoI will provide up to 25% ofthe cost as loan in the case of non-special category states and 90% for special categoryStates. Up to 50% (90% for special category States) loan provided for implementing the secondstage projects shall be converted into grant on achieving 15% AT&C loss in the project area.
RGGVY
This Scheme was introduced in April, 2005 for achieving the National Common MinimumProgramme objective of providing access to electricity to all Rural Households over a period offour years. Rural Electrification Corporation (REC) is the nodal agency for the programme.Under this scheme 90% Capital Subsidy will be provided for rural electrification infrastructureand the balance 10% will be loan assistance on soft terms by REC. The government hasapproved the continuation of RGGVY in the Eleventh Plan for the purpose of providing electricityto all households, electrification of about 1.15 lakh un-electrified villages and providingelectricity connections to 2.34 crore BPL households.
Exhibit 17: APDRP
Source: Power Finance Corporation, Angel Research
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KEC International
Transmission Towers
Annexure II
Date Order Location Length Customer Expected Brief Description of Projectsize (Rs cr) (km) Comp Date
23-4-09 95 Mozambique El Mozambique Turnkey Construction of 110KV transmission line && Namibia & Nampower Supply and Installation of OPGW cable
30-3-09 166 UP 193 PGCIL Dec-11 Supply and Construction for Tower Packagefor 800kv HVDC Bipole Biswanath Chariyali- AgraTransmission line
30-3-09 41 West Bengal 15 CESC Jun-09 Construction of 220kv M/C portion of OverheadTransmission line to Kasaba under Budge Budge Project
19-3-09 291 MP & Assam 383 PGCIL Nov-11 Construction of 765kv Satna-Bina Line, 400kv D/CBina Line associated with ATS for Sasan UMPP
6-3-09 155 Gujarat & 251 PGCIL Dec-11 Supply and Construction of 400kv D/CMaharashtra Gandhar -Navasari Line, LILO of 220kv D/C
Kawas-Navasari& 400Kv Navasari Navi Mumbaiassociated with ATS Mundra
6-3-09 185 Assam & AP 127 PGCIL Nov-11 Supply and Construction of 400kv D/CKameng-Balipara and 400kv D/C Balipara -Bongaigaon line
6-3-09 25 UP CORE Sep-10 Design, Supply, Erection, Testing & Commissioningof 25 kV A.C. Single Phase, 50 Hz. TractionOverhead Equipments, Switching Stations,
26-2-09 103 Punjab & 160 PGCIL May-11 Supply & Construction Of 765kv S/C Jattikalan-Haryana Moga Transmission Line
26-2-09 124 MP & 135 PGCIL Feb-11 Supply and Construction of 765kv Nandarwadi-Maharashtra Wardha Transmission Line
29-12-08 636 Turkey 196 EETC Dec-11 Design, Supply and Construction of 500kv doublecircuit lines
*19-12-08 42 Australia
19-12-08 88 Tajikistan 118 Jun-10 Supply and Construction of 220kv double circuitlines associated with Tajikistan-AfghanistanInterconnection Project
15-4-08 155 Kerala 150 PGCIL Mar-10 Supply and Construction of 400kv Double Circuit(QUAD) Edamon Muvattupuzha Transmission Line
11-1-08 46 MP 128 MPPTC Jul-09 Supply and Construction of 220kv Double CircuitTransmission Line from Dewas to Ashta
1-1-08 482 Saudi Arabia SEC Nov-09 Construction of 380KV transmission line on aturnkey basis
27-11-07 140 Namibia 306 Nampower Sep-09 Turnkey job of 350KV double circuit HVDCtransmission line from Baganeni to Jambezi
27-11-07 260 Saudi Arabia 123 SAMC Sep-09 Turnkey job of 380kv double circuit transmissionline connecting Saudi Arabia Electricity Company'ssubstation to Maaden Power Plant
27-11-07 391 Abu Dhabi 173 ADTDC Nov-09 Turnkey job of 400KV double circuit and quadcircuit transmission line connecting Fujairah andSweihan Substations
16-11-07 246 Algeria Sonelgaz Apr-09 Turnkey job of 400KV single circuit transmissionline
13-7-07 131 Karnataka 152 KPTC Dec-08 Design, Fabrication, Testing, Supply, Erection,Commissioning of 400KV D/C line
1-6-07 380 Kazhakhastan 475 KEGOC Sep-09 Design, Construction, Commissioning of 475kmtransmission line of 500KV in the Ekibastuz-Agadyr section
Exhibit 18: KEC - Recent Order Inflows
Source: Company, Angel Research; Note: * Details not available
17January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 17
KEC International
Transmission Towers
Profit & Loss Statement (Standalone) Rs croreY/E March FY2008 FY2009 FY2010E FY2011E
Net Sales 2,814 3,427 3,978 4,666
% chg 37.9 21.8 16.1 17.3
Total Expenditure 2,460 3,127 3,574 4,169
EBIDTA 354.3 300.3 404.2 497.4
(%of Net Sales) 12.6 8.8 10.2 10.7
Other Income 0.3 0.3 0.3 0.3
Depreciation& Amortisation 25.1 22.7 26.5 31.1
Interest 67.7 100.0 107.5 115.5
PBT 261.9 177.8 270.4 351.1
(% of Net Sales) 9.3 5.2 6.8 7.5
Extraordinary Expense/(Inc.) (1.3) (0.2) - -
Tax 89.7 61.5 89.2 115.9
(% of PBT) 34.3 34.6 33.0 33.0
PAT 172.2 116.3 181.2 235.2
% chg 64.6 (32.5) 55.8 29.8
Ad. PAT 173.4 116.5 181.2 235.2
% chg 65.7 (32.8) 55.5 29.8
Y/E March FY2008 FY2009 FY2010E FY2011E
SOURCES OF FUNDSEquity Share Capital 49.3 49.3 49.3 49.3
Pref Share Capital 10.4 - - -
Reserves & Surplus 435.4 509.2 661.5 867.9
Shareholders Funds 495.2 558.5 710.9 917.2
Total Loans 591.8 621.8 671.8 721.8
Deffered Tax Liability (net) 20.0 29.8 29.8 29.8
Total Liabilities 1,107.0 1,210.2 1,412.5 1,668.9
APPLICATION OF FUNDS
Gross Block 521.3 625.5 685.6 762.1
Less: Acc.Depreciation 89.9 122.2 148.7 179.8
Net Block 431.4 503.2 536.9 582.3
Capital Work-in-Progress 18.9 51.4 35.4 41.5
Investments 0.5 1.8 1.8 1.8
Current Assets 1,973.5 2,539.8 2,970.4 3,459.5
Current liabilities 1,317.3 1,886.0 2,131.9 2,416.2
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DisclaimerThis document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possessionthis document may come are required to observe these restrictions.Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory,compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change withoutnotice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and are for general guidance only. While everyeffort is made to ensure the accuracy and completeness of information contained, the company takes no guarantee and assumes no liability for any errors or omissions of the information. No one can usethe information as the basis for any claim, demand or cause of action.Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this document should make such investigations as it deems necessary to arriveat an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determinethe merits and risks of such an investment. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions- futures, options and other derivatives as well as non-investment grade securities - involve substantial risks and are not suitable for all investors. Reports based on technical analysis centers on studyingcharts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.We do not undertake to advise you as to any change of our views expressed in this document. While we would endeavor to update the information herein on a reasonable basis, Angel Broking, its subsidiariesand associated companies, their directors and employees are under no obligation to update or keep the information current. Also there may be regulatory, compliance, or other reasons that may prevent AngelBroking and affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Angel BrokingLimited and affiliates, including the analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companiesmentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions.Angel Broking Limited and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companiesreferred to in this report, as on the date of this report or in the past.
19January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539June 19, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 19
KEC International
Transmission Towers
Central Support & Registered Office:G-1, Akruti Trade Centre, Road No. 7, MIDC Marol, Andheri (E), Mumbai - 400 093 Tel : 2835 8800 / 3083 7700
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