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Good prospects for KEC International

November 12, 2007 09:50 IST

Given the sizeable opportunity in the power sector, power companies are busy raising funds to increase power generation capacities.

Even transmission and distribution major Power Grid Corporation (PGC) hit the market with its initial public offering. All these new investments mean solid prospects for transmission tower manufacturer KEC International.

Besides, PGC accounts for 25 per cent of its order book. If the opportunities in the domestic market weren't enough, KEC has a fast growing global business, strong order book and has just completed a restructuring exercise. 

KEC is a leading player in the domestic and global power transmission and distribution business. The company has executed a large number of turnkey orders in power transmission, distribution and railway electrification.

In FY07, two-thirds of revenues came from international business, and in this fiscal it should be higher. Its global business is spread over 16 countries.

The company is expecting its global business to maintain momentum with more focus on West Asia, Africa and US market.

"We expect more business in the Gulf region due to rising crude oil prices and in Africa as more funds are coming from the international development agencies to fund power infrastructure in these countries," says Ramesh Chandak, managing director, KEC International.

KEC plans to capitalise its international knowledge and expertise, and enter more countries.

Well connected

The company has recently formed a joint venture with US-based Power Engineers. The JV will undertake EPC work in the North American market.

The former will provide technical assistance while KEC will supply towers. With the JV, KEC has gained access to a high opportunity and technically advanced market.

Moreover, the company is already engaged in international projects worth Rs 3,600 crore accounting for 75 per cent of its current order book. The international business is expected to improve further as the company plans to explore newer markets.

The strategy also includes targeting larger projects, for which it has recently merged its two group companies. This will help it to scale up the balance sheet and qualify for larger projects.

Synergies

KEC recently announced the merger of group companies RPG Transmission, a listed company, MP Power Line and National Information Technologies (NIT) with itself.

RPG Transmission (RPGT) is one of the oldest players in the transmission and railway electrification business with a marginal presence in exports.

The company is present across the value chain in transmission, rural electrification, railway electrification and tower testing.

RPG Transmission shareholders will get four shares in KEC International for every nine shares held. Based on Wednesday's (Nov 7) prices and the swap ratio, RPG Transmission was trading at a 6 per cent discount to KEC International.

The merger will result in KEC becoming the largest transmission company globally with total tower manufacturing capacity of 161,000 tonne per annum.

RPGT has a surplus capacity of about 15,000 tonne a year, which will be utilised by KEC for its requirements in the international markets. Further, KEC will be able to bring down overall costs due to scale benefits.

Domestic opportunities

KEC believes there is huge potential in the domestic market. The merger will help in bidding for larger and competitive projects and thus consolidate its position to grab emerging opportunities in the domestic market.

According to industry estimates, the Indian government is planning to mobilise funds to the tune of Rs 71,000 crore (Rs 710 billion) by 2012 to support its power goals. Out of this, the Power Grid Corporation, a nodal agency, has planned to mobilise about Rs 55,000 crore (Rs 550 billion) for the expansion of transmission network and strengthening of grid.

KEC and RPGT have executed several projects for Power Grid and will stand to benefit from the ongoing planned expenditure in the sector. Power Grid accounts for Rs 1,000 crore (Rs 10 billion) or 25 per cent of KEC's order book. There have been orders from other players as well, which mostly include state electricity boards.

Telecom

KEC is also merging National Information Technology (NITL), which is into the design, supply and construction of telecom networks.

NITL has experience in maintaining wireless devices across the country. It has recently bagged four clusters under the government's Universal Service Obligation Fund (USOF) for setting up 384 towers under build-own-operate basis.

The towers will be erected by June 2008 and the income will start as the telecom service providers start renting them.

"These projects are allocated by the government and come with about 50 per cent subsidy. The service provider will have to hire these towers from us as a part of the government strategy to promote telecom in rural and remote areas of the country," says Chandak. The project cost is Rs 100 crore (Rs 1 billion), and will provide rental income to NITL.

NITL's turnover has grown from about Rs 13 crore (Rs 130 million) in FY05 to Rs 64 crore (Rs 640 million) in FY07, and is expected to reach about Rs 150 crore (Rs 1.5 billion) in FY09. The growth rate is expected to remain robust over the next four to five years as more towers come up.

NITL in the past has implemented tower projects for all the major telecom providers in the country such as Bharti, Vodafone, Reliance Communications and Tata Tele.

The merger of NITL would provide operational synergies in project management, equipment and workforce utilisation, and procurement. NITL's pre-qualification and experience will help KEC to diversify into the telecom infrastructure business as well.

Valuations

The share price of KEC has risen sharply to Rs 800, gaining about 22 per cent in the last one month. This is primarily due to expectation of more orders from Power Grid and the restructuring within the company.

At the current market price, the stock is trading at 25 times its FY08 estimated earnings and 15 times FY09 earnings. KEC has an order book of Rs 5,580 crore (Rs 55.80 billion), which is almost 2.2 times its consolidated FY07 estimated revenues. These orders are executable over the next 18 months.

Considering the strong earnings growth over the next few years and the benefits of restructuring, KEC International is a good long-term bet.

Besides, investors who are not going to sell the shares in a hurry could look at RPG Transmission as it trades at a discount to KEC International.

Jitendra Kumar Gupta in Mumbai
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