The outlook for transmission line companies has improved as competition in the domestic market has eased further and the international markets provide huge growth opportunity. The number of players qualified for the country’s largest power transmission company, Power Grid’s new orders has come down to only three as compared to at least 10, two years ago. Though the trend might change, it has brought big relief for the remaining players for now. Besides, activity in international markets, especially the CIS region, remains robust and competition is limited, given that there are only a few players. All these augur well for India’s top two transmission line players, KEC International and Kalpataru Power Transmission Ltd (KPTL).
Says Supriya Subramanian, analyst, Kotak Institutional Equities, in her December 7 report, “The trend of increasing market share was already witnessed in the first half of FY13, with KEC and KPTL receiving majority of the awards in the domestic market with a combined market share of 60 per cent compared to 20-30 per cent in past two years. Cumulatively, KEC and KPTL have a market share of 65-70 per cent in the international geographies in which they operate.”
The share of international business in the total order book of the companies has shot up in past few years and now stands at 50-60 per cent (as on September quarter). This is likely to increase. While KEC is already well-diversified in terms of geographies with a presence in 45 countries, KPTL is also spreading its wings. It has entered nine new countries in the last 18 months and now has presence in 32.
A robust order intake expected in the coming quarters will lead to continuation of strong revenue growth, while easing competitive pressures should translate into better margins and return ratios. Revenue visibility (orders in hand) is already comfortable at 1.4-1.9 times, based on trailing 12-month revenues. Thus, despite the gains reported by the two stocks in the recent past, analysts expect further upside in these, as they trade at reasonable valuations of six-eight times FY14 estimated earnings.
Dhirendra Tiwari, analyst, Antique Stock Broking, has initiated a ‘Hold’ on KEC International, with a target price of Rs 75, as he feels valuation (eight times) is at a significant premium to peers. Says Tiwari, “We expect KEC to continue enjoying the premium valuation due to its strong execution and diversified revenue streams, with significant global presence. The company will manage to come out of the current lower profitability state caused by a business slowdown, cost-of-entry strategy in new business (power systems, cables, railways and water forming 35 per cent of revenues) and see improvement in FY14.”
The company recently won orders worth Rs 612 crore in transmission, power systems, cables and water businesses. Given the price target, the upside from current levels of Rs 65 works out to 15 per cent. Subramanian reiterates ‘Buy’ on KPTL with a target price of Rs 120 (upside of 36 per cent from current levels of Rs 88) based on potential bottoming out of margins and return on equity, attractive valuation (5.7 times FY14 earnings), diversified presence across business segments and geographies and comfort in revenue visibility.
Though Power Grid’s orders might stagnate in the future, following the impact of low generation activity, this will be compensated by a less competitive environment and large international opportunities.
