Kalpataru Power - Margin blues - Edelweiss

Kalpataru Power (KPP) reported disappointing Q2FY13 numbers with sharp dip in margin in T/L business, which impacted EBIDTA margin by 320 bps YoY. Also, JMC Projects' margin declined by 320 bps YoY. This was largely due to higher impact of material cost (steel in KPP's case and sand and other material in JMC's case) across both businesses which could not be passed on, apart from impact of aggressively priced contracts in the T/L space. The company's order intake momentum was weak with a decline of 12% YoY fresh order intake. Management indicated 9.5-10.0% as sustainable margin band for KPP standalone. We cut our Consol EPS by 8% & 4% for FY13E and FY14E, respectively, as we cut our margins by 90bps & 70bps. Maintain Hold with a TP of INR 76.

Margin slip impacts bottom line; cutting OPM assumptions further

KPP's EBIDTA margin dipped a sharp 320bps YoY led by high raw material cost. This was primarily on account of high steel cost, which the company was unable to pass on. Also, it executed several projects in the T/L segment bagged amidst aggressive pricing during FY11. Management expects sustainable margin to be around 9.5-10.0%, which is around 80-90bps lower than FY12 level. We are cutting our OPM, building in impact of weak H1FY13 and further pain in T/L margin, which leads to earnings, cut of 6% and 7% for FY13E and FY14E, respectively in SA business.

Weak export awards impact orders; likely to improve in H2FY13Order intake declined by 12%% YoY to INR6.0bn for Q2FY13; for H1FY13 it stood at INR12.9bn (down 22% YoY), with order book at INR60bn (flat YoY, QoQ); consolidated order book stood at INR113bn. KPP is favourably placed in four projects in export market and two in India, which should aid post decent order intake growth in FY13.

Outlook and valuations: Cautious; Maintain 'HOLD'

While we expect KPP's order intake traction to improve during H2FY13 based on decent project award pipeline both India and export market, we remain concerned on overall profitability of both KPP and JMC Projects. We maintain 'HOLD/SP' reco on the stock with a target price of INR 76(earlier 78). The stock trades at consol PE of 6.6x and 5.3 x on FY13E and FY14E, respectively.

Source : Equity Bulls

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