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Stock Insight: Power Play

Kalpataru Power lines up strategy to cash in on government's infrastructure drive & export opportunities

The power transmission sector in India is all set for a mega changeover. With the increase in demand for electricity, the country urgently needs to increase its generating capacity as well as strengthen the existing transmission infrastructure.

The government has embarked on a plan to add 33,000 MW of capacity in the public sector and 6,500 MW of capacity in the private sector by 2006-07. The five-year plans propose to create a national grid to boost transmission capacity by adding over 60,000 km of transmission network by 2012. An investment of Rs 70,500 crore has been lined up to link all regions of the country.

The Centre's ambitious programme for rural electrification with planned investments of Rs 1,70,000 crore up to 2012 has thrown open opportunities in this space for players like Kalpataru Power Transmission, that are betting on new transmission projects.

Kalpataru Power has drawn up a strategy to emerge as a major infrastructure player in the country. A healthy order-book of Rs 2,000 crore, high margins and the entry into the pipeline contracting business hold great prospects for the company. The focus on infrastructure spending, including power, coupled with export opportunities in the Middle East is expected to boost the order flow for the company. Kalpataru Power Transmission (KPTL), incorporated in 1981 as HT Power Structure, is one of India's leading companies engaged in design, testing, fabrication, erection and construction of transmission lines and substation structures on a turnkey basis.

The promoters - Kalpataru Group - hold over 77 per cent equity in the company. The Group has a presence in the areas of real estate, civil contracting, international trading and consumer goods and services.

It is one of India's leading players in the field of turnkey projects for EHV (extra heavy voltage) transmission lines. The company exports tower parts of over 80,000 MTs to several countries and has executed contracts for reputed international companies such as ABB, Alstom, EnelPower, Sumitomo, Downer, Cobra, etc.

It has ventured into 11/33 KV lines and sub-station projects and would benefit from the thrust on rural electrification/Accelerated Power Development Reforms Programme of the government. It has already secured several projects in North India.

Surging crude oil, gasoline and metal prices in the international market have led to many countries increase expenditure on their power networks. Kalpataru Power has already bagged export orders from several countries in South East Asia, Middle East and Africa.

With its entry into the biomass power generation and pipeline infrastructure segments, the company has slowly diversified its business model without diluting its core competence in the transmission segment. The company has created a specialised team and unveiled capital expenditure plans to execute several cross-country pipeline projects for companies like Bharat Petroleum Corporation Ltd (BPCL), GAIL India, etc.

With the acquisition of a controlling stake (49.9 per cent) in the Rs 250-crore JMC Projects in 2005, Kalpataru Power has secured its presence in the areas of factories, industrial structures, buildings, software parks, and roads and bridges. JMC Projects has an order book worth Rs 800 crore.

Along with consortium partners, the company has secured its first partial EPC (excluding supply of line pipes) contract for the 74-km long Panvel-Dabhol pipeline project worth Rs 1,800 crore from GAIL India. The pipeline is to be commissioned by March 2007 and the company is making further capital investment of around Rs 30-35 crore to purchase specialised equipment for implementing the project. It secured two feeder separation orders, covering over 4,000 villages in Kolhapur, Nasik and Pune Zones from the Maharashtra State Electricity Distribution Company worth Rs 380 crore in May 2006. It has also secured a $9-million order for a transmitter (330 KV, 72 km) contract from Zambia.

For the quarter ended June 2006, Kalpataru's operating profit margin was 16 per cent, far better in comparison to its peer companies which have margins at around 10 per cent. The company's move to enter price variable contracts has helped it hedge against the volatility of the prices of raw materials resulting in better price realisation.

The transmission line sector, the company's core business, is witnessing phenomenal growth. Kalpataru Power's transmission and distribution (T&D) division achieved a total revenue of Rs 790 crore, registering a growth of over 64 per cent and contributing approximately 90 per cent to company's revenues. This division is expected to sustain its growth momentum on the back of strong order book position.

Revenues for the June quarter jumped 126 per cent and profits more than trebled. The company's full-year sales have grown at a CAGR of over 50 per cent from Rs 147 crore in 2001-02 to Rs 845 crore in 2005-06. Revenues are likely to reach Rs 1,500 crore in the current financial year. Net profit is likely to jump by 81 per cent to Rs 120 crore. Growth from exports will further provide fillip to the profitability of the company along with better margins. Though the expanding opportunities in the power sector in the country hold promise for companies like Kalpataru Power, any slowdown in proposed spending on power sector could impact the performance of the companies in this space. Rising material costs (steel and copper) could put pressure on operating margins.