Power Grid FPO 2013 – Apply

___________________________________________________________

FPO Update 11th Dec

  • The FPO closed finally with 6.74 times subscription. Of this, Retail was 2.17 X, QIB 9.09 X and HNI 9.7 X.
  • So Retail applicants should get 40-60% of their applied shares.
  • The pricing declared in this FPO was Rs 90, at the upper end of the range. Thus the FPO has been a success, and has raised about Rs 7000 crores.
  • This success indicates a mood change in the market. Certainly many firms will now approach the market with IPO/FPO offerings. Also its obvious that institutions and HNIs are participating/ investing more than Retail.
  • Time for the rise of Indian Retail?

___________________________________________________________

FPO Analysis

  • Published on: Dec 6, 2013 @ 11:39
  • Pricing: Rs 85-90 range
  • Issue Period:  3-6 Dec 2013 
  • Retail gets an additional 5% discount

Positives:

1) a PSU semi monopoly for power transmission
2) guaranteed returns on assets; predictable income and cash flow
3) over 15% year to date fall in share price makes this share a better value purchase today
4) plays a critical nation building role by developing the power trans capacity and control.
5) by yesterday FPO was already 4.8 times oversubscribed with qib portion 9 times oversubscribed. Retail is likely to get a good fraction of his application in the allotment.
6) retail gets 5% discount on price.

Negatives:

1) very high debt and D/E is over 2.4
2) government dominated sector with sale prices, returns and most costs all controlled. So out performance is difficult.
3) massive asset play. Essentially pgcil gets a return on massive transmission grid assets.
4) likely to continue to approach market for FPO every 2-3 years, resulting in earnings dilution, in order to continue current mission.

Opinion:

  • Current FPO is a good 12 months investment with a 20% return target.
  • Not recommended for long term > 2 year holding.
  • Apply at cut off.

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KEC International – A Power Utilization Play

—————————————————————————————————————————

June 2014 Promotion – this share has appreciated 112% to today’s CMP 117.

This is the 2013 update of the report called KEC International is a Modern Powerhouse, published in Feb 2012. Available on LINK.

  • Date: March 11, 2013
  • CMP: Rs 55.0
  • Small Cap: Market Cap 1394 crores
  • Advice:  Firm is valued at Rs 82; available today at 49% discount
  • Target:   March 2014 target of 179.  Medium Risk.

KEC International is a Power transmission EPC firm with operations in 48 countries. The synergistic diversifications into Power Systems, Telecom, Water and Railways are stabilizing. The Order Book has grown by 10.3% in a challenging FY13 year. The KEC share is available at a 49% discount to valuations. Invest for long term in this ‘Power Utilization Play’.  

High_voltage_transmission_towers_and_lines

High Voltage Transmission Towers and Lines

KEC International – Description and Profile

  • KEC International (KEC) is a global Engineering Procurement and Construction (EPC) firm with a focus on Power Transmission. It is the largest transmission tower manufacturing company in the world.
  • It is the 5,900 crores (FY12) flagship company of the RP Goenka group. Current Market Cap is 1238 cr. Employees number over 4800; Order Book is Rs.10,150 cr, giving about 1.5 years of visibility.
  • From a core of Power transmission, it has diversified into EPC related areas like Power Systems, Cables, Railways, Telecom and Water. Fig 1. About 90% of KEC customers are Government firms.

KEC Business Portfolio, JainMatrix Investments

Fig 1 – KEC is diversifying its business portfolio 

  • Beyond India, it has operations in 48 countries. The 2010 takeover of SAE Towers, a US based lattice transmission towers manufacturer has given it a good North & Latin America footprint.
  • Manufacturing plants are in India – Nagpur, Jabalpur and Jaipur; in Americas at Monterrey (Mexico) and Belo Horizonte (Brazil). Total tower manufacturing capacity is 274,000 MTs.
  • Shareholding pattern is Promoter 44.5%, MFs/DII 36.5%, FIIs 2.2%, Individuals 11.1% and Others 5.7%. The wide ownership with Indian Institutions is good and medium Promoter ownership is fair.

Business Model and Strategy

  • The core capability of KEC is its ability to deliver power transmission lines to Utilities, including design, materials procurement, execution and Project Management.
  • KEC also provides EPC services to Telecom, Railways and Water, see Fig 1. KEC has expanded into Power related areas – Cables, manufacture and cabling solution and – Power Systems, designing and constructing substations and Electrical Balance of Plant (E- BOP) delivery services.
  • KEC is successfully diversifying its business, thus de-risking the overall business portfolio. See Fig 2.
Order Book Breakup_Feb2013, JainMatrix Investments

Fig 2 – Order Book Breakup, Feb 2013, JainMatrix Investments

Industry Note:

  • Power Industry is broadly classified into Generation, Transmission and Distribution. The Indian power sector faces huge demand growth. But the government’s power generation capacity Plan v Achievement was 68% in the 11th Plan. (We are in 12th Plan now). Peak power shortfall has been 8-12% in 10 years. 40% of people have no access to electricity, and others access poor quality power.
  • The Public sector dominates the industry, owning 70-80% of current assets. However with the opening up to the Private sector, upto 50% of new investments are expected to be Private sector.
  • The key Power sector constraints are Fuel Linkages, State Elec. Board financial conditions and T&D losses. Most of the SEBs did not raise tariffs due to political and state govt pressures. This is being corrected now by the Central Govt. Power Generation has grabbed a lot of interest, but with Fuel Linkages still an issue, and restructuring of SEBs a slow process, the focus will now shifting to T&D.
  • T&D losses are 32% of generating capacity compared to the global average of 10%. The T&D projects help with better grid connectivity, reduction in losses and upgradation of Transmission equipment. T&D losses are due to power theft, poorly T&D equipment, low T&D capacity and bad metering. Thus KEC International is a Power Utilization Play, a critical need of the day in India.
  • The Transmission industry bidding norms have changed recently to ‘Tarriff Based Competitive bidding’. Here the Service Providers like KEC are responsible for Build, Own, Operate and Transfer of power lines. TSPs earn in the form of Transmission Charges payable by long-term customers.
  • Key players in the Power Transmission EPC are Areva T&D, Kalpatru Power, Jyoti Structures, Alstom Projects, and infra diversifieds like L&T, GMR and Reliance. A quick analysis shows among the listed focused firms, KEC has a 10-15% mkt share.
  • After a period of intense competition, we are now witnessing a consolidation favoring larger established players. The no. of players qualified for Power Grid’s new orders has come down to only three compared to at least 10 two years ago.

Unique strengths of KEC

  • Diversification of KEC beyond the Transmission EPC sector is good, as diverse businesses follow different cyclical patterns. Businesses set up in the last 3 years account for 27% of Orders Booked.
  • KEC has good presence beyond India, with 51% of current Orders Booked from other regions. In the last one year, KEC has also seen a resurgence of T&D demand from within India.
  • As the flagship RPG Group firm, KEC enjoys good management focus for its initiatives. Established in 1945 as Kamani Engineering Company, the firm has a rich past, and has again reinvented itself into a modern powerhouse. Ramesh Chandak, the MD & CEO is a CA and has lead KEC for the last 10 years.
  • Following the SAE towers M&A, KEC is now looking at additional acquisitions to accelerate growth.
  • Unlike many other Infra majors, KEC is very well managed financially with low leverage and good FCF

Stock Valuation, Performance and Returns

  • The share price has been volatile, moving from the all time high of 184 in Nov’07 to a low of 22 in Dec’08. Thereafter, the price has been affected by the overall low sentiment for infrastructure. Fig 3
Fig 3 – KEC Share Price History, JainMatrix Investments

Fig 3 – KEC Share Price History, JainMatrix Investments

  • KEC has shown a fine growth pattern (Fig 4) with revenues, but not with margins.
  • Sales have grown 19% CAGR over the last 5 years; EBITDA by 12% and Net Profit by 7% resp.
  • Operating margins had been around 10% previously. The recent high competition and entry into new sectors pushed it to around 6%. We expect this to steady at this level and slowly recover.
  • Typically the highest revenues are in the March quarter, due to the year-end of Govt. clients. Fig 4.
Fig 4 - Quarterly Sales and Profits, JainMatrix Investments

Fig 4 – Quarterly Sales and Profits, JainMatrix Investments

  • The dividend is Rs 1.2 for a FV of 2, giving a high Dividend Yield of 2.2%. Fig 5.
Fig 5 – KEC Share Price and Dividends, JainMatrix Investments

Fig 5 – KEC Share Price and Dividends, JainMatrix Investments

  • EPS has been growing at 7% CAGR.  Current PE at 9.2 is lower than Industry average of 15 times.
  • Free Cash Flow (FCF) however has been good.  It fell in FY11 primarily due to the SAE Tower acquisition. It’s been zero to positive for 4 out of last 5 years, and the highest in FY12. This is a very big positive for KEC, as unlike other infra companies, this is well managed financially. Fig 6.
Fig 6 – KEC, EPS and Cash Flow, JainMatrix Investments

Fig 6 – KEC, EPS and Cash Flow, JainMatrix Investments

  • The Price and PE chart is Fig 7. The PE ratio has a historical average of 17.5. It has moved in the range of 5-30 times across bear and bull phases of the market.
  • The current PE is 9.2 times. Current valuations are in the bottom quarter of a 6-year period. Definitely indicates undervalued status.
Fig 7 – Price and PE Chart, JainMatrix Investments

Fig 7 – Price and PE Chart, JainMatrix Investments

  • Price and EPS graph, Fig 8, shows that EPS accelerated till ‘08, then has been in the 5.5 – 7 range for the last 3 years. The recent fall was due to the investments in new sectors. My expectation is that EPS will grow in the sector drawn in this chart. Fig 8.
Fig 8 – Price and EPS Chart, JainMatrix Investments

Fig 8 – Price and EPS Chart, JainMatrix Investments

  • Consolidated Debt Equity at 1.01 (FY12) is low for an infrastructure firm. This is a positive.
  • Orders Booked to Billings, Fig 9, has been steady at 1.5 times.
Fig 9 – Orders Booked to Billings Ratio, JainMatrix Investments

Fig 9 – Orders Booked to Billings Ratio, JainMatrix Investments

  • Return on Capital Employed, ROCE, has been in a 22-36% range for the last 6 years.
  • Return On Net Worth, RoNW, also has been at 19-24% range. These are good numbers.
  • The Beta of KEC is 2.14 (Reuters) indicating high volatility compared to the Indices.

Peer Benchmarking

We have compared KEC with leading listed Peers, Chart 10:

Fig10 – Peer Benchmarking, JainMatrix Investments

Fig 10 – Peer Benchmarking, JainMatrix Investments

  • Relative to the peers, KEC has good ROCE and RoE numbers reflecting good financials.
  • D/E is good relative to peers. Valuations are not excessive. Price/ Book is low.
  • KEC comes out able to hold its own compared to Infra peers.

Risks

  • Domestic interest rates are expected to fall. A change there will affect our costs projections.
  • High competition in Power Transmission and Entry into new segments. Orders booked in the last 12-18 months in India have been at lower margins, but our projections assume an easing up of this.
  • Indian Power sector challenges. The key current issues are (1) financial stress among Utilities, particularly State Electricity Boards that are facing Tariff inflexibility and Collection issues, (2) Power Plants facing issues with fuel linkages and a shortage of Coal & Natural Gas, and (3) project execution delays due to government clearances like environmental, land acquisition, etc. This has affected the investment climate in this sector. The projects under execution by KEC are also affected, and execution/commissioning may be delayed.
  • Business uncertainty in MENA region – unrest and riots in this region can affect ongoing projects.
  • Unpredictable events like a European sovereign default, some new media issue/ bad publicity or any governmental charge sheet, etc. can occur that can mar equity performance for short periods.

Opinion, Outlook and Recommendation

  • India has a surging growth in electricity demand, yet there is a 9-13% power deficit today. This will widen in the next few years. Globally the thumb rule is that one rupee invested in generation must match an equal investment in T&D (1:1); however, in India it has been 1:0.5. There is now a huge opportunity for T&D players.
  • KEC should perform excellently based on the current strategy and execution capacities.
  • In 6 years, share price (adjusted) has fallen 12%, while the EPS growth is 7% (both CAGR). Other metrics like Sales, Orders Booked, Debt, etc too are favorable. The share is under-priced.
  • Current price is low due to poor sentiment/ pessimism in the Indian markets around the Power sector. However KEC is well placed to be a beneficiary of a sentiment revival.
  • In the next few quarters, a lot of pending Power transmission projects are to be bid out, and KEC should win a fair share of new business.
  • JainMatrix Investments values the company at Rs 82, so the share is available at a 49% discount
  • March 2014 target of 179, giving a 225% appreciation.

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Disclaimer

These reports and documents are prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/

KEC International is a Modern Powerhouse

  • Date: February 16, 2012
  • CMP: Rs 60.6
  • Advice:  Firm is valued at Rs 82; available today at 37% discount
  • Target:   March 2014 target of 245

KEC International is the second largest transmission tower manufacturer in the world. It delivers such projects in 45 countries. Synergistic diversifications into Power Systems, Telecom, Water and Railways have de-risked the business. The SAE Towers acquisition (USA) in 2010 was also successful. The Order Book is at 2.2 times FY11 sales. In the last 6 years, Price has barely increased by 1% while the EPS growth is 30% CAGR. The steep price fall of 2011 is done with, and the recovery has started. The KEC share is available at a 37% discount to valuations. Invest for long term in this ‘modern powerhouse’.

Subscribers have received this report around 16th Feb or later on subscribing

KEC International – Description and Profile

  • KEC International is an Engineering Procurement and Construction (EPC) company focused on Power Transmission. It is the largest transmission tower manufacturing company in the world.
  • It is the 3,900 crores (FY11) flagship company of the RPG group. Current Market Cap is 1609 crores.
  • In addition to Power transmission, it has diversified into related areas like Power Systems, Cables, and new verticals like Railways, Telecom and Water. 90% of customers are Government firms.
  • Beyond India, it has supplied power infrastructure to 45 countries globally. In addition, in Sept ‘10, KEC took over SAE Towers, a US based lattice transmission towers manufacturer, for $95m giving it a strong North & Latin American footprint. The acquisition / integration has been successful.
  • Manufacturing plants are in India – Nagpur (Mah.), Jabalpur (MP) and Jaipur (Rajasthan); Americas – Monterrey (Mexico), Belo Horizonte (Brazil). Total tower manufacturing capacity is 251,000 MTs.
  • The shareholding pattern, indicates wide ownership with Indian Institutions (good) and medium Promoter ownership (fair)
JainMatrix Investments

Fig 1 – Shareholding Pattern of KEC – Click to expand

  • Employees number over 4200; Order Book is Rs.9,200 cr, giving about 2.2 years of visibility (@FY11).

Business Model and Strategy:

  • The core capability of KEC is its ability to deliver power transmission lines to Utilities, from design, to materials procurement, to execution, involving Project Management, Design & Engineering skills.
  • In a form of evolution and growth in related areas, KEC has expanded by:
  1. Backward integrated into Cables – manufacture and implementing cabling solution
  2. Forward integration – into Power Systems, designing and constructing substations (range of 220 to 1150 kV substations) and Electrical Balance of Plant (E- BOP) delivery services.
  • Looking beyond the Power industry, KEC has been able to reposition its EPC and manufacturing for:
  1. Telecom industry – telecom towers, cabling, installation and commissioning
  2. Railways EPC work (an acquisition, Jay Railway Signaling undertakes the railway infra projects)
  • Civil infrastructure – bridges, tunnels, workshop modernization, building of stations
  • Tracks related – new track laying/ improve old tracks, electrification /power systems.
  • Signaling and telecommunication network.

3. Water – this includes Irrigation and Hydroelectric construction, Embankment and Flood Control, Sewage and industrial effluent treatment and Potable water treatment and distribution

  • KEC is successfully diversifying its business, thus de-risking the overall business portfolio. See Fig 2.
JainMatrix Investments

Fig 2 – Order Book Breakup of KEC – Click to expand

Industry Note:

  • Classification: Power Industry is broadly classified into Generation, Transmission and Distribution.
  • The Indian power sector faces huge demand growth. But the government’s power capacity Plan v Achievement has been as low as 51.5% in the 10th Plan. (We are in 11th Plan now). The shortfall of peak power has been 8-12% in the last decade. Over 40% of Indian population still doesn’t have access to electricity. Many have access to poor quality power.
  • The Public sector dominates the industry, owning 70-80% of current assets. However the government is opening up to the Private sector. In future, 50% of investments are expected to be from the Private sector.
  • Power Generation has grabbed a lot of interest, but focus in India is now shifting to Transmission, as in 2-3 projects, even after generation and fuel linkages were in place, the Power Evacuation facilities were not ready and all stakeholders are suffering due to the delay.
  • Key players in the Power Transmission EPC are Areva T&D, Kalpatru Power, Jyoti Structures, Alstom Projects, etc. It’s a crowded market, and competition includes infra diversifieds like L&T, GMR and Reliance. A quick analysis shows among the listed focused firms, KEC has a 10-15% mkt share.
  • The Transmission industry bidding norms have changed recently to ‘Tarriff Based Competitive bidding’, where the Service Providers like KEC are responsible for Build, Own, Operate and Transfer of power lines. TSPs earn in the form of Transmission Charges payable by long-term customers.
  • Also see reports on other related firms – BGR Energy Systems; Bottom Fishing and Winds of Change

Unique strengths of KEC

  • Diversification of KEC beyond the Transmission EPC sector is good, as diverse businesses follow different cyclical patterns. Businesses set up in the last 3 years account for 30% of Orders Booked.
  • KEC has good presence beyond India, with 55% of current Orders Booked from other regions. In the present power cyclical down phase in India, KEC is focusing on business in other geographies.
  • As the flagship RPG Group firm, KEC enjoys good management focus for its initiatives. Established in 1945 as Kamani Engineering Company, the firm has a rich past, and has again reinvented itself into a modern powerhouse. Ramesh Chandak, the MD & CEO is a CA and has lead KEC for the last 10 years.
  • Following the ‘10 SAE towers deal, KEC is now looking at additional acquisitions to accelerate growth

Stock valuation, performance and returns

  • KEC has shown a fine growth pattern (Fig 3) with Sales growing 18% CAGR over the last 6 years.
JainMatrix Investments

Fig 3 – Quarterly Sales and Profits at KEC

  • Net profit has grown very well at 24% CAGR.
  • Share price however has been volatile, moving to an all time high (in 2008) and low (in 2009).
JainMatrix Investments

Fig 4 – Price and dividends at KEC

  • EPS has been growing rapidly at 30% CAGR. Cash Flow however has been uneven.
JainMatrix Investments

Fig 5 – KEC – EPS and Cash Flow

  • Current PE at 9.3 is lower than current Industry average of 17.
  • The Price and PE chart – Fig 6 – indicates that current valuations are in the bottom quarter of 6-year historical charts. Definitely indicates undervalued status. This is in spite of the 90% surge from 20th Dec ’11 low of 32.
JainMatrix Investments

Fig 6 – Price and PE Chart of KEC

  • Price and EPS graph, Fig 7, shows that EPS accelerated till ‘08, then has been in the 5.5 – 7 range for next 3 years. The EPS should see an upside breakout from this range in the next few quarters. My expectation is that EPS will grow in the sector drawn in this chart.
JainMatrix Investments

Fig 7 – Price and EPS Chart

  • Debt equity at 1.51 (FY11) is very comfortable for an infrastructure firm.
  • Orders Booked to Billings, Fig 8, shows an improvement over the last two years.
Orders Booked to Billings Ratio for KEC International, JainMatrix Investments

Fig 8 – Orders Booked to Billings Ratio for KEC

  • Return on Capital Employed, ROCE, has been in a 22-40% range for the last 6 years.
  • Return On Net Worth, RoNW, also has been at 17-38% range. These are good numbers.
  • Operating margins have been hovering around 10% for last 3-4 years. This year’s high competition and entry into new sectors pushed it to around 8%. We expect this to revert to 10+ levels from FY13.
  • Cash and Cash equivalents are at 800 crores. Plus with a low DE ratio, KEC has access to a healthy war chest of internal cash plus debt with which they can look at new acquisitions.
  • PEG is at 0.4 – indicates safety and undervalued status

Financial Projections, with FY14 estimates

The consolidated financials and PE of KEC have been projected for the next 3 years.

Key Financials and Projections (Source: JainMatrix Investments)

Fig 9 – Key Financials and Projections (Source: JainMatrix Investments)

Risks:

  • Domestic interest rates unpredictability. This will affect the growth projections.
  • Hyper competition. Orders booked in the last 12-18 months in India have been at lower margins due to high competition. The projections assume an easing up of this in India.
  • Indian Power sector challenges. The key current issues are (1) financial stress among Utilities, particularly State Electricity Boards that are facing Tariff inflexibility and Collection issues, (2) Power Plants facing issues with fuel linkages and a shortage of Coal & Natural Gas, and (3) project execution delays due to government clearances like environmental, land acquisition, etc. This has affected the investment climate in this sector. The projects under execution by KEC are also affected, and execution/commissioning may be delayed.
  • Business uncertainty in MENA region – already a part of the order book is affected due to unrest.
  • Unpredictable events like a European sovereign default, some new media issue/ bad publicity or any governmental charge sheet, etc. can occur that can mar equity performance for short periods.
  • Past performance is no indication of future results

Opinion, Outlook and Recommendation

  • India has a surging growth in electricity demand, yet there is a 9-13% power deficit today. This will widen in the next few years.
  • Globally the thumb rule is that every rupee invested in generation must match an equal investment in T&D; however, in India it has been 1:0.5. There is now a huge opportunity for T&D players.
  • As a leading transmission EPC Company, KEC’s fortunes are linked to the regulatory environment and overall industrial climate of the Indian power sector. In a stable / improving environment, KEC should perform excellently based on the current manufacturing and execution capacities.
  • In 6 years, share price (adjusted) has increased by 1% while the EPS growth is 30% (CAGR). Other metrics like Sales, Orders Booked, Debt, etc too are favorable. The share is definitely under-priced.
  • Current price is low due to poor sentiment/ pessimism in the Indian markets around the Power sector. However KEC is well diversified across geographies as well as business segments.
  • From the steep fall of 2011, the share has bottomed out and risen rapidly of late, and is now at the key 200 DMA levels. Price should rise above this key level, and stay above for a fair period of time.
  • Near term positives include the weakening of the INR against the USD that should boost KEC revenues and profitability. It is an exporter of services, but most of its costs are in INR.
  • In FY12 end, and next few quarters, a lot of pending Power transmission projects are to be bid out, and KEC will win a fair share of new business.
  • The JainMatrix Investments valuation study prices the company at Rs 82, and so the share is today available at a 37% discount to this valuation 
  • March 2014 target of 245, giving a 300% appreciation.


For a pdf copy of this report, mail punit.jain@jainmatrix.com

…………………….

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/