The first two quarters of 2007-8 witnessed a slow take-off of power transmission projects due to differences between the Power Grid Corporation of India (PGCIL) and the Indian Government over sovereign guarantee for World Bank loans and between the Ministry of Power and Reliance Energy (REL) over the “right of way” issue in buildown-operate (BOO) projects.
With those issues resolved, we believe THAT Rs 15,000 crore worth of orders could be up for grabs in the transmission sector in the second half of 2007-8 and in 2008-9.
Currently, the combined order book of major players stands at Rs 9,500 crore. Our industry interactions suggest better deliverables in the 11th Five-Year Plan over all other previous plans, as 59,000 MW of power generation capacity (targeted 78,677 MW) is under construction in the very first year. Even if 60% of the target is achieved, it will be the largest ever generation capacity addition (in absolute terms) in the country. This will create a humongous business opportunity.
The Gulf interconnection grid being carried out by the Gulf Cooperation Council Interconnection Authority (GCCIA) to link the power grids of Kuwait, Saudi Arabia, Bahrain and Qatar (North Grid), will further be connected with the grids of United Arab Emirates and Oman (South Grid).
This offers business opportunity to the tune of Rs 4,000 crore in the next two years. New geographies are being increasingly explored to diversify the business risk and the players are mainly looking at the unexplored markets of South Africa as the next big opportunity. We like all the transmission companies, with Kalpataru Power Transmission as our top pick.
Kalpataru Power: KPTL’s order book escalated by over 50% YoY to Rs 3,300 crore as on 30 September 2007. The order book gives a book-to-bill ratio of two times, providing earnings visibility and growth momentum. We believe in the company’s execution capabilities and its ability to consistently deliver value to its shareholders.
We foresee strong 30% earnings CAGR for the company up till 2009-10. On a standalone basis, we believe that KPTL should be able to maintain over 16% EBITDA margins. We maintain Buy with our new 18-month price target of Rs 2,476.
Jyoti Structures: Jyoti Structures’ order book has improved to Rs 2,400 crore (converting to 2.5 times 2006-7 sales) as on 30 September. The company is planning to enter the unexplored markets of Namibia, South Africa, Uganda, Kenya and Tanzania to install 5,000 circuit km transmission lines in the high voltage segment.
We foresee strong 42% earnings CAGR for the company over 2007-10. We believe that JSL should be able to maintain over 12% EBITDA margins and thus earnings CAGR of 49%. We maintain Buy with our new 18-month price target of Rs 375.