Investment in transmission line is largely linked to creation of new power generation capacities.
The Indian power generation sector is slated to witness a quantum addition in thermal power as projects of 52618 MW (as against 12114 MW in the Xth plan) are planned for completion in the remaining three years of the 11th plan.
A huge chunk of the planned generation capacity addition is located in the eastern and central region while the main consumption centres are in the West, North and South.
In addition, several IPPs have applied to PGCIL for grant of long-term open access to transmit power during the XIth and XIIth plan.
This necessitates the establishment of high power capacity evacuation system. Thus, we see brisk order placing by PGCIL as it accelerates capex to meet its XIth plan investment target.
In a challenging year for the global economy, Kalpataru Power (KPTL) had a successful FY09 so far as building its order book is concerned.
Fresh orders during the year increased 49%. Order backlog rose 61% to Rs50 billion. This has given a boost to the revenue visibility, which has increased to 31 months of revenue, the highest amongst the listed peers.
Revenue growth was muted in FY09 partly due to delay in a large power distribution order.
However, with the rapid expansion in order book, which is convertible in 24 months, we see revenue growth accelerating in the coming quarters. We forecast revenues to grow from Rs18.8 billion in FY09 to Rs30.2 billion in FY11.
Kalpataru Power is currently trading at 14.1x and 10.4x FY10E and FY11E earnings respectively.
On the back of strong order backlog, the earnings growth is forecast to grow at a CAGR of 39% over FY09-11. ROE is expected to rise from 14.3% in FY09 to 17.9% in FY11.
We recommend a BUY with a target price of Rs865. The target price is arrived based on combining the value of transmission tower business (Rs811 based on DCF) and value of investment in JMC Projects (Rs55 as market value of investment).