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					ICICI Securities Limited
Sector Report
                                                                                                                                                        March 31, 2011

                                                                                                                     Power Transmission Sector
Valuation Summary
                             CMP               TP       Upside (%)            Rating
JSL                            82              89               9%              Add
KPTL                              135          147             9%                  Add    Gap between opportunity & reality needs to converge…
KEC                                 82          97            18%                   Buy   The government is planning a massive investment in the power
                                                                                          transmission sector in the XI-XII Plans to meet the requirements of the
                                                                                          higher power generation capacity and historical neglect of the sector.
Stock price performance (%)
                                                                                          This translates into an investment opportunity of | 3,80,000 crore
                                  1M             3M                6M          12M
                                                                                          (US$84.4 billion) in 2008-17. Transmission sector stocks have
JSL                                0.4          -16.4         -18.6           -31.0
                                                                                          underperformed the Nifty in the past year due to the subdued tendering
KPTL                               8.6          -17.6         -25.9           -36.1       activity by PGCIL and state utilities. With the expected pick-up of
KEC                                5.4           -5.6          -9.4           -24.1       tendering activity by PGCIL and state utilities to meet their plan targets
                                                                                          and with ordering for mega projects expected to commence, we believe
Price movement                                                                            the sector is due for a re-rating. With reasonable sales visibility, positive
                                                                                          outlook for new orders and stable margins, we project revenues and
                    7,000                                                     250
                                                                                          PAT of our coverage companies (Jyoti Structures [JSL]; Kalpataru
                                                                                          Power Transmission [KPTL]; KEC International [KEC]) will grow at
                                                                                    .
       .




                    6,250                                                     200

                    5,500                                                     150         16.3% and 16.8% CAGR in FY10-13E, respectively. We are initiating
       (in units)




                                                                                          coverage on JSL and KPTL with ADD rating and KEC with a BUY rating.
                    4,750                                                     100
                                                                                          Our top pick is KEC due to its strong sales visibility, high RoNW, stable
                                                                                    (|)




                    4,000                                                     50          margins and attractive valuations.
                        Mar-10                   Sep-10                 Mar-11
                                                                                          Strong tendering opportunity in next two or three years…
                                 Nifty (LHS)     JSL        KPTL        KEC
                                                                                          The government has lined up investments worth | 3,80,000 crore ($84.4
                                                                                          billion) during 2008-17 in the transmission sector. We believe PGCIL and
Analyst’s name                                                                            the state utilities will significantly step up their ordering activity over the
                                                                                          next two or three years driven by mega transmission projects like the nine
 Chirag Shah                                                                              high capacity power transmission corridors (HCPTC), and planned
 shah.chirag@icicisecurities.com                                                          expansion of national and state grids. This translates into an ordering
                                                                                          opportunity of ~| 180,000 crore ($40 billion) during FY11E-13E.
 Sanjay Manyal
 sanjay.manyal@icicisecurities.com                                                        …translates into reasonable earnings growth for companies & competition
                                                                                          We believe our coverage companies will be the key beneficiaries of the
                                                                                          huge domestic opportunities due to their strong execution capabilities
                                                                                          and diverse client base (PGCIL, state utilities and private sector). We
                                                                                          project domestic order backlog of ~| 22,000 crore ($5.5 billion) during
                                                                                          FY11E-13E for our coverage companies. Additionally, KEC and KPTL have
                                                                                          a sizable international presence (mainly Africa, Middle East and CIS
                                                                                          countries). Our coverage companies’ earnings are projected to grow at
                                                                                          17% CAGR in FY10-13E fuelled by their robust order book position and
                                                                                          stable margins expected.
                                                                                          Risks exist
                                                                                          The key risks to our call include lower-than-expected tendering of orders
                                                                                          by PGCIL and state utilities, delays in power generation capacity addition,
                                                                                          execution slippages by coverage companies, etc.
                                                                                          Recommendation
                                                                                          Power transmission sector stocks have underperformed the Nifty in the
                                                                                          last year. We believe the primary reason for the underperformance has
                                                                                          been the subdued ordering activity by PGCIL and state utilities, rising
                                                                                          competitive intensity as compared to 2005-08, slower execution, rising
                                                                                          capital intensity of the business (exposure to BOOT projects). Our three
                                                                                          coverage companies are currently trading at a substantial P/E discount
                                                                                          to their five year average one-year forward P/E (discount of 56% for
                                                                                          JSL, 40% for KPTL and 36% for KEC). We are valuing stocks on P/E as
                                                                                          well P/BV basis. We are initiating coverage on JSL and KPTL with ADD
                                                                                          rating and KEC (Top Pick) with a BUY rating.


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                                                               Investment Rationale
                                                               Massive investment targeted in XI and XII Plans
                                                               Aggressive power generation capacity addition targets…
  Driven by the need to alleviate the significant power        India’s rapid economic growth during the last decade (8.2% CAGR) has
  deficits faced by the country, the Government of India has   placed tremendous pressure on the existing infrastructure base (power,
  targeted aggressive investments in power generation at |     roads & highway, airports, telecom, etc). The power sector has witnessed
  410,900 crore in XI Plan and | 495,083 crore in XII Plan     a significant demand-supply gap due to the sustained growth of power
                                                               demand (4.8% CAGR in FY00-10), historical shortfalls in generation
                                                               capacity addition (53% and 49% in the IX and X Plans, respectively) and
                                                               high transmission and distribution (T&D) losses. Consequently, the peak
                                                               load deficit in India has been in the 11-17% range in FY00-10. This has
                                                               constrained the economic growth of the country.
                                                               With the GDP expected to grow at 7.1% CAGR in FY12E-22E, power
                                                               demand is estimated to increase at 7.8% CAGR (as per Central Electricity
                                                               Authority [CEA]). This is likely to place a further strain on power
                                                               infrastructure. The government has aggressive investment plans for the
                                                               sector, with ~62 GW of generation capacity targeted to be added as per
                                                               the mid-term appraisal (MTA) of the XI Plan. The scale of opportunity
                                                               becomes even larger in the XII Plan (100 GW capacity additions targeted).
                                                               This is a quantum leap from the capacity addition since India’s
                                                               independence (126 GW generation capacity at the end of the Xth Plan).
                                                               The aggressive power generation capacity targets will entail massive
                                                               investment estimated at | 410,900 crore ($91.3 billion) in the XI Plan and |
                                                               495,083 crore ($110 billion) in the XII plan as per CEA. Additionally, this
                                                               will require an equally large investment in T&D infrastructure.


                                                               Exhibit 1: Sustained growth of power demand in 2000-10; resulting in high peak load deficits
                                                                       180                                                             16.6                         18
                                                                                    13.0                                        13.8
                                                                             12.4                 12.2                   12.3                 11.9   12.6
                                                                       135                 11.8          11.2   11.7                                                14
                                                                                                                                                            10.2
                                                                (GW)




                                                                                                                                                                         (%)
                                                                       90                                                                                           9

                                                                       45                                                                                           5

                                                                        0                                                                                           0
                                                                             FY00

                                                                                    FY01

                                                                                           FY02

                                                                                                  FY03

                                                                                                         FY04

                                                                                                                  FY05

                                                                                                                         FY06

                                                                                                                                FY07

                                                                                                                                       FY08

                                                                                                                                              FY09

                                                                                                                                                     FY10

                                                                                                                                                            FY11*




                                                                                                    Peak demand                 Shortage %


                                                               Source: CEA, ICICIdirect.com Research; YTDFY11




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                                                                                                                                                             Page 2
ICICI Securities Limited

        Exhibit 2: Power demand projected to grow at 7% CAGR in FY12E-22E                         Exhibit 3: Generation capacity of ~162 GW likely to be added over
                   as per CEA                                                                                2008-17

                                                                                                            300
                    400
                                                                                                            225                                                            100
                    300
                                                                        218




                                                                                                    (GW)
                                                                                                            150                               21            62                              289
             (GW)




                    200                  153
                                                                                                                   75
                                                                                                                               105
                    100
                                                                                                                    0
                      0                                                                                                   Upto IX plan     X plan         XI plan*       XII plan*      By XII plan
                                     FY12E                             FY17E

        Source: CEA, ICICIdirect.com Research                                                     Source: CEA, ICICIdirect.com Research




                                                                      Exhibit 4: Massive power sector investment targeted in XI, XII Plans (~US$440 billion)
                                                                      (| crore)                                                                 XI plan                                  XII plan
                                                                      Generation                                                               410,900                                  495,083
                                                                      % of total power capex                                                        49                                        44
                                                                      Transmission                                                             140,000                                  240,000
                                                                      % of total power capex                                                        17                                        21
                                                                      Distribution                                                             287,000                                  400,000
                                                                      % of total power capex                                                        34                                        35
                                                                      Total                                                                   837,900                                1,135,083
                                                                      Source: CEA, ICICIdirect.com Research


                                                                      With a decade of underinvestment in the T&D space, the XI Plan and XII
                                                                      Plans are more progressive for the T&D segment. This is clearly evident
                                                                      from the fact that the share of expenditure on T&D in the XI and XII Plans
                                                                      is 51% and 56.4%, respectively, as compared to the 44.2% share in the X
                                                                      Plan. Like the generation segment, there is a structural change in the onus
                                                                      for expenditure in the XI and XII Plans in terms of private sector
                                                                      participation. The recent foray of private companies to build T&D
                                                                      infrastructure is a sign of huge quantum of capex to be committed by
                                                                      them in the next couple of years.


 Exhibit 5: Pie for T&D spend to increase in XI & XII Plan                                        Exhibit 6: Total expenditure planned by source


                                                                                                                    150,000               140,000
            100
            80                                                                                                                                                   100,000
                          44.2                   51.0                   56.4                                        100,000
                                                                                                       (| crore)




            60                                                                                                                                             65,000
                                                                                                                                     55,000
      (%)




            40                                                                                                          50,000                                                         30,000
                          55.8                                                                                                                                                    20,000
            20                                   49.0                   43.6
                                                                                                                           -
              0
                                                                                                                                         CTU's                STU's               Private Sector
                    Share in 10th Plan     Share in 11th Plan   Share in 12th Plan

                                   GENERATION                   T&D                                                                                  11th plan        12th plan

 Source: CEA, ICICIdirect.com, Research                                                           Source: CEA, ICICIdirect.com, Research




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                                                                    …translates into transmission sector investment of | 380,000 crore ($84
                                                                    billion) in XI-XII Plans
  Investment worth | 3,80,000 crore targeted in the XI and          One of the primary reasons for high T&D losses in India has been the
  XII Plans in the transmission sector to complement the            historical neglect of the sector in the previous five-year plan periods.
  expansion planned in the power generation space                   Majority of the investment was directed towards power generation while
                                                                    ignoring the T&D sector. According to internationally accepted
                                                                    benchmarks, an equal investment ratio should be maintained between
                                                                    power generation and T&D. Recognising this, the government has
                                                                    stepped up T&D spending in the XI Plan (51% of the total power sector
                                                                    investment) creating attractive opportunities for companies catering to
                                                                    this sector.
                                                                     Exhibit 7: Trend in T&D segment
                                                                    (| crore)                           X plan investment       XI plan investment         XII plan investment
                                                                    T&D                                          119,500                  427,000                     640,000
                                                                    Transmission                                  47100                  140,000                       240,000
                                                                    Distribution                                  72400                  287,000                       400,000
                                                                    T&D capex as % of total                                                    51                            56

                                                                    Source: Company, ICICIdirect.com Research


                                                                    Our power transmission coverage universe (JSL, KPTL and KEC) primarily
                                                                    focuses on the transmission sector (33% of T&D investment in XI Plan).
                                                                    With an aggressive XI Plan physical targets for power transmission
                                                                    capacity addition (88,515 ckm during XI Plan vs. 41,374 ckm added during
                                                                    X Plan) and substations (157,691 MVA during XI Plan vs. 76,892 MVA
                                                                    added during X Plan), an investment of | 1,40,000 crore is expected in
                                                                    FY08-12. The scale of opportunity becomes even larger in the XII Plan,
                                                                    which is pegged at | 240,000 crore.
  Exhibit 8: Transmission sector accounts for one-third of T&D sector investment in XI Plan

                                                                                    Power opportunity




                                          49%          Generation                                                      T&D          51%




                                                                        33%           Transmission                                     67%           Distribution




                             65%         Transmission line                                                            35%        Substation




               Tower package              Conductors                   Insulators                       Transformer          Substation package               Others

                     60%                      35%                         5%


  Source: Company, ICICIdirect.com Research




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  Exhibit 9: Quantum leap in transmission line and substation capacity addition targets in XI and XII Plans
                                                                        Actual capacity addition                                        11th plan progress          Target
                                                                                                                 Cumulative                                       addition
                                                                                                                  Upto 10th                   Addition upto    during 12th
                                         Upto 6th plan      7th plan*        8th plan     9th plan   10th plan         plan Target addition      Feb 2011             plan
  Transmission lines (CKM)                    52,034         40,719          24,623       34,893      41,374      193,643          88,515          50,611        120,000
     765 kV                                       -              -               -         1,160       1,158         2,318          5,273            1,379         25,000
     HVDC+/-500kV                                 -            1,634             -         3,104       1,134         5,872          5,400            1,580          5,000
     400 kV                                    6,029         20,061          10,052       13,236      23,057        72,435         47,446           28,328         50,000
     230/220 kV                               46,005         19,024          14,571       17,393      16,025       113,018         30,396           19,324         40,000

  Sub stations (MVA)                           46,621        39,924          38,497       56,901      76,892      258,835         157,691          82,513        301,000
    765 kV                                         -             -               -            -        2,331        2,331          24,500           4,500        110,000
    HVDC+/-500kV                                   -             -               -         5,200       5,000       10,200           8,500           1,000         16,000
    400 kV                                      9,330        16,230          15,305       19,515      35,390       95,770          51,960          34,120         80,000
    230/220 kV                                 37,291        23,694          23,192       32,186      34,171      150,534          72,731          42,893         95,000
  Source: CEA, ICICIdirect.com Research; *includes addition during 1991-92




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                                                              Transmission orders of | 180,000 crore expected in FY11E-13E
  Driven by orders from PGCIL, state transmission utilities   Transmission sector orders largely depend on the power generation
  and private sector, we project transmission orders worth    capacity being added in the country and are generally placed two years
  |180,000 crore in FY11E-13E                                 before the actual date of commission of generation capacity. With
                                                              significant power generation capacity expected to be added by FY15E and
                                                              remaining XI Plan orders, we estimate a transmission sector ordering
                                                              opportunity of ~| 180,000 crore in FY11E-13E.
                                                              Out of the ordering opportunity of ~| 180,000 crore over FY11E-13E, we
                                                              estimate that total opportunity for our coverage companies in the
                                                              transmission line packages and substation segment would be at |70000
                                                              crore and ~| 62700 crore, respectively.


                                                              Exhibit 10: Orders worth |180,000 crore expected to be tendered in FY11E-FY13E
                                                              (| crore)                                  FY11E        FY12E        FY13E        FY14E       FY15E
                                                              National grid                              6,012       10,084       14,983       16,814      13,395
                                                              HCPTC                                      7,000       23,092       19,541           -           -
                                                              Private investment                         8,800        8,800        6,800        6,800       4,800
                                                              Intra-state transmission                  20,263       26,177       27,803       22,303      12,982
                                                              Total                                     42,075       68,154       69,127       45,917      31,177
                                                              Source: CEA, MTA, ICICIdirect.com Research




                                                               Exhibit 11: Break up of the opportunity by type of orders
                                                              Opportunity by type of orders (| Crore)
                                                                                                    % orders      FY11E       FY12E    FY13E       FY14E      FY15E
                                                              Transmission line                         65%      27,349   44,300      44,933      29,846     20,265
                                                                 Tower packages                         60%      16,530   26,775      27,157      18,039     12,248
                                                                 Conductors                             35%       9,467   15,335      15,554      10,331      7,015
                                                                 Insulators                               5%      1,352       2,191    2,222       1,476      1,002
                                                              Sub-stations                              35%      14,726   23,854      24,194      16,071     10,912
                                                              Total                                              42,075   68,154      69,127      45,917     31,177

                                                              Source: Company, ICICIdirect.com Research




                                                              PGCIL and state transmission utilities (STUs) will continue to lead
                                                              investments with ~85% share in both XI and XII Plans. PGCIL has recently
                                                              announced the creation of nine high capacity power transmission
                                                              corridors (HCPTC) linking independent power producers (IPP) plants in
                                                              several states including Orissa, Chhattisgarh, Jharkhand, Sikkim, Andhra
                                                              Pradesh, Tamil Nadu and Madhya Pradesh to different regions of India.
                                                              This presents an opportunity of | 49,633 crore (| 58,061 crore including
                                                              IDC). Ordering for this mega project is expected to pick up pace over
                                                              FY12E-FY13E. Below are the capacity expansion targets of key players in
                                                              the sector (detailed information on all agencies is provided in the
                                                              following sections)




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                                       •   PGCIL: PGCIL plans to expand the capacity of the National Grid (inter-
                                           regional transmission system) to 32.6 GW by the end of the XI Plan
                                           (vs. 14.6 GW at the end of X Plan). Investment targets stand at |
                                           55,000 crore (over and above HCPTC spending). In the XII Plan, the
                                           government plans to further raise National Grid capacity to 75 GW.
                                           We have assumed that approximately 10% orders for the XI Plan and
                                           the entire XII Plan orders remain to be tendered. This translates into
                                           an ordering opportunity of approximately | 31,100 crore during
                                           FY11E-FY13E.
                                       •   State transmission utilities: Fuelled by power sector reforms
                                           (unbundling of state utilities - separation of generation, transmission
                                           and distribution functions) in recent years, and focus on reducing T&D
                                           losses, state utilities have significantly stepped up spending in the
                                           transmission sector. State utilities plan to invest | 65,000 crore in the
                                           XI Plan to expand intra-state transmission network (from 131,828 ckm
                                           at the end of X Plan to 175,869 ckm in the XI Plan). In the XII plan,
                                           state transmission utilities are expected to invest approximately |
                                           100,000 crore. We have assumed that ~70% of XI Plan orders have
                                           been placed by FY10-end and entire XII Plan ordering remains to be
                                           tendered. This translates into an ordering opportunity of ~| 74,250
                                           crore during FY11E-FY13E.
                                       •   Private sector: In the XI Plan, investment of | 20,000 crore has been
                                           envisioned from the private sector directed towards expanding inter-
                                           state transmission network. Several PPP projects have been awarded
                                           by state utilities including Haryana, Rajasthan, Maharashtra, etc. Of
                                           the XI Plan investment target, we have assumed that 50% of the
                                           orders have been placed by FY10-end. In the XII Plan, the quantum of
                                           private sector investment is expected to increase to | 30,000 crore.




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                                                                   PGCIL – HCPTC
                                                                   Order tendering to pick-up in FY12-FY13E
  We expect PGCIL to award new orders worth |49,633                With the higher share of private sector in incremental power generation
  crore towards nine HCPTC projects in FY11E-13E                   capacity (57% in XII Plan vs. 14% in XI Plan), we expect strong growth in
                                                                   capacity of IPPs over the next few years (15 GW at present). This will
                                                                   necessitate the need for an inter-state transmission network linking IPPs
                                                                   to various parts of the country. In January 2010, PGCIL announced the
                                                                   creation of nine HCPTC projects at an estimated capex of | 58,000 crore (|
                                                                   49,633 crore excluding IDC). The identified projects will transfer ~50 GW
                                                                   of power generated by IPP plants.
                                                                   Based on our analysis of commissioning schedule of various IPP projects,
                                                                   we expect ordering for this mega project to get completed by FY13E
                                                                   (assuming an average execution period of two years). However, order
                                                                   tendering by PGCIL has been behind target in H1FY11. Though there may
                                                                   be some ordering for HCPTCs that will be done in FY11, the major pick
                                                                   will be witnessed over FY12E-FY13E.
       Exhibit 12: Creation of nine HCPTC projects announced by PGCIL; total capex of | 49,633 crore
                                                                                                                                         Total cost Total cost (excl IDC; |
                                                                                                     Objective of Creating HCPTC          (| crore)                  crore)
        HCPTC – I                                                                             Phase-I Generation Projects in Orissa          8,752                   7,481
        HCPTC – II                                 IPP projects in Jharkhand and state sector generation projects in West Bengal             5,709                   4,880
        HCPTC – III                                                                                           IPP projects in Sikkim         1,304                   1,121
        HCPTC – IV                                       IPP projects in Bilaspur complex, Chattisgarh & IPPs in Madhya Pradesh              1,243                   1,062
        HCPTC – V                                                                                      IPP projects in Chhattisgarh        28,824                  24,636
        HCPTC – VI                                                            IPP projects in Krishnapatnam Area, Andhra Pradesh             2,065                   1,765
        HCPTC – VII                                                                      IPP projects in Tuticorin area, Tamil Nadu          2,357                   2,015
        HCPTC – VIII                                                              IPP projects in Srikakulam area, Andhra Pradesh            2,986                   2,552
        HCPTC – IX                                           IPP projects in southern region for transfer of power to other regions          4,821                   4,121
        Total                                                                                                                              58,061                  49,633
       Source: PGCIL, ICICIdirect.com Research



                                                                   Exhibit 13: ~ Transmission line orders to constitute ~61% of total capex for HCPTC projects

                                                                                                                                       Setup cost
                                                                     Transmission system components                                      (| crore)              % of total
                                                                     Transmission lines                                                    30,067                      61
                                                                     Sub-stations                                                          13,670                      28
                                                                     Transformers                                                            3,000                      6
                                                                     Reactors                                                                2,895                      6
                                                                     Total project cost                                                    49,633                  100%

                                                                  Source: PGCIL, ICICIdirect.com Research




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                                                               PGCIL – National Grid
                                                               Aggressive XI plan targets to expand National Grid…
  National Grid capacity is targeted to expand by 2.7x (from   At the end of the X Plan, the capacity of the National Grid stood at 14.6
  14.6 GW to 38 GW) in XI Plan                                 GW dominated by transmission lines and substations in the 400 KV
                                                               capacity range. Expansion of inter-regional transmission networks is
                                                               required due to the uneven distribution of power generation capacity
                                                               across India and need to transport power to areas where high demand
                                                               exists. Consequently, the government plans to expand the National Grid
                                                               capacity to 38.2 GW by FY12E.
                                                               Exhibit 14: Majority of National Grid transmission capacity installed at 400 KV level
                                                                           (as on December 2010)
                                                                                                 Transmission line (CKM)                        Sub-stations (MVA)
                                                                                              Centre         State       Private           Centre         State          Private
                                                               765 kV                          3,573          409            -              4,500          -                 -
                                                               HVDC+/-500kV                    5,948        1,504           782               -            -                 -
                                                               400 kV                         68,423       29,931         4,558            61,170       64,447               -
                                                               230/220 kV                     10,360      121,630           423             5,276      191,389            1,440
                                                               Source: CEA, ICICIdirect.com Research;


                                                               …translates into high capex for PGCIL
  Total investment of |55,000 crore targeted towards           In the XI Plan, | 55,000 crore is planned for investment by PGCIL, India’s
  upgrading the National Grid in the XI Plan                   inter-state transmission utility of which only ~| 26,000 crore has been
                                                               spent by PGCIL by FY10. The government’s emphasis on reducing
                                                               transmission losses will lead to significant investments to be made in high
                                                               capacity transmission lines (765 KV, +/- 500 kV HVDC Lines). According to
                                                               the MTA of the XI Plan, transmission capacity of 18.5 GW is likely to be
                                                               added by FY12E (shortfall of 24% vis-à-vis planned targets).
                                                               Eastern region to account for majority of capex on surplus power availability
                                                               Of the XI Plan target for the National Grid, the north-east and eastern
                                                               regions will account for majority of investment due to the surplus power
                                                               generating capacity. With more power generation projects expected to be
                                                               commissioned in the north-east region (mainly hydro power), surplus
                                                               power from these projects will need to be transferred to energy deficit
                                                               regions of the country – driving the need for a larger transmission
                                                               network.
                                                               Exhibit 15: Power surplus in Eastern India; driving transmission sector investment in region


                                                                                             Winter                    Monsoon                           Summer
                                                                           20                       16                       16                                     15

                                                                           10
                                                                                                                  3                    4                                 3
                                                                                                         2
                                                                    (GW)




                                                                            0
                                                                                                                            -1
                                                                           -10                 -5                      -6                          -4          -5
                                                                                   -10 -9                                                               -10
                                                                           -20



                                                                                  Northern          Western    Southern          Eastern       North-Eastern


                                                               Source: Planning Commission, ICICIdirect.com Research




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     Exhibit 16: Majority of National Grid expansion in XI Plan targeted in East and North-east India due to surplus power generation capacity
                                                                                                        Target addition during   Achieved till Nov
      (MW)                                                                       At the end of X plan                  XI plan               2009    % completed
      Eastern region - Southern region
         Gazuwaka HVDC back to back                                                           1,000                       -                   -
         Balimela-Upper Sileru 220 kV S/C                                                       120                       -                   -
         Talcher-Kolar HVDC Bipole                                                            2,000                       -                   -
         Upgradation of Talcher–Kolar HVDC bipole                                                -                       500                 500           100%
      Total                                                                                   3,120                      500                 500           100%
      Eastern region - Northern region
         Muzaffarpur - Gorakhpur 400 kV D/C (Quad Moose)                                      2,000                       -                   -
         Dehri-Sahupuri 220 kV S/C                                                              120                       -                   -
         Sasaram HVDC back to back                                                              500                       -                   -
         Patna-Balia 400 kV DC quad                                                           1,600                       -                   -
         Biharshariff-Balia 400 kV D/C quad                                                      -                     1,600               1,600           100%
         40% series comp on Biharshariff-Balia 400 kV D/C quad                                   -                       200                  -              0%
         Barh-Balia 400 kV D/C quad                                                              -                     1,600                  -              0%
         40% series comp on Barh-Balia 400 kV D/C quad                                           -                       200                  -              0%
         Sasaram–Fatehpur 765 kV S/C                                                             -                     2,100                  -              0%
         Gaya–Balia 765 kV S/C                                                                   -                     2,100                  -              0%
         Sasaram-Balia 400 kV D/C quad                                                           -                     1,600                  -              0%
        Sasaram bypassing (additional capacity)                                                 500                       -                   -
      Total                                                                                   4,720                    9,400               1,600            17%
      Eastern region - Western region
         Rourkela-Raipur 400 kV D/C                                                           1,000                       -                   -
         TCSC on Rourkela-Raipur 400 kV D/C                                                     400                       -                   -
         Budhipara-Korba 220 kV D/C+S/C                                                         360                       -                   -
         Ranchi-Sipat 400 kV D/C (40% SC)                                                        -                     1,200               1,200           100%
         Ranchi-Rourkela-Raipur 400 kV D/C                                                       -                     1,400               1,400           100%
         Ranchi – Sipat Pooling Point 765 kV S/C                                                 -                     2,300                  -              0%
      Total                                                                                   1,760                    4,900               2,600            53%
      Eastern region - North Eastern region
         Birpara-Salakati 220 kV D/C                                                            240                       -                  -
         Malda-Bongaigaon 400 kV D/C                                                          1,000                       -                  -
         Bongaigaon-Siliguri 400 kV D/C Quad                                                     -                     1,600                 -               0%
      Total                                                                                   1,240                    1,600                 -               0%
      Northern region - Western region
         Vindhychal HVDC back to back                                                           500                       -                   -
         Auria-Malanpur 220 kV D/C                                                              240                       -                   -
         Kota-Ujjain 220 kV D/C                                                                 240                       -                   -
         Agra-Gwalior 765 kV S/C line-1 400 kV op.                                            1,100                       -                   -
         Agra-Gwalior 765 kV S/C line-2 400 kV op                                                -                     1,100               1,100           100%
         Kankroli-Zerda 400 kV D/C                                                               -                     1,000               1,000           100%
      Total                                                                                   2,080                    2,100               2,100           100%
      Western region - Southern region
        Chandrapur HVDC back to back                                                          1,000                       -                  -
        Barsur–L.Sileru 200 kV HVDC mono pole                                                   200                       -                  -
        Kolhapur-Belgaum 220 kV D/C                                                             240                       -                  -
        Ponda – Nagajhari 220 kV D/C                                                            240                       -                  -
        Sholapur-Raichur 765 kV S/C line-1                                                       -                     1,100                 -               0%
        Narendra HVDC back-to-back with 400 kV D/C line                                          -                     1,000                 -               0%
      Total                                                                                   1,680                    2,100                 -               0%
      North Eastern region / Eastern region - Northern region / Western region
         Biswanath Chariyali–Siliguri–Agra + 800 kV HVDC bi-pole line                           -                      3,000                 -               0%
      Total                                                                                     -                      3,000                 -               0%

      Overall National Grid capacity expansion                                               14,600                   23,600               6,800            29%
     Source: Planning Commission, MoP, ICICIdirect.com Research




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                                                                 State transmission utilities
                                                                 Substantially higher spending by state utilities in XI Plan
  Substantial spending has been targeted at the state level –    For the XI Plan, the aggregate investment by state transmission utilities
  | 65,000 crore in XI Plan and | 100,000 crore in XII Plan      was | 65,000 crore (plan target). Fuelled by power sector reforms
                                                                 (unbundling of state utilities - separation of generation, transmission and
                                                                 distribution functions) in recent years, and focus on reducing T&D losses,
                                                                 state utilities have significantly stepped up spending in the transmission
                                                                 sector (| 25,285 crore in the X Plan). The scale of investment becomes
                                                                 even larger in the XII Plan (| 100,000 crore).
                                                                 Maximum incremental investment in the XI Plan is targeted by power
                                                                 hungry states, including Maharashtra (19% share of incremental
                                                                 spending), Tamil Nadu (9%), Chhattisgarh (9%), Andhra Pradesh (6%),
                                                                 Delhi (4%), etc.
                                                                 Large order tendering for XI Plan still needs to be done
  Only 65% of physical targets in XI Plan achieved till Q3FY11   Despite the aggressive investment targets, actual transmission capacity
                                                                 added by state utilities is behind schedule (~65% of 44,041 ckm planned
                                                                 in XI Plan capacity has been added by Q3FY11). On the tendering front,
                                                                 we have assumed that 30% of XI Plan orders still need to be done. This
                                                                 has created a large opportunity for power transmission companies
                                                                 catering to this space as state utilities step up tendering activity over the
                                                                 next few quarters to meet their plan targets.
                                                                 220/132 KV projects to dominate state utilities’ orders
                                                                 State utilities will continue to rely on transmission lines and substations in
                                                                 the 220 KV capacity range in the XI Plan. Although the share of higher
                                                                 capacity transmission projects will increase, going forward, they are likely
                                                                 to have a small share in total capacity added by state utilities.
                                                                 For the XI Plan, approximately 80% of the capacity added by the state
                                                                 utilities till date has been at the 220 KV and 132 KV level while only 4% of
                                                                 the capacity added has been at the 400 KV level.
                                                                 Exhibit 17: Shortfall of ~20% in capacity added by state utilities vis-à-vis XI Plan targets (Q3FY11)
                                                                                                                FY08        FY09       FY10        FY11*          Total
                                                                 Transmission line Target                      7,237       8,043      8,263         5,362       28,905
                                                                                          400 kV               2,013       2,367      2,244         1,878        8,502
                                                                                          230/220 kV           5,224       5,676      6,019         3,484       20,403
                                                                                    Achievement                5,038       5,637      6,164         5,695       22,534
                                                                                          400 kV               1,259       1,707      1,552         1,742        6,260
                                                                                          230/220 kV           3,779       3,930      4,612         3,953       16,274
                                                                                    Shortfall                    30%        30%         25%           -6%          22%
                                                                 Sub-stations       Target                    14,315      17,103     18,665        14,930       65,013
                                                                                          400 kV               3,695       3,270      6,615         7,430       21,010
                                                                                          230/220 kV          10,620      13,833     12,050         7,500       44,003
                                                                                    Achievement               11,348      12,100     12,585        15,195       51,228
                                                                                          400 kV               1,890       1,065      2,390         6,615       11,960
                                                                                          230/220 kV           9,458      11,035     10,195         8,580       39,268
                                                                                    Shortfall                    21%        29%         33%           -2%          21%

                                                                 Source: CEA, ICICIdirect.com Research; *up to Dec 2010




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     Exhibit 18: Transmission sector investment increases 2.6x times in XI Plan (vis-à-vis X Plan spending)

                                                                                                                                 % of incremental
      (| crore)                                 X plan   FY08E         FY09E         FY10E         FY11E      FY12E      Total         investment
      Northern Region
          Chandigarh                             18.0      12.3           4.0           4.0            6.0        7.0     33.3              0.0%
          Delhi                                   325       375          595           541            378        117     2,006              4.2%
          Himachal Pradesh                        282       300          239           395            210          85    1,229              2.3%
          Haryana                                 586      42.6          127           236            128          20      553             -0.1%
          Jammu and Kashmir                      73.8       205          200           104            400        435     1,343              3.1%
          Punjab                                  718       185          241           310            378        421     1,534              2.0%
          Rajasthan                             1,704       448          640           843            710        630     3,271              3.9%
          Uttar Pradesh                         1,793       562          600           650            700        750     3,262              3.6%
          Uttarakhand                             405       100          150           200            250        250       950              1.4%
      Total                                     5,905     2,229        2,795         3,282          3,160      2,715    14,181            20.5%
      Western Region
         Chhattisgarh                             543       553        1,185         1,392            774        177     4,080             8.8%
         Gujarat                                  222      39.0          265           305           35.7        100       745             1.3%
         Goa                                     75.3      35.0         42.0          45.0           45.0       50.0       217             0.4%
         Madhya Pradesh                           951       346          697           715            452        126     2,336             3.4%
         Maharashtra                            1,229       581        1,117         2,800          2,507      1,836     8,841            18.9%
         Daman & Diu                             35.3        2.0          2.5         30.5           15.0         2.4     52.4             0.0%
         Dadra & Nagar Haveli                    24.5        3.0        23.0          26.8           30.0         1.0     83.8             0.1%
      Total                                     3,081     1,560        3,331         5,313          3,858      2,293    16,355            32.9%
      Southern Region
         Andhra Pradesh                         1,933       744          897           946            766        909     4,262             5.8%
         Karnataka                              3,489     1,189        1,298           447            218        375     3,526             0.1%
         Kerala                                   933       250          300           350            400        450     1,750             2.0%
         Tamil Nadu                             1,845     1,702        1,666           268            478      1,217     5,331             8.6%
         Puducherry                              45.0      32.2         51.3          49.2           55.4       55.8       244             0.5%
      Total                                     8,245     3,917        4,213         2,060          1,917      3,006    15,113            17.0%
      Eastern Region
         Bihar                                  1,254       500          550           600            650        700     3,000              4.3%
         Orissa                                 5,067       660          405           246            128         93     1,531             -8.8%
         Jharkhand                                194       155          319           220            193        145     1,032              2.1%
         West Bengal                              951       142          204         1,426            287        309     2,367              3.5%
         Sikkim                                    -        638        2,588         2,919          1,300        650     8,096            20.1%
      Total                                     7,465     2,094        4,066         5,411          2,557      1,896    16,025            21.2%
      N-E Region
         Arunachal Pradesh                        124      107           129           174           243        193        845              1.8%
         Assam                                   224       112           294           443           478        341      1,667              3.6%
         Manipur                                 11.6       30            35            40              45         57      207              0.5%
         Meghalaya                               140       129           147           106              72         57      512              0.9%
         Mizoram                                   0.3      86            52            19              19         20      197              0.5%
         Nagaland                                  79       93           114            14            -          -         222              0.4%
         Tripura                                 10.5       26            55            60              65         67      273              0.7%
      Total                                      590       583           827           857           921        734      3,923              8.3%
      State Sector                             25,285    10,383       15,232        16,924         12,414     10,645    65,597           100.0%
     Source: PGCIL, ICICIdirect.com Research




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                                                                    Private sector projects
                                                                    Higher private sector investment expected in XII Plan
  Investment worth | 20,000 crore anticipated from private          Although the sector was open to private sector investment since 1998,
  players in XI Plan. Private sector contribution is expected       there was only one operational PPP project prior to the XI Plan. In the XI
  to further increase in the XII Plan                               Plan, an investment of | 20,000 crore has been envisioned from the
                                                                    private sector directed towards expanding the inter-state transmission
                                                                    network. Several PPP projects have been awarded by state utilities
                                                                    including Haryana, Rajasthan, Maharashtra, etc.
                                                                    We expect private sector contribution to increase, going forward, driven
                                                                    by expected bids from UMPPs in the XII Plan period and financial distress
                                                                    faced by several state utilities.
                                                                    Private sector participation in power generation projects expected to
                                                                    provide further opportunities
                                                                    The high share of the private sector in generation capacity addition in the
                                                                    XII Plan could translate into private sector transmission utility orders. For
                                                                    example, Adani Power has recently awarded a 1,000 km dedicated HVDC
                                                                    power transmission line contract worth ~| 1,380 crore to Siemens for
                                                                    evacuating power from the Mundra power plant in Gujarat to
                                                                    Mohindergarh in Haryana. Similarly, Essar Power Transmission Co.
                                                                    received a captive order to construct and maintain the transmission line
                                                                    from the power plant at Mahan in Madhya Pradesh being installed by
                                                                    Essar Power.
        Exhibit 19: Traction in national level projects awarded to private sector

                                                                Private player   Project cost    Estimated
         Private player (s)               Investment route          stake (%)       (| crore)   completion                                                 Project detail
                                                                                                          Evacuation of power from 1,100 MW capacity generation project in
         Torrent Power                   JV with PowerGrid               74%            400          FY11                                                         Gujarat
                                                                                                            Transmission system for 1,000 MW Karcham-Wangtoo project in
         Jaiprakash Hydro Power          JV with PowerGrid               74%           1,000         FY11                                              Himachal Pradesh

         Reliance Power                                                                                      Evacuation of power from Parbati-II & III (800 MW and 520 MW of
         Transmission Ltd                JV with PowerGrid               74%          1,070          FY13      NHPC) and Koldam HEP (800 MW of NTPC) in Himachal Pradesh
                                                                                                             Development of pooling station in Sikkim and transfer of power to a
         Teesta Urja                     JV with PowerGrid               74%            708          FY12                     new pooling station in north West Bengal / Bihar
                                                                                                             Transmission system connecting Palatana (generation project site)
         ONGC                            JV with PowerGrid               26%          1,750          FY12                                 in Tripura to Bongaigaon in Assam
                                                                                                                           Western Regional System Strengthening Scheme-II:
         Reliance Power                  Independent power                                                Construction, maintenance and operation of nine transmission lines
         Transmission Ltd                   transmission co.            100%           1,380         FY11                                    for 25 years on the BOO basis


         Reliance Power                  Independent power                                                   North Karanpura line: 1045 km long transmission network covering
         Transmission Ltd                   transmission co.            100%           1,550         FY14           Madhya Pradesh, Chhattishgarh, Uttar Pradesh and Haryana
         Reliance Power                  Independent power                                                   Talcher II: 592 km long transmission line covering Andhra Pradesh
         Transmission Ltd                   transmission co.            100%             820         FY14                                                            and Orissa
                                                                                                                                                    East North interconnection:
                                         Independent power                                                      Two 400KV double circuit transmission lines connecting Assam
         Sterlite Technologies              transmission co.            100%             800         FY14                                         with West Bengal and Bihar
        Source: Companies, ICICIdirect.com Research




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     Exhibit 20: Several PPP projects awarded to private players by state utilities
                                                               Project cost (|        Estimated
      Private player (s)          State            PPP route        crore)            completion   Project detail

      Kalpataru Power
      Transmission Ltd and Techno
      Electric and Engineering Co.                                                                 Two 400 KV sub-stations at Kabulpur and Dipalpur in Haryana
      Ltd.                         Haryana          DBFOT                   382         FY13       for Jhajjar power transmission project
                                                                                                   400 kV S/C Bikaner- Deedwana- Ajmer Line and 400 kV S/C
      GMR Infrastructure          Rajasthan         BOOM                                FY13       Hindaun- Alwar line

                                                                                                   400 kV (Quad) double circuit power transmission lines from
      JSW Energy                  Maharashtra         JV                    580         FY12       Jaigad for evacuating power from Jaigad power project
                                                                                                   Two 765kV single circuit Tiroda-Koradi-Akola- Aurangabad
                                                                                                   lines and 765kV/ 400kV substations at Tiroda, Koradi, Akola
      Adani Power                 Maharashtra         JV                  4,379         FY13       and Aurangabad
     Source: Companies, ICICIdirect.com Research




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                                                                 Intense competition…but have to live with it going ahead
                                                                 Intense competition in recent years…
  Although competition has increased in the recent past, we      Attracted by the massive government investment and onus of PGCIL to
  expect large players to be able to sustain their margins due   increase its vendor base so as to step up the growth rate of T&D
  to the large quantum of orders anticipated in the near         infrastructure (relaxation in bidding norms), competitive intensity in the
  future                                                         transmission sector has substantially increased in recent years. This has
                                                                 led to new players bidding aggressively for PGCIL projects (sometimes
                                                                 15-20% lower than our coverage companies). Unabated continuance of
                                                                 this situation could result in margin contraction for our coverage
                                                                 companies.
                                                                  Exhibit 21: Share of Top 5 players in PGCIL ordering over FY09-9MFY11


                                                                           90
                                                                                                  78.6        75.9
                                                                           80                                                                             75.1
                                                                                       67.5                                        70.2
                                                                           70
                                                                                                                                              56.8
                                                                           60
                                                                     .




                                                                           50
                                                                           40
                                                                     (%)




                                                                           30
                                                                           20
                                                                           10
                                                                            0
                                                                                               Substations                                Tower Package

                                                                                                                 FY09   FY10   9MFY11

                                                                  Source: Company, ICICIdirect.com Research




                                                                 …however situation could improve…
                                                                 We believe the margins could be sustained at current levels due to the
                                                                 large tendering activity expected by PGCIL and state utilities over the next
                                                                 two or three years. Additionally, with majority of smaller players already
                                                                 operating at near full capacity, we believe these players will find it difficult
                                                                 to bid for new projects in the near future. Thus, this is positive for overall
                                                                 industry margins. Lastly, the two step bidding procedure being followed
                                                                 by PGCIL (financial bids following results of the technical bids) will bring
                                                                 some sanity to the bids being placed by suppliers.
                                                                 …but focus on international markets is gaining prominence
                                                                 Over the past few years, markets like Africa, Middle East, US and Latin
                                                                 America have become key markets for the coverage companies. Both
                                                                 KEC and KPTL have been executing orders in more than 20 countries. The
                                                                 prominence of international orders in the backlog provides growth to the
                                                                 coverage companies and cushion against the competitive intensity in the
                                                                 domestic markets (specifically in the case of PGCIL orders), in our view.
                                                                 As of Q3FY11, the share of the international order book stood at 54%,
                                                                 36%and 18% for KEC, KPTL and JSL, respectively. Apart from these, KEC
                                                                 and JSL are expanding their footprints in the US markets via acquisitions
                                                                 (SAE Tower acquired by KEC in Q2FY11) and setting up greenfield
                                                                 capacity (JSL likely to commission a 30,000 MT tower manufacturing
                                                                 capacity in the US by December 2011)




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                                                              Coverage companies command reasonable share in transmission line PGCIL
                                                              orders along with competition…
  Our coverage companies, along with Tata Projects and        Based on the market share for PGCIL orders, JSL, KPTL, KEC, EMC and
  EMC, enjoy a significant share of the transmission towers   Tata Projects are the major contenders for transmission tower orders.
  market                                                      Also, an erstwhile marginal player i.e. SPIC has been gaining market share
                                                              (37.7%in 9MFY11 vs. 6.5% in FY10) via consortium bidding (JV with BS
                                                              Transcomm, SMO and Aster). As of Q3FY11, our coverage companies i.e.
                                                              KEC, KPTL and JSL commanded a market share of 12.8%, 13.1% and 0%
                                                              respectively in Q3FY11. Though JSL has not won any orders in 9MFY11 it
                                                              commanded a market share of 14.9% and 11.1% in FY09 and FY10,
                                                              respectively.


                                                              Exhibit 22: JSL, KPTL and KEC enjoy high market share in transmission tower PGCIL orders
                                                              Company                                                   FY09                   FY10      FY11 (Till Q3)
                                                               Associated Transrail Structures                         19.3%                      0.8%            0.0%
                                                               EMCO Ltd                                                  9.0%                     0.0%            0.0%
                                                               JSL                                                     14.9%                  11.1%               0.0%
                                                               KEC                                                     16.6%                      1.7%          12.8%
                                                               Tata Projects                                             9.6%                 21.0%             15.4%
                                                               Electrical Manufacturing Co.*                             7.8%                     7.8%            0.0%
                                                               IVRCL Infra                                               0.0%                     8.0%            0.0%
                                                               L&T                                                       7.1%                     8.9%            0.0%
                                                               Gammon                                                    0.0%                     2.4%          11.3%
                                                               KPTL                                                      9.9%                     4.7%          13.1%
                                                               SPIC*                                                     1.3%                     6.5%          37.9%
                                                              Source: PGCIL, ICICIdirect.com Research;*includes orders obtained by JV companies


                                                              …but have limited capabilities to undertake high capacity substation
                                                              projects
                                                              With PGCIL expected to award EPC orders for higher capacity substations
                                                              (765 KV) in the future, we believe that companies with capabilities to
                                                              undertake high capacity transmission and substation orders will enjoy a
                                                              strong competitive advantage. Among the companies in our coverage
                                                              universe, capacity to undertake substation projects stands at 500 KV
                                                              (KEC), while it is 400 KV (each for JSL and KPTL).
                                                              Exhibit 23: MNC players have high market share for substation package PGCIL orders
                                                              Company                                                   FY09                   FY10      FY11 (Till Q3)
                                                               ABB                                                     25.1%                      7.2%          13.8%
                                                               L&T*                                                    23.0%                      0.0%            0.0%
                                                               Siemens*                                                21.8%                  44.2%             27.8%
                                                               GET Power                                                 5.3%                     2.7%          19.2%
                                                               ECI Engineering & Construction                            4.8%                     0.0%            0.0%
                                                               Areva T&D                                                 2.4%                 19.2%             11.8%
                                                               Crompton Greaves                                          4.4%                     8.2%            0.0%
                                                               Hyosung (South Korea)                                     0.0%                     6.9%            0.0%
                                                               KEC                                                       0.0%                     0.0%          11.5%
                                                              Source: PGCIL, ICICIdirect.com Research; *includes orders obtained by JV companies




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                                       For the substation and transformers and reactor segments, MNC players
                                       ABB, Areva T&D, Siemens, Hyosung (South Korean player) and Crompton
                                       Greaves enjoy a high market share for PGCIL orders.


                                       Exhibit 24: MNC players have high market share for transformers and reactors PGCIL orders
                                       Company                                                   FY09                   FY10   FY11 (Till Q3)
                                        Areva T&D                                                 7.0%                  3.2%          10.8%
                                        BHEL                                                    12.2%                   8.7%            7.3%
                                        Crompton Greaves*                                       37.0%                  34.5%            3.3%
                                        Hyosung (South Korea)                                   39.3%                  16.3%          32.2%
                                        Siemens                                                   4.5%                  0.0%          34.5%
                                        Baoding (China)                                           0.0%                 10.2%            0.0%
                                        TBEA Shenyang (China)                                     0.0%                 21.8%            0.0%
                                        Vijai Electricals                                         0.0%                  0.6%          11.9%
                                       Source: PGCIL, ICICIdirect.com Research; *includes orders obtained by JV companies




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ICICI Securities Limited

                                                             Operating Metrics
                                                             Strong sales visibility for coverage companies; robust order intake expected
                                                             in FY11E-12E
  With a TTM book-to-bill ratio of 1.6-2.0x times, our       Our coverage universe companies enjoy strong sales visibility with a TTM
  coverage companies enjoy strong sales visibility           book-to-bill ratio in the 1.6-2.0x range. With the subdued tendering
                                                             activity by PGCIL and state utilities in 9MFY11, the order-book-to bill ratio
                                                             of our coverage companies has marginally declined (e.g. KEC, which has
                                                             secured some large overseas orders). However, we expect the domestic
                                                             ordering activity to pick up strongly in Q4FY11E and FY12E-FY13E driving
                                                             growth of order backlog growth (~16% CAGR in FY10-13E to ~| 22,252
                                                             crore at an aggregate level).
                                                             Additionally, a reasonable global macroeconomic outlook, stable
                                                             commodity prices and higher funding allocation by donor countries and
                                                             multilateral agencies for new projects are likely to drive overseas orders
                                                             (mainly from Africa, Middle East and CIS countries). Overseas orders are
                                                             an important component for two of our coverage companies (KEC and
                                                             KPTL).
                                                             With the positive outlook for order intake and higher execution rate by
                                                             companies (to meet contractual obligations), we project robust growth of
                                                             revenues for our coverage companies in FY10-13E (16.8% CAGR at an
                                                             aggregate level). In 9MFY11, project execution was adversely impacted
                                                             by the severe monsoon season and slower order inflows.
  Exhibit 25: Strong sales visibility of our coverage companies; robust order inflows expected in FY11E-12E from domestic and overseas markets
                                                                                                                                 CAGR           CAGR
                          Order book position        FY06    FY07      FY08     FY09     FY10   FY11E     FY12E     FY13E     (FY06-10)     (FY10-13E)

  JSL                  Order book size (| crore)     1,700   2,000    3,120    3,606    3,606    4,007    4,510     5,186        20.7%           12.9%
                             Net sales (| crore       698     971     1,370    1,717    2,013    2,301    2,596     2,824        30.3%           11.9%
                     Book-to-bill ratio (x times)      2.4     2.1      2.3      2.1      1.8      1.7      1.7       1.8
                          New orders (| crore)               1,271    2,490    2,203    2,013    2,190    3,100     3,500


  KPTL                 Order book size (| crore)     1,500   2,300    3,400    5,000    5,000    5,163    5,989     6,625        35.1%            9.8%
                             Net sales (| crore       840    1,524    1,738    1,882    2,596    2,863    3,329     3,902        32.6%           14.5%
                     Book-to-bill ratio (x times)      1.8     1.5      2.0      2.7      1.9      1.8      1.8       1.7
                          New orders (| crore)               2,324    2,838    3,482    2,596    2,995    4,100     4,480


  KEC                  Order book size (| crore)     2,506   3,086    4,200    5,163    5,707    8,687   10,080    10,711        22.8%           23.4%
                             Net sales (| crore      1,727   2,041    2,814    3,427    3,906    4,630    5,786     6,849        22.6%           20.6%
                     Book-to-bill ratio (x times)      1.5     1.5      1.5      1.5      1.5      1.9      1.7       1.6
                          New orders (| crore)               2,621    3,928    4,390    4,450    6,701    7,180     7,480


  Aggregate            Order book size (| crore)     5,706   7,386   10,720   13,769   14,313   17,856   20,579    22,522        25.8%           16.3%
                             Net sales (| crore      3,265   4,536    5,922    7,027    8,516    9,794   11,712    13,575        27.1%           16.8%
                     Book-to-bill ratio (x times)      1.7     1.6      1.8      2.0      1.7      1.8      1.8       1.7
                         New orders (| crore)                6,216    9,256   10,076    9,060   11,886   14,380    15,460
  Source: Companies, ICICIdirect.com Research




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  Exhibit 26: Book-to-bill ratio marginally declines in H1FY11 on subdued domestic ordering activity by PGCIL, state utilities
                                 Order book position            Q2FY10         Q3FY10          Q4FY10             Q1FY11         Q2FY11     Q3FY11
  JSL                         Order book size (| crore)          3,869          4,030            4,150             4,106          4,250      4,100
                                     Net sales (| crore           472            509              546                564           542        551
                            Book-to-bill ratio (x times)           2.1            2.1              2.1               2.0            2.0        1.9
                                  New orders (| crore)            382            670              666                520           686        401


  KPTL                        Order book size (| crore)          5,500          5,200            5,000             4,800          5,000      5,000
                                    Net sales (| crore)           550            716              837                536           630        790
                            Book-to-bill ratio (x times)           2.7            2.3              1.9               1.8            1.8        1.8
                                  New orders (| crore)           1,250           416              637                336           830        790


  KEC                         Order book size (| crore)          5,543          6,051            5,707             5,650          7,000      8,000
                                     Net sales (| crore           875            949             1,357               846          1,001      1,071
                            Book-to-bill ratio (x times)           1.5            1.6              1.5               1.4            1.7        1.9
                                  New orders (| crore)           1,263          1,457            1,013               789          2,351      2,071


  Aggregate                   Order book size (| crore)         14,912         15,281           14,857            14,556         16,250     17,100
                                     Net sales (| crore          1,897          2,173            2,739             1,946          2,173      2,412
                            Book-to-bill ratio (x times)           2.0            1.9              1.7               1.7            1.8        1.8
                                 New orders (| crore)            2,895          2,542            2,315             1,645          3,867      3,262
  Source: Companies, ICICIdirect.com Research


                                                                KPTL most diversified in terms of business vertical; KEC geographically
                                                                diversified
  KPTL has a well diversified order book with its presence in   On closer inspection of our coverage companies, KPTL enjoys highest
  civil engineering and international transmission sectors      order book diversification with 67% stake in its civil engineering
                                                                subsidiary, JMC Projects, having an order book of | 4,300 crore (Q3FY11)
                                                                in addition to the | 5,000 crore order book of the standalone entity.
                                                                Additionally, oil & gas pipeline projects (high growth potential) account for
                                                                approximately 3% of the consolidated order book, providing the company
                                                                further diversification. Lastly, with domestic transmission orders
                                                                constituting 33% of the consolidated order book, KPTL is substantially
                                                                exposed to the attractive domestic opportunity.
                                                                On the other hand, KEC has maximum exposure to the overseas
                                                                transmission sector (54% of order book). The company has recently
                                                                increased its focus on the lucrative American market with acquisition of
                                                                SAE Towers, expanding the scope of operations from the earlier focus
                                                                areas of Africa, Middle East and CIS countries.
                                                                JSL is least diversified and primarily caters to the domestic T&D sector
                                                                (82% of order book as of Q3FY11). Going ahead, we believe JSL will
                                                                incrementally gain on the international business as it is commissioning a
                                                                30000 MT capacity in the US so as to capture the opportunity in the US
                                                                and Canadian T&D market.




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                                                              Exhibit 27: KPTL enjoys maximum order book diversification as of Q3FY11
                                                              (%)                                                                      JSL               KPTL            KEC
                                                              Transmission                                                            80.0               48.4            72.0
                                                                 International*                                                        -                 18.3            54.0
                                                                 Domestic                                                              -                 30.1            18.0
                                                              Sub-stations                                                             5.0                -
                                                                                                                                                                         19.0
                                                              Distribution                                                            15.0                1.3
                                                              Other infrastructure segments**                                          -                 50.3             9.0
                                                              Source: Companies, ICICIdirect.com Research; *includes orders of SAE Towers; ** KPTL includes order book of its
                                                              subsidiary, JMC, and infrastructure segment




                                                              EBITDA margins of JSL least vulnerable to higher commodity prices
  Among our coverage companies, the EBITDA margins of         JSL has been successful in generating stable EBITDA margins even in
  JSL are least vulnerable to higher commodity prices (high   periods where commodity prices have been high. This is largely due to
  share of domestic projects – price variation clause)        the dominance of domestic projects in the order book (mainly with a price
                                                              variation clause). On the other hand, the EBITDA margins of KPTL and
                                                              KEC contracted substantially in FY09 due to their high overseas exposure
                                                              (fixed price contracts mainly) and the impact of the global economic
                                                              slowdown.
                                                              As of Q3FY11, KPTL’s 75-80% standalone order book is based on the
                                                              price variation clause. We believe it will be able to maintain its EBITDA
                                                              margins in the range of 11-11.5% over FY11E-FY13E. In terms of order
                                                              book, international orders comprise 38% of the overall order book.
                                                              Nevertheless, we believe the margins of KEC are most vulnerable to
                                                              higher commodity prices (high share of fixed price contracts in order
                                                              book). However, an upside case also exists from higher margins from
                                                              SAE Towers (14% EBITDA margins generated vs. ~10% for KEC). Hence,
                                                              we expect KEC’s EBITDA margins to hover around 10.4-10.6% levels over
                                                              FY11E-FY13E.
                                                              We have modelled stable EBITDA margins for our coverage companies in
                                                              FY11E-13E despite the high industry competition. The reasons for our
                                                              margin assumptions are margin visibility on the current order book, likely
                                                              reduction in bidding intensity (saturation of manufacturing capacity of
                                                              marginal players and two-stage bidding process by PGCIL) and the
                                                              companies’ management focus on bidding for only those projects that
                                                              fulfil certain minimum return criteria.
                                                              Exhibit 28: Stable EBITDA margins forecasted in FY11E-13E

                                                                      18.0                 17.1
                                                                                  15.2
                                                                      15.0                            14.1
                                                                                           12.9
                                                                                                      12.5                     11.7                     11.6      11.8
                                                                                                                   11.4                          11.6
                                                                (%)




                                                                      12.0        10.7     12.4
                                                                                                      12.6                     11.6          11.5        11.3    11.5
                                                                                                                  10.8
                                                                       9.0                                                     10.4          10.6       10.3     10.4
                                                                                  9.4
                                                                                                                  8.8
                                                                       6.0
                                                                              FY06        FY07        FY08        FY09         FY10          FY11E      FY12E   FY13E


                                                                                                       JSL              KPTL               KEC

                                                              Source: Companies, ICICIdirect.com Research




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                                                                 High working capital requirements
                                                                 The working capital requirements of KPTL are highest among our
  KPTL has high working capital requirements (155 days in
                                                                 coverage companies (155 days in FY10) while it is lowest for KEC (78
  FY10). With increasing prominence of BOOT projects,
                                                                 days). The number of debtor days remains high for all companies at 160-
  working capital requirements could increase further
                                                                 185 days due to retention money and back payments in domestic and
                                                                 international government contracts. With power transmission
                                                                 manufacturers actively scouting for BOOT projects, we expect working
                                                                 capital requirements to increase further in future. KPTL has recently
                                                                 achieved financial closure of BOOT power transmission projects from
                                                                 Haryana Vidyut Prasaran Nigam.
                                                                 Exhibit 29: KPTL has highest working capital requirements (in days)
                                                                 Company                FY07         FY08      FY09      FY10     FY11E      FY12E      FY13E
                                                                  JSL                    134          127      118        117          133    129         128
                                                                  KPTL                   111          135      206        155          137    140         138
                                                                  KEC                     42           76       54         78          79      79         80
                                                                  Average                 85          105      110        111          109    107         107
                                                                 Source: Companies, ICICIdirect.com Research




                                                                 KEC has high leverage levels
                                                                 Despite higher working capital requirements, JSL and KPTL have
                                                                 managed to keep leverage at comfortable levels (0.6-0.7x range in FY10).
                                                                 On the other hand, KEC’s leverage was higher at 1.0x in FY10. It is
                                                                 expected to rise to 1.4x in FY11E (due to borrowings to fund the SAE
                                                                 Towers acquisition).
                                                                 Exhibit 30: JSL, KPTL enjoy relatively comfortable D/E ratios
                                                                 Company                FY07         FY08      FY09      FY10     FY11E      FY12E      FY13E
                                                                 JSL                     0.6          0.7       0.7       0.7          0.7     0.5        0.5
                                                                 KPTL                    0.5          0.4       0.8       0.6          0.5     0.5        0.4
                                                                 KEC                     1.4          1.2       1.1       1.0          1.5     1.3        1.1
                                                                 Average                 0.7          0.7       0.9       0.8          0.8     0.7        0.7
                                                                 Source: Companies, ICICIdirect.com Research


                                                                 JSL generates highest RoCE among peers
  Historically, JSL has been able to maintain high and stable    In FY06-10, JSL has generated strong RoCE in the 25-33% range driven
  return ratios. KPTL suffers from poor sales/assets multiples   by the robust topline growth (30% CAGR), stable operating margins and
                                                                 high asset utilisation. We expect the company to continue to generate
                                                                 robust return ratios in FY11E-13E.
                                                                 On the other hand, KPTL has generated the lowest return ratios among
                                                                 peers in FY06-10. In our view, a major factor responsible for this is the low
                                                                 utilisation of asset base (KPTL had sales/assets ratio of 1.7x in FY10 vs.
                                                                 2.5x for JSL and 2.8x for KEC). Both KEC and JSL have access to large
                                                                 third-party tower manufacturing capacity at 60,000 MT/annum (dedicated
                                                                 value-added partners) and 50,000 MT/annum (Gulf Jyoti JV plant),
                                                                 respectively. We expect KPTL’s return ratios to deteriorate further in
                                                                 FY11E due to higher borrowings for working capital requirements (higher
                                                                 due to power transmission BOOT) and the equity dilution through QIP
                                                                 route in Q1FY11 (| 450 crore raised).
                                                                 For KEC, the return ratios are expected to decrease in FY11E due to an
                                                                 increase in borrowings to fund the acquisition of SAE Towers.




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                                       Exhibit 31: JSL generates higher RoCE than peers on stable margins, high asset utilisation rate


                                               40.0                  37.8
                                                        37.2
                                                        35.3         33.1
                                               32.5                                  29.2
                                                        33.4                                        27.5
                                                                                                                  25.6
                                                                                                                            21.9




                                         (%)
                                               25.0                                                 27.6                            19.7
                                                                                     24.6
                                                                     21.6                                         22.9              22.6
                                               17.5                                                                         21.4
                                                                                                    17.2
                                                                                     13.7                         14.6      13.6    14.5
                                               10.0
                                                        FY07        FY08           FY09             FY10          FY11E     FY12E   FY13E


                                                                             JSL             KPTL           KEC

                                       Source: Companies, ICICIdirect.com Research




                                       Exhibit 32: KEC’s RoNW leads peers on high leverage level

                                                 50.0
                                                         45.6         44.9
                                                         39.4
                                                 39.0
                                                                                                     28.2
                                                         27.7                                                      24.5      23.4    24.1
                                           (%)




                                                 28.0                 23.5            22.2
                                                                                                     20.0
                                                 17.0                 21.3            21.0
                                                                                                                   19.0
                                                                                                     18.7                    16.2
                                                                                      11.8                         14.3              13.6
                                                                                                                                     13.2
                                                                                                                             12.6
                                                  6.0
                                                         FY07         FY08            FY09           FY10         FY11E     FY12E   FY13E

                                                                                             JSL           KPTL       KEC

                                       Source: Companies, ICICIdirect.com Research




                                       Exposure and focus on BOOT projects to increase equity intensity

                                       The Government of India (GoI) is now laying greater emphasis on private
                                       participation in building T&D networks. It is expected that both central
                                       (PowerGrid) and state utilities (state transmission companies) would be
                                       placing transmission line and substation contracts only on a BOOT basis
                                       in the coming years. Going ahead, this may be equity dilutive in nature for
                                       funding the projects.

                                       KPTL has recently bagged a BOOT project in the transmission and road
                                       segment (JMC Projects). The company had also raised | 450 crore for
                                       funding the subsidiary and meeting the working capital needs. Also, JSL
                                       has recently come out with an NCD issue with warrants attached to it. On
                                       conversion of warrants (price of | 120 per share) equity dilution will
                                       happen to the tune of 20% on a post conversion basis. We believe the
                                       increasing equity intensity of the EPC companies may add to investor
                                       scepticism and cap the valuation multiples of the coverage companies.

                                       All the coverage companies are trading in the range of 7x-11x on FY12E
                                       earnings. This, we believe, is a substantial discount to their historical one
                                       year P/E averages of 13-16x for all three companies.



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                                       Risks and concerns
                                       Lower order tendering due to economic slowdown
                                       In case of an economic slowdown, order tendering by PGCIL, state
                                       utilities and private sector could be significantly lower. With the growing
                                       share of private sector investment, order inflows are especially vulnerable
                                       to an economic slowdown.
                                       Delays in power capacity addition
                                       Since transmission orders depend on generation capacity addition, lower-
                                       than-expected generation capacity addition could result in lower order
                                       inflows for our coverage companies. Historically, India has been plagued
                                       by shortfalls in generation capacity addition vis-à-vis planned targets
                                       (53% in IX Plan and 49% in X Plan). The situation has somewhat
                                       improved in the XI Plan but the likely shortfall is still high at ~24%.
                                       Execution delays
                                       Execution of several transmission projects could be delayed due to
                                       political unrests, terrorism, etc. With some HCPTC projects planned in
                                       politically sensitive states, including Andhra Pradesh, Jharkhand,
                                       Chhattisgarh, Orissa, etc, these projects could face execution delays. This
                                       could result in lower-than-expected revenues for our coverage
                                       companies.
                                       Additionally, execution slippages could happen due to manpower
                                       shortages, delays in receipt of environmental and land approvals, natural
                                       calamities, etc.
                                       Geopolitical tensions
                                       Since companies are geographically diversified beyond India, any
                                       geopolitical crisis may lead to slippages in execution and hamper order
                                       inflow growth for the coverage companies. For instance, the recent
                                       ongoing crisis in the MENA region may lead to minor slippages but may
                                       hamper the order inflow growth from this region in the medium-term.
                                       Higher commodity prices
                                       Commodities (steel, zinc, etc) constitute a high proportion of raw material
                                       costs. With a positive outlook for the global economy, commodity prices
                                       are on an upward trend. Significantly higher commodity prices could
                                       result in lower margins for our coverage companies. KEC and KPTL are
                                       especially vulnerable due to the high share of fixed price contracts in the
                                       order book.
                                       Higher interest rates
                                       Our coverage companies are significantly leveraged due to their high
                                       working capital requirements. The leverage levels could increase further
                                       due to BOOT projects that could be secured in the future. With the RBI
                                       struggling to contain domestic inflation, interest rates could be raised
                                       (resulting in lower profitability for our coverage companies).
                                       Margin contraction due to intense competition
                                       Entry of new players (domestic and international) attracted by the high
                                       government investment has led to fierce bidding for PGCIL and state
                                       utility orders. Continued aggressive bidding could lead to margin
                                       pressures for our coverage companies.




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                                                                  Valuation
                                                                  Underperformance to Nifty in past year; sector due for re-rating driven by
                                                                  robust tendering activity expected in next two or three years
  All our coverage companies are currently trading at             Power transmission sector stocks have underperformed the Nifty in the
  substantial discounts to their five year average one year       last year. We believe the primary reason for underperformance has been
  forward P/Es. With strong order flows expected from             the subdued ordering activity by PGCIL and state utilities, rising
  PGCIL, state utilities and private sector, we believe that      competitive intensity as compared to 2005-08, slower execution and
  stocks of our coverage companies are due for a re-rating        rising capital intensity of the business (exposure to BOOT projects).


 Exhibit 33: Coverage companies have underperformed Nifty…                                     Exhibit 34: … as well as the BSE Capital Goods Index

  300
                                                                                                   300
  250
                                                                                                   250
  200                                                                                              200
  150                                                                                              150
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                                                                                                         Apr-06




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                                                                                                         Apr-10
                                                                                                          Jul-06
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                                                                                                         Jan-08

                                                                                                          Jul-08
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                                                                                                         Jan-09

                                                                                                          Jul-09
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                                                                                                         Jan-10

                                                                                                          Jul-10
                                                                                                         Oct-10
                                                                                                         Jan-11
    0
        Apr-06




        Apr-07




        Apr-08




        Apr-09




        Apr-10
         Jul-06
        Oct-06
        Jan-07

         Jul-07
        Oct-07
        Jan-08

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        Jan-09

         Jul-09
        Oct-09
        Jan-10

         Jul-10
        Oct-10
        Jan-11




                        KEC         KPTL         JSL         NSE Nifty                                             KEC         KPTL         JSL        BSE Capital Goods

 Source: Bloomberg, ICICIdirect.com Research                                                   Source: Bloomberg, ICICIdirect.com Research,
 Prices Rebased to 100                                                                         Prices Rebased to 100




                                                                  Going ahead, the T&D companies may not get the multiples that they
                                                                  used to enjoy during 2005-08, in our view. During the last five years, our
                                                                  coverage companies use to trade in a one year forward P/E multiple of 14-
                                                                  16x vs. current range of 7-10x. Our three coverage companies currently
                                                                  trade at substantial P/E discount to their five year average one-year
                                                                  forward P/E (discount of 39% for JSL, 36% for KPTL and 35% for KEC).


                                                                  Exhibit 35: JSL, KPTL and KEC are currently trading at substantial discounts to their five year
                                                                  average one-year forward P/E multiples
                                                                   Company                                   Current P/E              5 year average P/E             Discount (%)
                                                                   JSL                                              6.2                            14.2                      56.1
                                                                   KPTL                                             9.8                            16.4                      40.3
                                                                   KEC*                                             8.3                            13.7                      39.4
                                                                  Source: Companies, ICICIdirect.com Research; *average P/E includes prices since the stock’s listing (Mar 2006)




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                                       What would be an appropriate way to value T&D EPC companies?
                                       Conventionally the companies should be valued on earnings multiples
                                       (P/E multiple) as the business model is not capital intensive and mainly
                                       dependent on the order inflows and timely execution of the same. The
                                       current macro headwinds that the companies are facing at this point in
                                       time are slow ordering activity of the CTUs and STUs, relatively higher
                                       competitive intensity, liquidity pressure to combat working capital
                                       management and exposure to BOOT projects in future. This will increase
                                       the capital raising intensity, which will make these companies look highly
                                       attractive in terms of forward P/E multiples when compared with historical
                                       averages. Whether these multiples do capture the future in terms of an
                                       anticipated pick-up in ordering, pick-up in generation capacity, rising
                                       market shares vs. competition, pick-up in execution rates and decline in
                                       commodity prices is tough to answer given the volatile local and global
                                       macroeconomic backdrop at this point in time.
                                       Hence, in order to capture the various “ifs and buts” surrounding the
                                       sector, we have tried to capture the uncertainties by constructing three
                                       scenarios wherein we try to value the T&D companies using P/E multiples
                                       (assuming things improve and pick up from hereon) and also P/BV
                                       multiple (if the macro backdrop worsens we believe that companies in the
                                       sector will trace back to their book values and capture the negatives).
                                        Exhibit 36: Weightages for multiples under three scenarios

                                                                                    Bull Case        Base Case   Bear Case
                                       P/E Multiple (FY12E EPS)                         100%              80%          50%
                                       P/B Multiple (FY12E BV)                            0%              20%          50%
                                       Source: Company, ICICIdirect.com Research




                                        Exhibit 37: Valuation for KPTL

                                       KPTL                                         Bull Case        Base Case   Bear Case
                                       (| per share)
                                       FY12E EPS                                        13.8              13.8       13.8
                                       FY12E BV                                        115.3             115.3      115.3

                                       FY12E Target P/E Multiple (x)                       12              10            8
                                       FY12E Target P/BV Multiple (x)                     1.1               1          0.8

                                       Holdco discount for JMC                            10               20           30
                                       Per share value of JMC in KPTL                     15               14           12
                                       SOTP Target as per construct                      181              147          113
                                       Upside potential (%)                              34.1             9.0        -16.1
                                       Source: Company, ICICIdirect.com Research




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ICICI Securities Limited


                                                                     Exhibit 38: Valuation for JSL
                                                                    JSL                                                  Bull Case              Base Case           Bear Case
                                                                    (| per share)
                                                                    FY12E EPS                                                12.6                     12.6                  12.6
                                                                    FY12E BV                                                 93.8                     93.8                  93.8

                                                                    FY12E Target P/E Multiple (x)                               9                       7                      5
                                                                    FY12E Target P/BV Multiple (x)                            1.1                       1                    0.9

                                                                    Targets as per construct                                 113                        89                    74
                                                                    Upside potential (%)                                     38.3                      8.9                 -10.1
                                                                    Source: Company, ICICIdirect.com Research



                                                                     Exhibit 39: Valuation for KEC
                                                                    KEC                                                  Bull Case              Base Case           Bear Case
                                                                    (| per share)
                                                                    FY12E EPS                                                 9.7                      9.7                   9.7
                                                                    FY12E BV                                                 45.5                     45.5                  45.5

                                                                    FY12E Target P/E Multiple (x)                              13                       11                     9
                                                                    FY12E Target P/BV Multiple (x)                            1.5                      1.3                   1.1

                                                                    Targets as per construct                                 126                        97                    69
                                                                    Upside potential (%)                                     53.8                     18.5                 -16.3
                                                                    Source: Company, ICICIdirect.com Research




                                                                    Top pick KEC with CAGR of 22% for revenues, 19% for PAT over FY10-FY13E
  KEC is our top pick in the sector with a target price of | 97     Our top pick is KEC due to its strong sales visibility, robust order flows,
  per share                                                         relatively better return ratios, stable margins and attractive valuations.
                                                                    KEC is currently trading at 7.5x and 6x its FY12E and FY13E earnings,
                                                                    respectively.


  Exhibit 40: Peer valuation
                                             Revenue
                                             (| crore)        EBITDA Margin (%)         P/E (x)          EV/EBITDA (x)               P/BV (x)
                         Market cap                                                                                                                 Target         Upside
              CMP (|)      (| crore)      FY11E       FY12E       FY11E    FY12E     FY11E     FY12E     FY11E     FY12E       FY11E        FY12E price (|)           (%)     Rating
    JSL           82             672      2,301       2,596       11.5      11.3       6.7        6.2       4.2      2.8         1.2            1.0           89       9           ADD
    KPTL         135           2,041      2,863       3,329       11.6      11.6      11.3        9.8       7.0      6.9         1.2            1.1          147       9           ADD

  x KEC           82           2,108      4,630       5,786       10.6      10.3       9.5        7.5       6.3      5.2         2.1            1.7           97      18           BUY
  Source: Company, ICICIdirect.com Research




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ICICI Securities Limited

                                       Is valuation of T&D EPC companies mirroring that of construction
                                       companies?
                                        Exhibit 41: Price movement of T&D EPC companies and construction companies in sync


                                           300

                                           250

                                           200

                                           150

                                           100

                                            50

                                             0


                                                 Apr-06




                                                                                      Apr-07




                                                                                                                          Apr-08




                                                                                                                                                              Apr-09




                                                                                                                                                                                                   Apr-10
                                                           Jul-06
                                                                    Oct-06
                                                                             Jan-07


                                                                                               Jul-07
                                                                                                        Oct-07
                                                                                                                 Jan-08


                                                                                                                                   Jul-08
                                                                                                                                            Oct-08
                                                                                                                                                     Jan-09


                                                                                                                                                                        Jul-09
                                                                                                                                                                                 Oct-09
                                                                                                                                                                                          Jan-10


                                                                                                                                                                                                            Jul-10
                                                                                                                                                                                                                     Oct-10
                                                                                                                                                                                                                              Jan-11
                                                                                                   KEC                    KPTL                 JSL                     IVRCL                  NCC

                                       Source: Bloomberg, ICICIdirect.com Research




                                       If one is a believer of the efficient market hypothesis then the above
                                       chart depicting the price trends of T&D EPC companies and construction
                                       stocks says it all. The recent brutal decline in stock prices has certainly
                                       discounted the following negatives pertaining to both sets of business
                                       models and the environment:
                                            •             Tepid order flows are affecting both T&D EPC companies (PGCIL
                                                          and SEBs have delayed ordering in FY11) and construction stocks
                                                          (lack of order inflows from the road and irrigation sector)
                                            •             Execution has been disappointing: For T&D companies,
                                                          execution to a great extent depends on the progress of the related
                                                          generation project, which is not as per schedule due to various
                                                          regulatory hurdles and clearances not coming in time. Also, the
                                                          extended monsoon was one of the key reasons for slippages. The
                                                          same is almost similar to that of construction companies.
                                            •             Tight liquidity and high working capital requirements: A rising
                                                          rate environment and tight liquidity conditions are negative for
                                                          T&D EPC and construction companies. This makes working capital
                                                          loans dearer and, hence, has a negative impact on profitability.
                                            •             Rising competitive intensity: Irrational bidding by smaller EPC
                                                          companies in the T&D space have limited the order flows and put
                                                          a cap on incremental margin expansion. Competition has become
                                                          structural as PGCIL and SEBs want to diversify their vendor base
                                                          in order to accelerate their T&D infrastructure. Similar is the case
                                                          for construction companies where irrational competition exists in
                                                          the road segment.
                                            •             Rising capital intensity: Taking exposure to BOOT and BOT
                                                          projects has resulted in creation of separate SPVs and dilution of
                                                          stake in the SPV in order to gather capital for execution. This, we
                                                          believe, has not gone down well with investors and has resulted
                                                          into P/E de-rating. Similar are the trends emerging in the T&D EPC
                                                          space wherein many BOOT and BOT projects are in the offing.




   ICICIdirect.com | Equity Research
                                                                                                                                                                                                                        Page 27
ICICI Securities Limited

                                                                 Few charts that justify our stance:

 Exhibit 42: Revenue growth deceleration for T&D EPC cos…                                          Exhibit 43: …so is the case for construction companies

                                                               32.57                                                                                                         37.8
           35     30.33                                                                                          40
           30                                                                                                    35
                                       22.63                                                                     30                 26.9
           25                                  20.58
                                                                                                                 25
           20
     .




                                                                                                           .
                                                                       14.55                                     20                              15.8
           15             11.95
     (%)




                                                                                                           (%)
                                                                                                                 15                                                                          11.0
           10                                                                                                    10
            5                                                                                                     5
            0                                                                                                     0
                      JSL                    KEC                  KPTL                                                                     NCC                                     IVRCL Infra

                   Revenue CAGR (FY06-FY10)         Revenue CAGR (FY10-13E)                                                    Revenue CAGR (FY06-FY10)               Revenue CAGR (FY10-12E)

 Source: Company, ICICIdirect.com Research                                                         Source: Company, ICICIdirect.com Research



 Exhibit 44: PAT deceleration visible but still reasonable…                                        Exhibit 45: …compared to construction companies


           50                                                                                                     25                                                         22.4
                                       40.05
           40     34.70                                                                                           20                16.6

                                                               26.70                                              15
           30
     .




                          19.38                                                                                   10
                                                                                                           .




                                               18.26
                                                                                                                                                  4.1
     (%)




           20                                                          14.17
                                                                                                           (%)




                                                                                                                       5
           10                                                                                                          0
            0                                                                                                      -5                      NCC                                     IVRCL Infra
                                                                                                                                                                                           -3.9
                      JSL                    KEC                  KPTL                                           -10

                          PAT CAGR (FY06-10)       PAT CAGR (FY10-13E)                                                               PAT CAGR (FY06-10)               PAT CAGR (FY10-12E)

 Source: Company, ICICIdirect.com Research                                                         Source: Company, ICICIdirect.com Research



                                                                  Exhibit 46: Trend in consolidated order inflow and execution rate for T&D EPC companies


                                                                               5000                                                                                                     25


                                                                               4000                                                                                                     20
                                                                   .




                                                                                                                                                                                             .
                                                                   (| crore)




                                                                               3000                                                                                                     15
                                                                                                                                                                                             (%)




                                                                               2000                                                                                                     10


                                                                               1000                                                                                                     5
                                                                                      Q4FY09


                                                                                               Q1FY10


                                                                                                              Q2FY10


                                                                                                                           Q3FY10


                                                                                                                                       Q4FY10


                                                                                                                                                    Q1FY11


                                                                                                                                                             Q2FY11


                                                                                                                                                                          Q3FY11




                                                                                                        Order Inflow                    Execution Rate

                                                                 Source: Company, ICICIdirect.com Research




    ICICIdirect.com | Equity Research
                                                                                                                                                                                                   Page 28
ICICI Securities Limited


                                        Exhibit 47: Trend in order inflow and execution rate for IVRCL Infra


                                                       9000                                                                                       11
                                                       8000                                                                                       10
                                                       7000                                                                                       9




                                           .
                                                       6000                                                                                       8




                                                                                                                                                       .
                                                       5000                                                                                       7




                                           (| crore)
                                                       4000                                                                                       6




                                                                                                                                                       (%)
                                                       3000                                                                                       5
                                                       2000                                                                                       4
                                                       1000                                                                                       3
                                                          0                                                                                       2
                                                              Q4 FY09   Q1 FY10 Q2 FY10    Q3FY10         Q4FY10     Q1FY11     Q2FY11   Q3FY11

                                                                                Order inflow (Rs crore)            Execution rate (%)


                                       Source: Company, ICICIdirect.com Research




                                       Silver lining for T&D EPC companies:
                                       If one looks at the capex cycle from an ordering point of view, it is
                                       evident that the power sector has witnessed robust ordering activity
                                       wherein ordering activity for sectors such as roads, ports, irrigation and
                                       industrial sectors has been lacklustre. Given the huge power generation
                                       ordering that has happened, a pick-up in T&D projects is inevitable
                                       given that delays (regulatory, environmental and financial) do not
                                       aggravate the generation side of the segment.
                                       A pick-up in HCPTC ordering by PGCIL will be a huge kick for T&D
                                       equipment players and will lead to a huge re-rating of earnings
                                       multiples, in our view.




   ICICIdirect.com | Equity Research
                                                                                                                                              Page 29
ICICI Securities Limited

                                       Other valuation multiples analysed
                                       P/E multiple and earning CAGR: KEC has the best profile
                                       We have analysed the attractiveness of the current valuations of our
                                       coverage companies by comparing their estimated earnings CAGR in
                                       FY10-12E with the current P/E valuations. Based on this analysis, KEC is
                                       well placed with its reasonable P/E valuations and relatively high earnings
                                       growth in FY12E-13E.
                                       Exhibit 48: Attractive P/E valuations and high earnings CAGR for KEC
                                                    25.0



                                                    20.0
                                        .
                                        Earnings CAGR (%)

                                                    15.0



                                                    10.0


                                                            5.0
                                                                                          4.0          5.5           7.0             8.5               10.0           11.5         13.0
                                                                                                         JSL                   KPTL
                                                                                                                           P/E (x times)         .            KEC


                                       Source: Companies, ICICIdirect.com Research




                                       EV/EBITDA vs. order execution period
                                       The comparison of the companies’ order execution period with their
                                       EV/EBITDA multiples identifies KEC as a better stock due to a faster order
                                       execution rate.
                                       Exhibit 49: KEC International well placed due to its shorter execution periods
                                                                                          30.0

                                                                                          27.5
                                                            Execution period (months) .




                                                                                          25.0

                                                                                          22.5

                                                                                          20.0

                                                                                          17.5

                                                                                          15.0
                                                                                                 1.5           3.0           4.5                 6.0                7.5           9.0
                                                                                                                           EV/EBITDA (x times)         .
                                                                                                               JSL                    KPTL                          KEC

                                       Source: Companies, ICICIdirect.com Research




   ICICIdirect.com | Equity Research
                                                                                                                                                                             Page 30
ICICI Securities Limited

                                       P/BV multiple vs. RoNW
                                       We have further compared the coverage companies’ estimated RoNW (in
                                       FY12E) with their current P/BV valuations. This analysis also identifies KEC
                                       as a better pick among our coverage companies due to its attractive P/BV
                                       valuation (1.6x) and high and stable returns (RoNW of 23%).

                                       Exhibit 50: High and stable RoNW at reasonable P/BV multiples identify KEC as a good pick

                                                       2.1
                                                       1.8
                                                       1.5




                                            P/BV (x)
                                                       1.2
                                                       0.9
                                                       0.6
                                                       0.3
                                                       0.0
                                                         10.0            14.0                18.0         22.0              26.0
                                                                                        RoNW (%)
                                                                 JSL                  KPTL               KEC


                                       Source: Companies, ICICIdirect.com Research;




   ICICIdirect.com | Equity Research
                                                                                                                         Page 31
ICICI Securities Limited
Initiating Coverage
                                                                                                                                                                March 31, 2011
Rating Matrix
Rating                              :     Buy
                                                                                                        Jyoti Structures Limited (JYOSTR)
Target                              :     | 89
                                                                                                                                                                          | 82
Target Period                       :     12 months
Potential Upside                    :     9%                                       Show me the orders…
                                                                                   Diverse EPC capabilities, a strong domestic focus and wide client base
YoY Growth (%)
                                                                                   make Jyoti Structures Ltd (JSL) a key beneficiary of the massive power
| crore                    FY10         FY11E       FY12E        FY13E             sector investment planned in the XI-XII Plans. The company’s revenues
Revenue                     17.2          14.3        12.8          8.8            and earnings are projected to grow at 12% and 15% CAGR,
EBITDA                      19.6          12.8        10.9         11.3            respectively, over FY10-13E, fuelled by its reasonable sales visibility
Net Profit                  14.1          14.9        20.8          6.5            (TTM book-to-bill ratio of 2x in Q3FY11). However, a pick-up in order
Current & Target Multiple (x)                                                      inflows will be highly crucial for re-rating. Stronger-than-expected
                           FY10         FY11E       FY12E        FY13E             performance of subsidiaries and success in the domestic BOOT segment
PE                           7.3           6.4         6.6          6.2            provide attractive value creation opportunities. We are initiating
EV/ EBITDA                   4.2           4.1         2.8          2.4            coverage on the stock with ADD rating given that the recent correction
P/BV                         1.3           1.1         0.9          0.8            in the stock price has priced in the negatives, but at the same time new
Target P/E                  14.0          12.3        12.7         11.9            orders will be eagerly awaited.
Target Ev/ EBITDA            6.8           6.4         4.9          4.2
Target P/BV                  2.5           2.1         1.7          1.5
                                                                                   Well-placed to grow order book but needs to get orders at the earliest
Stock Metrics                                                                      With an order book of | 4,100 crore (Q3FY11), the company enjoys
Bloomberg Code                                                  JYS:IN             reasonable sales visibility (TTM book-to-bill ratio of 2x). The order intake
Reuters Code                                                 JYTS:BO               is expected to be robust in FY11E-13E fuelled by the large order pipeline
Face Value (|)                                                              2      and positive macroeconomic environment. Though the company’s wide
Promoters Holding                                               27.6
                                                                                   client base and status as a turnkey provider of transmission lines and
Market Cap (| cr)                                                672               substations make it especially well-placed to enjoy significant traction in
52 week H/L                                              183.5/116.9               order book expansion, the current market share loss in PGCIL tendering
Sensex                                                        18,447               will be a key overhang until its starts winning the orders. Consequently,
Average volumes                                             232,834                we project strong growth of the company’s order book (7.7% CAGR in
Price movement                                                                     FY10-13E to | 5,186 crore) and revenues (12.3% CAGR to | 2,824 crore).
                                                                                   Value creation opportunities for subsidiaries
             240                                        7,200
                                                                                   The performance of international operations, especially the Gulf JV, is
             180                                        5,400
                                                                                   expected to improve sharply in CY11E (though the current ongoing crisis
                                                                 (Nifty)




             120                                        3,600                      in the MENA region may lead to slippages in execution). This, coupled
    (|)




              60                                        1,800                      with the company’s plans to bid for domestic power transmission BOOT
              0                                         0                          projects and US expansion (inorganic route), could lead to value creation
              Ja n-10   May-10      S ep-10       Jan-11                           opportunities for subsidiaries. This provides a further upside to our
                                                                                   valuation case.
                          JS L           Nif ty - RHS
                                                                                   Valuations
Comparable return matrix (%)                                                       At the CMP of | 82, the stock is trading at P/E of 6.4x and 6.6x on FY11E
                                 1M         3M           6M                12M     and FY12E earnings, respectively. We believe low discounting and a
  Jyoti Structures                0.4      -16.4        -18.6                -31   steep correction in the stock price is for the want of order inflows and
  KEC International               5.4       -5.6         -9.4              -24.1   dilutive concerns owing to the issue of warrants attached with NCDs.
  Kalpataru Power                8.6       -17.6        -25.9              -36.1   Though the company has reasonable revenue visibility, a pick-up in
  Crompton Greaves           -8.6         -26.2         -17.8              -1.2    order wins is highly crucial for a re-rating of the stock. We are initiating
  Areva T&D                  -9.4         -10.4          -4.7               3.9    coverage on the stock with a Add rating and target price of | 89.
Analyst’s name                                                                     Exhibit 1: Key Financials*
                                                                                   (| Crore)                                 FY09         FY10         FY11E    FY12E     FY13E
 Chirag Shah
                                                                                   Revenues                                  1,717        2,013         2,301    2,596     2,824
 shah.chirag@icicisecurities.com
                                                                                   EBITDA                                      196          234           264      293       326
                                                                                   Net Profit                                   80           91           105      126       134
 Sanjay Manyal
 sanjay.manyal@icicisecurities.com                                                 PE (x)                                      8.4          7.3           6.4       6.6      6.2
                                                                                   Target PE (x)                              16.0         14.0          12.3     12.7      11.9
                                                                                   EV/EBITDA (x)                               4.8          4.2           4.1       2.8      2.4
                                                                                   P/BV (x)                                    1.6          1.3           1.1      0.9       0.8
                                                                                   RoNW (x)                                   21.0         20.0          19.0     16.2      13.2
                                                                                   RoCE (%)                                   29.2         27.5          25.6     21.9      19.7
                                                                                   Source: Company, ICICIdirect.com Research, *Standalone financials




   ICICIdirect.com | Equity Research
ICICI Securities Limited

Share holding pattern (Q3FY11)
                                                                             Company Background
Shareholders                                              Holding (%)
                                                                             Incorporated in 1974, Jyoti Structures Ltd (JSL) is an EPC player operating
Promoters                                                         27.6       in the power transmission sector. The company has capabilities to
Institutional Investors                                           40.9       undertake transmission line, substation and distribution projects. Since
Public                                                            15.3       inception, it has manufactured over 15,000 circuit km of high voltage
Others                                                             16.2      transmission lines and over 550,000 MT of transmission line towers. As
                                                                             on Q3FY11, the company’s order book stood at | 4,100 crore. The
Promoter & Institutional holding trend (%)                                   transmission, rural electrification and substation segments accounted for
                                                                             76%, 14% and 9% of the order book, respectively.
           60                49              49                              In FY06-10, the company’s revenues grew at 30% CAGR to | 2,013 crore
                                                         43          41
           45                                                                driven by the substantial investment in the domestic power sector. JSL is
                  27                    27          27          28           primarily a domestic focused company with ~92% of standalone entity
           30
    (%)




                                                                             revenues and 81% of the standalone entity order book derived from India
           15                                                                (as on Q3FY11).
            0                                                                Outside India, JSL has a subsidiary, Jyoti Structures Africa (Pty) Ltd and a
                 Q4FY10                 Q1FY11      Q2FY11      Q3FY11       JV, Gulf Jyoti International LLC, which have been formed to tap power
                                                                             sector opportunities in Africa and the Gulf region, respectively.
                                   Promoter         FI & MF
                                                                             JSL has two manufacturing plants in Nashik and Raipur with a combined
                                                                             production capacity of 94,000 MT per annum. The overall capacity of the
                                                                             company is 110,000 MT per annum. It has in-house facilities for
                                                                             manufacturing transmission lines up to 800 kV and substations up to 400
                                                                             kV. The company is headquartered in Mumbai.


          Exhibit 2: Total revenues have grown at 30% CAGR in FY06-10                            Exhibit 3: Order book in Q3FY11 provides strong sales visibility
                     driven by robust order intake                                                          (TTM book-to-bill ratio of 2x)

                             2,400                                                                                   4,800
                                                                                     2,013
                                                                             1,717                                   3,600
                             1,800
                                                                     1,370
                                                                                                         (| crore)
                 (| Crore)




                                                                                                                     2,400
                             1,200                        971
                                             698
                                                                                                                     1,200
                                  600
                                                                                                                        0
                                   0
                                                                                                                             Jun-08

                                                                                                                                      Sep-08

                                                                                                                                               Dec-08

                                                                                                                                                        Mar-09

                                                                                                                                                                 Jun-09

                                                                                                                                                                          Sep-09

                                                                                                                                                                                   Dec-09

                                                                                                                                                                                            Mar-10

                                                                                                                                                                                                     Jun-10

                                                                                                                                                                                                              Sep-10

                                                                                                                                                                                                                       Dec-10
                                             FY06        FY07        FY08    FY09    FY10


          Source: Company, ICICIdirect.com Research                                              Source: Company, ICICIdirect.com Research




   ICICIdirect.com | Equity Research
                                                                                                                                                                                                               Page 33
ICICI Securities Limited

                                                                    Exhibit 4: High utilisation of tower manufacturing capacity in FY06-10

                                                                                             120,000                                                         110,000          110,000        120
                                                                                                                                            95,800




                                                                                                                                                                                                     (Capacity Utilisation - %)
                                                                                              90,000        76,000          76,000                                                           105




                                                                            (MT per annum)
                                                                                              60,000                                                                                         90


                                                                                              30,000                                                                                         75


                                                                                                  0                                                                                          60
                                                                                                             FY06            FY07               FY08           FY09            FY10

                                                                                                                     Installed capacity - LHS                   Capacity Utilisation - RHS


                                                                    Source: Company, ICICIdirect.com Research




   Exhibit 5: JSL has been operating in domestic power transmission sector for ~35 years

                                              Secured first
                                            turnkey contract                                                                 Established a JV in
                                                                                         Established                                                                Became the first
       Incorporated as                      with Maharashtra                                                                 Dubai viz. Gulf Jyoti
                                                                                        manufacturing                                                              Indian company to
       Jyoti Structures                      State Electricity                                                                International LLC
                                                                                       facility in Raipur                                                          test 1200kv tower
           Pvt Ltd                                Board




           1974                1979               1988             1989                        1993               1996               2005               2006              2010




                          Commenced                       Initial public offering:                          Established an in-                  Incorporated a subsidiary
                           commercial                          Listed on BSE                                  house tower                        in South Africa viz. Jyoti
                          production at                                                                     testing facility at                  Structures Africa Pty Ltd
                          Nashik facility                                                                        Igatpuri


   Source: Company, ICICIdirect.com Research




 ICICIdirect.com | Equity Research
                                                                                                                                                                                                  Page 34
ICICI Securities Limited

                                                                 Investment Rationale
                                                                 Strong sales visibility – Robust order intake expected
                                                                 With an order book of | 4,100 crore (Q3FY11), JSL enjoys strong sales
The order book is projected to grow at 7.7% CAGR in FY10-        visibility (TTM book-to-bill ratio of 2x). We project the order book will
12E to | 5,186 crore driven by robust order inflows              remain at ~| 4,100 crore by Q4FY11 (against the management guidance
                                                                 of | 4,800-5,000 crore) on the back of order inflows from PGCIL), private
                                                                 sector orders and orders from state utilities. Going ahead, we expect the
                                                                 order backlog to grow at a CAGR of ~7.7% over FY10-13E and expect the
                                                                 order backlog to be at | 5186 crore.

                                                                 Exhibit 6: JPL to participate in bids for ~| 5,000-6,000 crore in H2FY11
                                                                 Agency                                                                                                        | crore
                                                                 PGCIL*                                                                                                        3,000
                                                                 Reliance                                                                                                      2,000
                                                                 State utilities                                                                                                   500
                                                                 BOOT projects**                                                                                            900-1,000
                                                                 Source: Company, ICICIdirect.com Research, * Includes PGCIL projects for which commercial bids are yet to be
                                                                 opened, **Two BOOT projects for REC and PFC


                                                                 In 9MFY11, the order intake was | 1,640 crore, dominated by private
                                                                 sector (e.g. Adani Power) and state utilities. We expect a strong order
                                                                 intake in FY12E fuelled by the positive macroeconomic environment,
                                                                 higher investment by PGCIL and state utilities to meet their XI Plan targets
                                                                 and high-value HCPTC orders. Further, with the commencement of order
                                                                 intake from planned generation capacity addition of ~100 GW in the XII
                                                                 Plan (2013-17), we believe a significant opportunity exists for domestic
                                                                 players such as JSL. Consequently, we project the company’s order book
                                                                 will grow at 7.7% CAGR in FY10-13E to | 5,186 crore and revenues will
                                                                 grow at 12.3% CAGR to | 2,824 crore.


    Exhibit 7: Order book projected to grow at 7.7% CAGR in FY10-13E to                      Exhibit 8: …driving revenues at 12.3% CAGR in FY10-13E to
               | 5,136 crore…                                                                           | 2,824 crore

                        9,000                                                                                        3,600
                                                                                                                                                                                   2,824
                                                                                                                                                                           2,596
                        6,750                                                                                        2,700                                         2,301
            .




                                                                                                                                                   2,013
                                                                                                       (| crore) .




                                                                                                                                           1,717           1,708
            (| Crore)




                        4,500
                                                                                                                     1,800         1,370
                        2,250                                                                                                971
                                                                                                                      900
                           0
                                FY09      FY10        FY11E      FY12E        FY13E                                     0
                                                                                                                             FY07 FY08 FY09 FY10 9MFY11FY11E FY12E FY13E
                                       Order book        Order intake


    Source: Company, ICICIdirect.com Research                                                Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                                              Page 35
ICICI Securities Limited

                                     A lacklustre performance in order wins in FY11E in PGCIL tenders has led
                                     to a deceleration in revenue visibility for JSL. The book to bill ratio as of
                                     Q3FY11 stood at 1.9x vs. 2.1x in Q3FY10. Hence, going ahead, a pick-up
                                     in order flows is highly crucial for JSL, in our view.

                                     Exhibit 9: TTM book to bill ratio (x)

                                         2.3
                                                                2.2
                                         2.2
                                                     2.1                        2.1         2.1           2.1
                                         2.1
                                                                                                                      2.0            2.0
                                         2.0
                                                                                                                                                   1.9
                                         1.9

                                         1.8

                                         1.7

                                         1.6
                                                    Q4FY09   Q1FY10        Q2FY10         Q3FY10      Q4FY10         Q1FY11         Q2FY11        Q3FY11

                                                                                      TTM Book-to-bill ratio (x times)

                                     Source: Company, ICICIdirect.com Research



                                     Exhibit 10: Loss in market share key negative for JSL

                                               16            14.9
                                               14
                                               12                        11.1

                                               10
                                         .




                                                8
                                         (%)




                                                6                                                               4.6
                                                                                                                                           3.8
                                                4
                                                2
                                                                                      0                                         0
                                                0
                                                                    Tower Packages                                          Substation

                                                                                          FY09     FY10     9MFY11
                                     Source: Company, ICICIdirect.com Research




 ICICIdirect.com | Equity Research
                                                                                                                                                 Page 36
ICICI Securities Limited

                                                              Strong execution capabilities – but EPC capabilities in high capacity
                                                              substation lacking
                                                              JSL has strong execution capabilities having successfully undertaken
                                                              transmission line, substation and distribution projects for public and
JSL is one of the few domestic players with capabilities to   private sector clients over the years.
undertake transmission line and substation projects (up to
                                                              We believe JSL’s capability to undertake transmission line and
400 Kv)
                                                              substations projects (up to 400 Kv) enhances its competitive position in
                                                              the industry given the shift towards EPC ordering by key clients. However,
                                                              with PGCIL expected to award EPC orders for higher capacity substations
                                                              (765 Kv) in future, JSL will need to upgrade its capabilities quickly to
                                                              continue to remain competitive (Crompton Greaves and Areva T&D are
                                                              key competitors in this space). In 9MFY11, JSL has bagged an order in the
                                                              substation space of about ~| 42 crore from PGCIL.
                                                              Diversified order book adds to appeal
                                                              Although JSL’s order book is highly skewed towards domestic orders
                                                              (82% of total in Q3FY11), the company enjoys strong order book
                                                              diversification. The overall order book is divided among PGCIL
                                                              (accounting for 26% of the total order book in Q3FY11), private sector
                                                              (14%), state utilities (58%), NTPC, etc. The company’s dependence on
                                                              PGCIL has reduced from ~45% of the total order book a few years back.
The company’s dependence on PGCIL has decreased over          In our view, this is a positive development for the company as it broadens
the years. State utilities and private sector clients         the client base and avoids execution challenges as PGCIL awards a high
constituted 74% of the order book in Q3FY11                   proportion of orders in Q4 (to meet its annual targets).
                                                              Key non-PGCIL orders for JSL over the years have come from private
                                                              sector players, including Reliance and Adani Power, and state utilities,
                                                              including Maharashtra, Tamil Nadu, Uttar Pradesh, Chhattisgarh and DVC.
                                                              Exhibit 11: PGCIL accounts for only 26% of order book




                                                                                                                      PGCIL
                                                                                                                       26%



                                                                                           State Utilities
                                                                                               58%
                                                                                                                       Private Sector
                                                                                                                            16%


                                                              Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                        Page 37
ICICI Securities Limited

                                                            BOOT projects provide upside potential
                                                            With the government’s emphasis on encouraging private sector
                                                            investment in the power sector, BOOT projects are increasingly becoming
                                                            attractive for power transmission companies. In addition to the EPC
The company is set to place bids for two BOOT projects in   component, BOOT projects provide companies like JSL a stable revenue
H2FY11 with a combined value of | 900-1,000 crore           stream.
                                                            JSL is likely to bid for one BOOT project, valued at | 600-700 crore, in
                                                            H2FY11. The execution period of this project will be 36 months. We
                                                            expect the company to participate in future BOOT projects also.
                                                            According to the management, the funding decision (debt vs. equity) for
                                                            the BOOT project will be taken after the bid results are announced.
                                                            Small international presence – turnaround of Gulf JV expected in CY11E
                                                            International revenues constituted ~19% of consolidated revenues in
                                                            FY10. JSL has executed some transmission line and substation projects in
                                                            Africa and the Gulf region through Jyoti Structures Africa (Pty) Ltd and
                                                            Gulf Jyoti International LLC.
                                                            The management is positive on the growth prospects of the Gulf JV. With
                                                            an order book of | 1,050 crore executable over 18 months, the JV is
                                                            expected to generate revenues of | 400-500 crore in CY11 (vs. | 130 crore
The Gulf JV performance is expected to be turned around
                                                            in CY09). The management views North Africa and some GCC countries
in CY11E
                                                            as key areas for business expansion. Profitability is likely to be robust with
                                                            the management expecting PAT margins to be in the 6% range for the JV.
                                                            We expect the African subsidiary to take some more time to stabilise its
                                                            performance. The subsidiary has placed bids in South Africa for projects
                                                            to the tune of | 700-800 crore.
                                                            We have, however, not incorporated the performance of the international
                                                            operations in our valuation case. A stronger-than-expected performance
                                                            provides an upside to our valuation case.
                                                            Exhibit 12: Both overseas ventures currently marginally contribute to JSL’s overall
                                                                        topline, profitability
                                                                                               Gulf Jyoti International LLC   Jyoti Structures Africa (Pty) Limited

                                                               Revenues (| Cr)                                        133                                     130
                                                               PAT (| Cr)                                              -6.6                                  -11.0
                                                               Order Book (| Cr)                                    1,050                                     -
                                                               Nature of ownership                                     JV                              Subsidiary

                                                             Source: Company, ICICIdirect.com Research




                                                            Plans to expand presence in US market through inorganic route
                                                            The company is eyeing the lucrative US market for supplying steel towers
                                                            driven by its large market potential and superior margin profile. For this,
                                                            the company plans to invest ~US$30 million in a US-based lattice steel
                                                            tower manufacturer. This comes on the heels of the acquisition of the US-
                                                            based SAE Towers Holdings LLC by JSL’s competitors, KEC International,
                                                            making the latter a global leader in lattice towers.
                                                            We, however, await further clarity on this from the management.




  ICICIdirect.com | Equity Research
                                                                                                                                                       Page 38
ICICI Securities Limited

                                     Co recently issued non-convertible debentures: Cap on valuations
                                     The company has recently issued non-convertible debentures (| 123
                                     crore) with detachable warrants (total issue size of | 369 crore). Every
                                     shareholder holding eight equity shares will receive one NCD with two
                                     detachable warrants. The NCDs will have a coupon rate of 7% and will be
                                     redeemed within 15 months from the date of allotment. The warrants
                                     have an exercise price of | 120 (exercisable within 18 months from date
                                     of issue). We have built in two scenarios 1) with dilution and 2) without
                                     dilution.
                                     Exhibit 13: Key changes with and without warrant conversion
                                                                                 With Dilution           Without Dilution
                                                                                 FY12E           FY13E    FY12E           FY13E
                                     Interest cost (| crore)                      86.1           105.4     96.2           102.2
                                     EPS(|)                                       12.3            13.1     14.6            16.7
                                     Debt to Equity(x)                            0.51            0.51     0.76            0.72
                                     RoE(%)                                       16.2            13.2     18.3            17.8

                                     Source: Company, ICICIdirect.com Research




 ICICIdirect.com | Equity Research
                                                                                                                       Page 39
ICICI Securities Limited

                                     Risks and concerns
                                     Margin contraction from increased competition
                                     In our view, the company’s margins could decline due to the increased
                                     industry competition. In recent years, domestic and MNC players have
                                     aggressively bid for PGCIL projects (by 12-15% lower than JSL’s bids).
                                     According to the management, as a result of the increased competition,
                                     the company’s market share for PGCIL’s transmission line orders has
                                     dropped in recent quarters (from 16-17% level in Q4FY10).
                                     Lower margins due to commodity price volatility
                                     Although domestic orders come with a price variation clause, the
                                     company’s international orders are fixed price contracts. The company’s
                                     margins could contract due to a significant increase in commodity prices
                                     (steel, zinc, etc). Steel and zinc accounted for ~47% of the total raw
                                     material costs in FY10.
                                     High working capital requirements
                                     JSL has high working capital requirements (~32% of net sales in FY10),
                                     which are primarily funded through long-term working capital loans (D/E
                                     ratio of 0.75 in Q3FY11). Hence, higher interest rates can lead to lower
                                     profitability.
                                     Lower revenues due to execution delays
                                     Although JSL has a track record of successfully executing projects, a
                                     lower-than-expected execution rate in future could result in lower
                                     revenues. Projects could be delayed due to various external and internal
                                     factors including economic slowdown, delays in environment clearances,
                                     manpower shortages, raw material shortages, etc.




 ICICIdirect.com | Equity Research
                                                                                                     Page 40
ICICI Securities Limited

                                                             Financials

                                                             Revenues to grow at 12.3% CAGR in FY10-13E
The execution rate is likely to pick up in H2FY11E due to    With an order book of | 4,100 crore in Q3FY11, JSL enjoys strong sales
contractual requirements. We project FY11E revenue           visibility. Fuelled by robust order intake due to the massive power sector
growth at 14% to | 2,301 crore (vs. company guidance of      investment and 22 months execution period, we project the company’s
~| 2,500 crore)                                              revenues will grow at 12.3% CAGR in FY10-13E to | 2,824 crore.
                                                             In H2FY11, we expect the company’s execution rate to pick up
                                                             significantly driving FY11E revenue growth at 14% YoY to | 2,301 crore
                                                             (vs. 16% YoY growth in H1FY11). This is in line with the company’s
                                                             revenue guidance of | 2,450-2,550 crore for FY11E.
                                                              Exhibit 14: Revenues projected to grow at 19% CAGR in FY10-13E to | 2,824 crore

                                                                                    3,000                                                                                      2,824
                                                                                                                                                                     2,596
                                                                                                                                                            2,301
                                                                                    2,250                                               2,013
                                                                                                                              1,717              1,708
                                                                                                                   1,370
                                                                                    1,500
                                                                 (| crore)




                                                                                                      971

                                                                                         750


                                                                                          0
                                                                                                  FY07             FY08       FY09      FY10     9MFY11     FY11E   FY12E     FY13E

                                                              Source: Company, ICICIdirect.com Research




                                                             EBITDA margin to sustain at current levels
Margins insulated to a large extent as all domestic orders
                                                             We expect JSL to generate EBITDA margins in the range of 11-11.5% in
have a price variation clause
                                                             FY11E-13E. The company’s margins are insulated to a large extent from
                                                             higher raw material costs as its domestic orders have a price variation
                                                             clause. Margins could, however, come under pressure due to the
                                                             increased industry competition.
                                                              Exhibit 15: EBITDA margin to sustain in 11-11.5% range

                                                                                   400                                                                                       16.0


                                                                                   300         12.9                                                                          14.0
                                                                                                            12.5                 11.6
                                                                       (| crore)




                                                                                                                       11.4                        11.5      11.3   11.5
                                                                                   200                                                    11.1                               12.0
                                                                                                                                                                                    (%)




                                                                                   100                                                                                       10.0


                                                                                    0                                                                                        8.0
                                                                                               FY07         FY08       FY09      FY10   9MFY11    FY11E     FY12E   FY13E

                                                                                                               EBITDA (LHS)                 EBITDA Margins (RHS)

                                                              Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                                             Page 41
ICICI Securities Limited

                                                         Earnings to grow at CAGR of 13.5% in FY10-FY13E to | 134.4 crore
                                                         With the steady growth in order book and revenues led by the timely
                                                         execution of orders and sustainable margins of ~11.5%, we expect
                                                         earnings to grow at a CAGR of 13.5% to | 134.4 crore during FY10-13E.

                                                         Exhibit 16: Earnings to grow at CAGR of 13.5% in FY10-FY13E to | 134.4 crore

                                                                         160
                                                                         140
                                                                         120
                                                                         100



                                                             (| crore)
                                                                         80
                                                                                                                                                               126.3     134.4
                                                                         60
                                                                                                                                                     104.6
                                                                                                                             91.9
                                                                         40                           72.4     79.7                        75.9
                                                                                              55.0
                                                                         20
                                                                                    27.7
                                                                          0
                                                                                    FY06      FY07    FY08     FY09          FY10      9MFY11        FY11E     FY12E     FY13E

The company is expected to generate high return ratios   Source: Company, ICICIdirect.com Research
due to a stable margin profile


                                                         Expected to generate high return ratios
                                                         We believe the company will be successful in sustaining high return ratios
                                                         (RoCE and RoNW) given its stable margin profile. This stems from the
                                                         company’s initiatives to execute only those projects that meet some
                                                         specific return criteria. We have, however, not modelled any equity
                                                         dilution or debt raising by the company to fund its growth initiatives.


                                                          Exhibit 17: Expected to generate high RoCE and RoNW


                                                                               40            33.4
                                                                                                        33.1          29.2            27.5
                                                                               30                                                                    25.6      21.9
                                                                                                                                                                        19.7
                                                                                             27.7
                                                                               20
                                                              (%)




                                                                                                     23.5      21.0                 20.0          19.0
                                                                               10                                                                             16.2
                                                                                                                                                                         13.2

                                                                                0
                                                                                           FY07      FY08      FY09            FY10           FY11E         FY12E      FY13E

                                                                                                                 RoCE                RoNW

                                                          Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                                       Page 42
ICICI Securities Limited

                                                           Valuations

At our base case, we have derived a target price of | 89   At the CMP of | 82, the stock is trading at a P/E of 6.4x and 6.6x on FY11E
per share with a potential upside of 9%                    and FY12E earnings, respectively. We believe low discounting and a steep
                                                           correction in stock price is for the want of order inflows and dilutive
                                                           concerns owing to the issue of warrants attached with NCDs. Though the
                                                           company has reasonable revenue visibility, a pick-up in order wins is
                                                           highly crucial for a re-rating of the stock. We are initiating coverage on the
                                                           stock with a Add rating and a target price of | 89 per share.


                                                           Exhibit 18: Valuation for JSL
                                                           JSL                                               Bull Case                Base Case         Bear Case
                                                           (| per share)
                                                           FY12E EPS                                                  12.6                 12.6                 12.6
                                                           FY12E BV                                                   93.8                 93.8                 93.8

                                                           FY12E Target P/E Multiple (x)                                 9                   7                     5
                                                           FY12E Target P/BV Multiple (x)                              1.1                   1                   0.9

                                                           Targets as per construct                                   113                    89                   74
                                                           Upside potential (%)                                       38.3                  8.9                -10.1
                                                           Source: Company, ICICIdirect.com Research




                                                            Exhibit 19: P/E band chart

                                                                        350

                                                                        280

                                                                        210
                                                                  (|)




                                                                        140
                                                                                                                  `
                                                                         70

                                                                          0
                                                                         Mar-04       Mar-05     Mar-06   Mar-07             Mar-08     Mar-09      Mar-10


                                                                              Price            5.0x       10.0x               15.0x         20.0x            25.0x

                                                            Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                             Page 43
ICICI Securities Limited
                                     Exhibit 20: P/BV band chart

                                                       500
                                                       450
                                                       400
                                                       350




                                         .
                                                       300




                                         (|/share)
                                                       250
                                                       200
                                                       150
                                                       100
                                                        50
                                                         0




                                                                 Apr-05




                                                                                                     Apr-06




                                                                                                                                         Apr-07




                                                                                                                                                                             Apr-08




                                                                                                                                                                                                                 Apr-09




                                                                                                                                                                                                                                                     Apr-10
                                                                          Jul-05
                                                                                   Oct-05
                                                                                            Jan-06


                                                                                                              Jul-06
                                                                                                                       Oct-06
                                                                                                                                Jan-07


                                                                                                                                                  Jul-07
                                                                                                                                                           Oct-07
                                                                                                                                                                    Jan-08


                                                                                                                                                                                      Jul-08
                                                                                                                                                                                               Oct-08
                                                                                                                                                                                                        Jan-09


                                                                                                                                                                                                                          Jul-09
                                                                                                                                                                                                                                   Oct-09
                                                                                                                                                                                                                                            Jan-10


                                                                                                                                                                                                                                                              Jul-10
                                                                                                                                                                                                                                                                       Oct-10
                                                                                                                                                                                                                                                                                Jan-11
                                                                                                              Share Price                                  1x                         2x                    3x                       4x                        5x

                                     Source: Company, ICICIdirect.com Research




                                      Exhibit 21: EV/EBITDA band chart

                                                                 3,000

                                                                 2,400

                                                                 1,800
                                                     (| Crore)




                                                                 1,200

                                                                   600

                                                                          0
                                                                          Mar-04                      Mar-05                      Mar-06                      Mar-07                       Mar-08                         Mar-09                     Mar-10


                                                                                                                  EV                         3.0x                            5.0x                         7.0x                         9.0x                            11.0x

                                      Source: Company, ICICIdirect.com Research




 ICICIdirect.com | Equity Research
                                                                                                                                                                                                                                                                       Page 44
ICICI Securities Limited
                                     Exhibit 22: Profit & loss account*
                                     | Crore                                                FY09      FY10   FY11E   FY12E    FY13E
                                     Total Revenues                                        1,717     2,013   2,301   2,596    2,824
                                     Growth (%)                                             25.3      17.2    14.3    12.8       8.8
                                     Op. Expenditure                                       1,521     1,779   2,037   2,303    2,498
                                     EBITDA                                                  196       234     264     293      326
                                     Growth (%)                                             14.0      19.6    12.8    10.9     11.3
                                     Depreciation                                               9       17      20      21        23
                                     EBIT                                                    187       217     244     272      303
                                     Interest                                                 68        79      89      86      105
                                     Other Income                                               7        5       2       7         7
                                     Extraordinary Item                                         0        0       0       0         0
                                     PBT                                                     126       144     158     193      205
                                     Growth (%)                                               5.1     14.2     9.2    22.1      6.5
                                     Tax                                                       47       52      53      66        71
                                     Other items                                                0       -1       0       0         0
                                     Rep. PAT before MI                                        80       91     105     126      134
                                     Adjustments                                                0        0       0       0         0
                                     Adj. Net Profit                                          80        91     105     126      134
                                     Growth (%)                                             17.5      14.1    14.9    20.8       6.5
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




                                     Exhibit 23: Balance sheet*
                                     | Crore                                                FY09      FY10   FY11E   FY12E    FY13E
                                     Equity Capital                                           16        16      16      20       20
                                     Reserves & Surplus                                      400       487     582     937    1,060
                                     Shareholder's Fund                                      417       503     598     958    1,080
                                     Borrowings                                              298       356     441     481      541
                                     Unsecured Loans                                           5         5       5       5        5
                                     Deferred Tax Liability                                    8        18      18      18       18
                                     Source of Funds                                         729       882   1,062   1,462    1,644
                                     Gross Block                                             169       230     230     252      282
                                     Less: Acc. Depreciation                                  52        65      82     101      122
                                     Net Block                                               117       165     147     150      159
                                     Capital WIP                                               5         3      25      33       23
                                     Net Fixed Assets                                        122       168     172     183      182
                                     Intangible Assets                                         0         4       2       0       -3
                                     Investments                                              23        20      20      20       20
                                     Cash                                                     30        42      27     345      451
                                     Trade Receivables                                       748       896   1,149   1,296    1,443
                                     Loans & Advances                                        177       164     185     207      231
                                     Inventory                                               146       235     251     277      311
                                     Total Current Asset                                   1,100     1,336   1,611   2,125    2,436
                                     Current Liab. & Prov.                                   517       646     743     866      992
                                     Net Current Asset                                       582       690     868   1,259    1,444
                                     Miscellaneous expense not W/O                             1         0       0       0        0
                                     Application of Funds                                    729       882   1,062   1,462    1,644
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




 ICICIdirect.com | Equity Research
                                                                                                                             Page 45
ICICI Securities Limited

                                     Exhibit 24: Cash flow statement*
                                     | Crore                                                FY09         FY10    FY11E   FY12E    FY13E
                                     Net Profit before Tax                                   126          144      158     193      205
                                     Other Non Cash Exp                                        0            0        0       0        0
                                     Depreciation                                              9           17       20      21       23
                                     Direct Tax Paid                                          47           52       53      66       71
                                     Other Non Cash Inc                                        7            5        2       7        7
                                     Other Items                                              68           79       89      86      105
                                     CF before change in WC                                  149          182      211     227      256
                                     Inc./Dec. In WC                                         -75          -95     -194     -73      -79
                                     CF from Operations                                       75           88       18     154      177
                                     Pur. of Fix Assets                                      -66          -65      -22     -30      -20
                                     Pur. of Inv                                              -7            3        0       0        0
                                     CF from Investing                                       -65          -57      -20     -23      -13
                                     Inc./(Dec.) in Debt                                      79           57       86      40       60
                                     Inc./(Dec.) in Net Worth                                  4            5        0     245        0
                                     Others                                                  -77          -88      -98     -98     -118
                                     CF from Financing                                         6          -26      -13     187      -58
                                     Opening Cash Balance                                     14           30       42      27      345
                                     Closing Cash Balance                                     30           42       27     345      451
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




                                     Exhibit 25: Key ratios*
                                                                                            FY09         FY10    FY11E   FY12E    FY13E
                                     Raw Material (%)                                       64.2         61.3     56.9    57.7     57.6
                                     Employee Expenditure (%)                                 2.5          3.0     3.2     3.1      3.3
                                     Effective Tax Rate (%)                                  36.9         36.3    33.7    34.4     34.4

                                     Profitability Ratios (%)
                                     EBITDA Margin                                           11.4        11.6     11.5    11.3     11.5
                                     PAT Margin                                               4.6         4.6      4.5     4.9      4.8

                                     Per Share Data (|)
                                     Revenue per share                                     210.2     245.5       280.6   253.5    275.8
                                     Book Value                                             50.9      61.4        73.0    93.5    105.5
                                     Cash per share                                          3.6       5.1         3.3    33.7     44.1
                                     EPS                                                     9.8      11.2        12.8    12.3     13.1
                                     Cash EPS                                               10.8      13.3        15.2    14.4     15.4
                                     DPS                                                     0.9       1.0         1.0     1.0      1.0
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




 ICICIdirect.com | Equity Research
                                                                                                                                 Page 46
ICICI Securities Limited

                                     Exhibit 26: Key ratios*
                                     Return Ratios (%)                                      FY09         FY10    FY11E    FY12E     FY13E
                                     RoNW                                                   21.0         20.0     19.0     16.2      13.2
                                     ROCE                                                   29.2         27.5     25.6     21.9      19.7
                                     ROIC                                                    9.9          9.4      9.1      8.0       7.5
                                     Financial Health Ratio
                                     Operating CF (Rs Cr)                                     75           88        18     154       177
                                     FCF (Rs Cr)                                                9          22        -4     124       157
                                     Cap. Emp. (Rs Cr)                                       719          864    1,044    1,444     1,626
                                     Debt to Equity (x)                                      0.7          0.7      0.7      0.5       0.5
                                     Debt to Cap. Emp. (x)                                    0.4          0.4      0.4      0.3       0.3
                                     Interest Coverage (x)                                   2.7          2.8      2.8      3.2       2.9
                                     Debt to EBITDA (x)                                       1.5          1.5      1.7      1.7       1.7
                                     DuPont Ratio Analysis
                                     PAT/PBT (%)                                             63.1        63.7     66.3     65.6      65.6
                                     PBT/EBIT (%)                                            67.5        66.4     64.5     70.8      67.6
                                     EBIT/Net Sales (%)                                      10.9        10.8     10.6     10.5      10.7
                                     Net Sales/Total Asset (x)                                2.6         2.5      2.4      2.1       1.8
                                     Total Asset/NW (x)                                       1.7         1.8      1.8      1.5       1.5



                                     Working Capital                                        FY09      FY10       FY11E    FY12E     FY13E
                                     Working Cap./Revenues (%)                              33.9      34.3        37.7     48.5      51.1
                                     Inventory turnover                                      23.9     34.5        38.5     37.1      38.0
                                     Debtor turnover                                       132.5     149.0       162.1    171.8     177.0
                                     Creditor turnover                                       65.5     72.2        71.7     72.5      75.6
                                     Current Ratio                                            2.1       2.1        2.2      2.5       2.5



                                     FCF Calculation (| crore)                              FY09         FY10    FY11E    FY12E     FY13E
                                     EBITDA                                                  196          234      264      293       326
                                     Less: Tax                                                47           52       53       66        71
                                     NOPLAT                                                  149          182      211      227       256
                                     Capex                                                   -66          -65      -22      -30       -20
                                     Change in working cap.                                  -75          -95     -194      -73       -79
                                     FCF                                                       9           22       -4      124       157



                                     Valuation                                              FY09         FY10    FY11E    FY12E     FY13E
                                     PE (x)                                                   8.4          7.3     6.4      6.6       6.2
                                     EV/EBITDA (x)                                            4.8          4.2     4.1      2.8       2.4
                                     EV/Sales (x)                                            0.6          0.5      0.5      0.3       0.3
                                     Dividend Yield (%)                                       1.1          1.2     1.2      1.2       1.2
                                     Price/BV (x)                                             1.6          1.3     1.1      0.9       0.8
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




 ICICIdirect.com | Equity Research
                                                                                                                                   Page 47
ICICI Securities Limited
Initiating Coverage
                                                                                                                                                                      March 31, 2011
Rating Matrix
Rating                                    :    Add
                                                                                        Kalpataru Power Transmission (KALPOW)
Target                                    :    | 147
                                                                                                                                                                              | 135
Target Period                             :    12 months
Potential Upside                          :    9%                                       Diversified play…
                                                                                        A diversified business model, focus on high growth areas and strong
YoY Growth (%)                                                                          client base make Kalpataru Power Transmission Ltd (KPTL) an attractive
                                  FY10        FY11E     FY12E               FY13E       play in the power transmission space. KPTL enjoys strong sales visibility
Total Revenue                     37.9         10.0      16.6                17.2       with a consolidated order book of | 9,250 crore and standalone order
EBITDA                            49.1          9.3      16.7                19.0       book of | 5,000 crore (TTM book-to-bill ratio of 1.8x). The company is
Net Profit                        81.7          7.5      15.0                20.4       well placed to benefit from higher infrastructure spending in multiple
                                                                                        sectors (power, oil & gas, civil engineering, logistics). We project
Current & Target Multiple (x)                                                           standalone revenues and PAT will grow at 15% and 14% over FY10-13E,
                                  FY10        FY11E     FY12E               FY13E       respectively. We are initiating coverage on the stock with a BUY rating.
PE                                10.5         11.3       9.8                 8.1
EV/ EBITDA                          8.7         7.1       6.3                 5.3
                                                                                        T&D to dominate standalone business…
P/BV                               1.8          1.3       1.2                 1.0       We forecast standalone revenues will grow at 15% CAGR to | 3,902 crore
Target P/E                        11.8         12.7      11.0                 9.1       in FY10-13E. The transmission & distribution (T&D) segment is expected
Target Ev/ EBITDA                  9.5          7.9       7.0                 5.9
                                                                                        to dominate overall revenues (~90% of total in FY13E) fuelled by the
Target P/BV                        2.0          1.5       1.3                 1.2
                                                                                        large power sector opportunity in the domestic and overseas markets. We
                                                                                        believe KPTL is well-placed to expand its order book driven by its credible
Stock Metrics                                                                           project execution track record and strong client base (PGCIL, state utilities
Bloomberg Code                                                            KPP:IN        and foreign power utilities). In our view, the anticipated higher tendering
Reuters Code                                                          KAPT.NS           activity by PGCIL and state utilities in order to meet their XI Plan (in
Face Value (Rs)                                                                  2      H2FY11-FY12E) investment targets and the commencement of order
Promoters Holding                                                     55.0              intake from planned generation capacity addition in the XII Plan (2013-17)
Market Cap (Rs cr)                                                   1,811              will translate into robust order inflows for KPTL. As a result, we expect
52 week H/L                                                      220/121.2              KPTL’s order book to grow at 17% CAGR to | 6,625 crore over FY10-13E.
Sensex                                                              18,447              …supported by strong performance of subsidiaries
Average volumes                                                     66,681
                                                                                        KPTL has exposure to high growth business opportunities (civil
                                                                                        engineering, logistics) through its subsidiaries JMC Projects and Shree
Price movement
                                                                                        Shubham Logistics. We expect these businesses to perform strongly over
                                                                                        the next few years fuelled by the large infrastructure spending in the XI
     .




                 280                                      8,000
                                                                                        Plan and robust growth for agri-logistics services in India. Additionally,
                                                                      .




                 210                                      6,000                         profitability of both subsidiaries is expected to improve in FY11E-13E.
     (|/share)




                                                                      (Index)




                 140                                      4,000                         Valuations
                  70                                      2,000                         At the CMP of | 135/share, the stock is trading at P/E multiple of 11.3x
                   0                                      0
                                                                                        and 9.8x on FY11E and FY12E earnings, respectively. With reasonable
                  Mar-10     Jul-10       Nov-10
                                                                                        sales visibility, continued traction in the domestic and international
                                                                                        orders and higher capex by domestic oil & gas companies, we estimate
                           KPTL                    Nifty (RHS)                          standalone revenues and PAT will grow at 15% and 14% CAGR,
Comparable return matrix (%)                                                            respectively, over FY10-13E. We have valued the stock based on SOTP
                                                                                        methodology and arrived at a fair value of | 147.
                                      1M         3M            6M               12M     Exhibit 1: Key Financials*
  Jyoti Structures                     0.4      -16.4         -18.6               -31   (| Crore)                                 FY09         FY10         FY11E    FY12E    FY13E
  KEC International                    5.4       -5.6          -9.4             -24.1   Total Revenues                           1,882        2,596         2,856    3,329    3,902
  Kalpataru Power                      8.6      -17.6         -25.9             -36.1   EBITDA                                     204          304           332      388      461
                                                                                        Net Profit                                   94         171           184      212      255
  Crompton Greaves                    -8.6      -26.2         -17.8             -1.2
                                                                                        PE (x)                                    18.9         10.5          11.3      9.8       8.1
  Areva T&D                           -9.4      -10.4          -4.7              3.9    Target PE (x)                             21.3         11.8          12.7     11.0      9.1
Analyst’s name                                                                          EV/EBITDA (x)                             13.2           8.7           7.1      6.3      5.3
 Chirag Shah                                                                            P/BV (x)                                    2.1          1.8           1.3      1.2      1.0
 shah.chirag@icicisecurities.com                                                        RoNW (x)                                  11.8         18.7          14.3     12.6     13.6
                                                                                        RoCE (%)                                  13.7         17.2          14.6     13.6     14.5
 Sanjay Manyal                                                                          Source: Company, ICICIdirect.com Research, *Standalone financials
 sanjay.manyal@icicisecurities.com




   ICICIdirect.com | Equity Research
ICICI Securities Limited

 Share holding pattern (Q3FY11, %)
                                                                             Company Background
                                                                             Kalpataru Power Transmission Ltd (KPTL) is an EPC contractor operating
 Promoters                                                  55.0             in the power transmission and distribution sector. The company has
 Institutional Investors                                    35.4             capabilities to execute EHV transmission line projects up to 800 KV. Since
 Others                                                        9.6           inception, it has installed ~8,500 km transmission lines and ~700,000 MT
                                                                             towers. It has undertaken several projects in India and abroad (mainly in
 Promoter & Institutional holding trend (%)                                  Asia, Africa and the Middle East). Besides the power transmission and
                                                                             distribution sector, the company has interests in the oil & gas pipeline,
        80         64                                                        power generation (biomass) and real estate businesses.
                                   55           55        55
        60
                                        37           36        35
                                                                             As on Q3FY11, KPTL’s order book stood at ~| 5,000 crore with the
        40                27                                                 domestic transmission, international transmission, distribution and
  (%)




        20                                                                   infrastructure segments constituting 56%, 34%, 3% and 7% of the total
                                                                             order book, respectively. In FY06-10, the company’s revenues have
          0
                                                                             grown at 33% CAGR to | 2,596 crore driven by robust growth of T&D
                Q4FY10             Q1FY11      Q2FY11     Q3FY11
                                                                             revenues (30% CAGR) backed by strong investment in the domestic
                           Promoter          FI & MF
                                                                             power sector. It has geographically diverse revenues with the share of
                                                                             international sales at 45% in FY10 (vs. 26% in FY06) for the standalone
                                                                             entity.
                                                                             KPTL’s largest subsidiary is JMC Projects (India) Ltd, a publicly-listed civil
                                                                             contracting company, with an order book of | 4300 crore (Q3FY11). Other
                                                                             operating subsidiaries of KPTL include Shree Shubham Logistics, Energy
                                                                             Link (India) Ltd, and Amber Real Estate Ltd.
                                                                             KPTL has two fabrication plants in Gandhi Nagar with a combined
                                                                             capacity of 108,000 MT per annum. The company is headquartered in
                                                                             Mumbai and has employee strength of 2,000 personnel. It was listed on
                                                                             the BSE/NSE in 2000.
        Exhibit 2: CAGR of 33% in standalone revenues in FY06-10…                                Exhibit 3: …and 35% CAGR of order book in FY06-10

                          2,800                                               2,596                               6,000
                                                                                                                                                  5,000   5,000   5,000

                                                                     1,882            1,956                       4,500
                          2,100                           1,738
                                                1,524                                                                                     3,400
                                                                                                      (| crore)
              (| crore)




                          1,400                                                                                   3,000           2,300
                                     840                                                                                  1,500
                           700                                                                                    1,500


                               0                                                                                     0
                                     FY06       FY07      FY08       FY09     FY10    9MFY11                              FY06    FY07    FY08    FY09    FY10    9MFY11


        Source: Company, ICICIdirect.com Research                                                Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                                  Page 49
ICICI Securities Limited

                                                                     Investment Rationale
                                                                     Strong sales visibility; sustained growth of order book expected
TTM book-to-bill ratio of 1.8x for the standalone business
                                                                     With standalone entity order book of | 5,000 crore, KPTL enjoys strong
in Q3FY11 provides strong sales visibility. KPTL currently
                                                                     sales visibility (TTM book-to-bill ratio of 1.8x). With the company bidding
holds L1 position in several projects in which it has
                                                                     aggressively for domestic and international orders (placed bids for orders
placed bids
                                                                     of | 4,000 crore at the end of 9MFY11 – L1 position in several of them),
                                                                     massive transmission sector spending and repeat orders from existing
                                                                     clients, we expect sustained order book expansion in FY11E-13E.
                                                                     Additionally, robust demand for oil & gas pipelines in India over the next
                                                                     few years is likely to drive infrastructure segment orders. Consequently,
                                                                     we project the company’s order book and revenues will grow at 13%
                                                                     CAGR and 17% CAGR to | 6,625 crore and | 3,902 crore in FY11E-13E,
                                                                     respectively.
                                                                     However, the FY11E sales growth (14.2% YoY vs. 33% CAGR in FY06-10)
                                                                     is likely to be moderate due to execution slippages in 9MFY11 as a result
                                                                     of the severe monsoon season. Also, in Q3FY11, KPTL experienced
                                                                     slippages to the tune of | 20 crore due to disturbances in the Middle East
                                                                     particularly in Algeria where the company has an order book to the tune
                                                                     of |100 crore.
      Exhibit 4: Order book projected to grow at 13% CAGR in FY11E-13E…                             Exhibit 5: …driving sales at 17% CAGR in FY11-13E to | 3,902 crore

                          8,000                                                                                          5,000
                                                                                      6,625                                                                                                          3,902
                                                                          5,989                                          4,000
                          6,000                                   5,163                                                                                                                   3,329
                                                  5,000   5,000
                                                                                                                                                                                  2,856
                                                                                                                         3,000                                        2,596
              (| crore)




                                                                                                            (| crore)




                          4,000           3,400
                                                                                                                                              1,738      1,882
                                  2,300                                                                                  2,000       1,524
                          2,000
                                                                                                                         1,000

                             0                                                                                                   0
                                  FY07    FY08    FY09    FY10    FY11E FY12E FY13E                                                  FY07     FY08       FY09         FY10       FY11E    FY12E     FY13E

      Source: Company, ICICIdirect.com Research                                                     Source: Company, ICICIdirect.com Research




                                                                     Exhibit 6: Moderation in book to bill ratio for KPTL


                                                                                3.5

                                                                                3.0

                                                                                2.5

                                                                                2.0
                                                                          (x)




                                                                                1.5

                                                                                1.0

                                                                                0.5
                                                                                          Q3FY09



                                                                                                   Q4FY09



                                                                                                                        Q1FY10



                                                                                                                                     Q2FY10



                                                                                                                                                Q3FY10



                                                                                                                                                             Q4FY10



                                                                                                                                                                              Q1FY11



                                                                                                                                                                                          Q2FY11



                                                                                                                                                                                                      Q3FY11




                                                                      Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                                                                   Page 50
ICICI Securities Limited

                                                                  T&D to remain core business for KPTL
                                                                  PGCIL, state utilities to step-up tendering activity
                                                                  As of Q3FY11, the T&D segment accounted for ~90% of KPTL’s order
                                                                  book. Of this, the share of domestic transmission projects stood at ~56%.
                                                                  With a diverse domestic customer base (PGCIL, state utilities and private
                                                                  sector clients), credible project execution track record and large power
An improved global macroeconomic environment, stable
                                                                  sector opportunity, we believe KPTL is well placed to expand its T&D
crude oil prices and substantial power sector capex in
                                                                  order book in FY11E-13E. We expect the order backlog to grow at 13%
Africa, GCC and CIS regions will drive foreign orders for
                                                                  CAGR over FY11E-FY13E.
KPTL in FY11E-13E
                                                                  Although the order intake in 9MFY11 (~2% YoY de-growth over 9MFY10)
                                                                  has been subdued, we expect it to pick up over Q4FY11 and FY12E-FY13E
                                                                  driven by PGCIL and state utilities (to meet their XIth and XIIth Plan
                                                                  targets). In Q4FY11, PGCIL is expected to offer projects worth | 3,000
                                                                  crore for bidding. These include orders for HCPTC projects (nine projects
                                                                  in total worth ~| 58,000 crore), which are likely to continue till FY12E-13E.
                                                                  PGCIL has historically been a key client for KPTL.
      Exhibit 7: KPTL has secured several domestic T&D orders from state utilities in FY10-YTD FY11
                                                                          Project value (|
          Date                                               Project                                                                                            Project Details
                                                                                    crore)
          Sep-09               Maharasthra State Electricity Co. Ltd.                    1,200                  Execution of 220 kv and 132 kv transmission lines and substation
          Sep-09                    North East Transmission Co. Ltd.                      200                                                 Execution of 158 km of 400 kv D/C
          Jan-10                        Tamil Nadu Electricity Board                      154                                  Commissioning of 400 kv D/C MTPS-ARASUR line
                         Chhattisgarh State Power Transmission Co.
          Apr-10                                                                          319                 Turnkey project of 400 kv D/C Quad Marwa-Raipur transmission line
                                                               Ltd
          Sep-10               Parbati Koldam Transmission Co. Ltd.                       100                 Supply & erection of 400 kv D/C Koldam-Ludhiana transmission line
          Oct-10                       PMC Projects (India) Pvt. Ltd.                     286                                    765 kv S/C Aloka- Aurangabad transmission line
          Dec-10                  PowerGrid Corporation of India Ltd.                    600*                  Execution of 765 kv of 238 km transmission lines in Orissa and MP
      Source: Company, ICICIdirect.com Research, *Project value includes PGCIL order and order from Societe National d'Electricite, of Democratic Republic of Congo for the design,
      supply and installation of 400 KV - 279Km transmission line


                                                                  Greenfield manufacturing facility in Raipur to cater to domestic demand
                                                                  KPTL is expanding its transmission tower manufacturing capacity by
                                                                  30,000 MT to 138,000 MT. A new greenfield facility will be set up in
                                                                  Raipur, Central India, to cater to the demand in the central and eastern
                                                                  belt of the country (and achieve savings in freight cost). The existing
                                                                  Gandhi Nagar facility will continue to cater to the western belt and export
                                                                  markets.
                                                                  Exhibit 8: Trend in capacity for manufacturing towers.
                                                                                     160,000
                                                                                                                                                                      138,000
                                                                                     140,000

                                                                                     120,000                    108,000          108,000            108,000

                                                                                     100,000
                                                                            (MT's)




                                                                                                 84,000
                                                                                      80,000

                                                                                      60,000

                                                                                      40,000
                                                                                                 FY08               FY09           FY10              FY11E             FY12E

                                                                        Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                                     Page 51
ICICI Securities Limited

                                                             Attractive opportunities in Africa, CIS and GCC regions
                                                             KPTL is actively bidding for projects in Africa, CIS and GCC regions. In the
                                                             international arena, over the last few years, KPTL has enjoyed handsome
                                                             order inflows from government-owned utilities in Africa (Algeria, Ethiopia,
                                                             Kenya, Congo, etc) and the Middle East (Abu Dhabi, Kuwait, etc). The
                                                             company has executed projects in over 28 countries across the globe.
                                                             Focusing on international markets for order inflow would also help KPTL
                                                             to cushion against rising competition in the Indian T&D EPC segment
                                                             wherein marginal players are bidding aggressively at competitive
                                                             margins.
                                                             We expect continued momentum in the international order intake driven
                                                             in the long-term (except for the troubled Middle East and Africa region
                                                             wherein order inflows may taper down in the medium-term due to
                                                             ongoing political crisis in the region), due to the substantial investment
                                                             planned in the transmission sector. According to industry sources, of the
                                                             US$867 billion investment expected in the global transmission sector in
                                                             2007-15, the Middle East and Africa are expected to have 7% share (a
                                                             large opportunity for transmission tower manufacturers).
   Exhibit 9: Company has secured some large orders in Africa in FY10-YTD FY11
                                                                 Project value (|
     Date                                            Project                                                                                                 Project Details
                                                                           crore)
     Jan-10                                 Sonelgaz, Algeria                   100                           220 kv of transmission lines of 100 km and 60 kv line of 120 km
                                                                                      Transmission lines: 400 kv D/C of 164 km, 220 kv D/C of 30 km and 400 kv D/C of 231 km
     Sep-10            Kenya Electricity Transmission Co. Ltd                   453
                                                                                                                                                     and 220 kv D/C of 52 km
     Oct-10                 National Grid Corp. of Philippines                  98                           Construction of 108 km of 230 kv double circuit transmission line
   Source: Company, ICICIdirect.com Research



                                                             Exhibit 10: International markets have gained prominence in KPTL’s order book

                                                                        100.0
                                                                         90.0
                                                                         80.0
                                                                         70.0
                                                                         60.0
                                                                         50.0
                                                                  (%)




                                                                         40.0
                                                                         30.0
                                                                         20.0
                                                                         10.0
                                                                          -
                                                                                      Q2FY10        Q3FY10         Q4FY10           Q1FY11          Q2FY11       Q3FY11

                                                                    Transmission - International          Transmission - Domestic            Distribution       Infrastructure


                                                             Source: Company, ICICIdirect.com Research




 ICICIdirect.com | Equity Research
                                                                                                                                                                 Page 52
ICICI Securities Limited

                                                               Sustained growth of T&D order book in FY11E-13E
                                                               KPTL’s credible track record of executing domestic and international
                                                               projects has resulted into repeat orders from key clients, including PGCIL,
                                                               Maharashtra State Electricity Transmission Co, Sonelgaz (Algeria), etc. We
PGCIL is expected to offer projects worth | 3,000 crore        expect this trend to continue in future.
for bidding in H2FY11. In FY12E-13E, strong tendering
                                                               Consequently, we project the company’s T&D segment order book and
activity is expected by PGCIL and state utilities, providing
                                                               revenues will grow to | 6245 crore (14% CAGR in FY11E-13E) and | 3,457
attractive opportunities for KPTL
                                                               crore (18% CAGR in FY11E-13E), respectively. The segment is expected
                                                               to continue to dominate KPTL’s revenues (~89% of total in FY13E).
                                                                Exhibit 11: T&D segment expected to account for ~90% of standalone revenues in FY11E-13E

                                                                                 4,000                                                                     100
                                                                                                                                                   89
                                                                                                                                        88
                                                                                 3,000   89           87             84         87                         90
                                                                                                              88
                                                                     (| Crore)



                                                                                 2,000                                                                     80




                                                                                                                                                                 (%)
                                                                                 1,000                                                                     70


                                                                                    0                                                                      60
                                                                                          FY07       FY08     FY09   FY10   FY11E      FY12E     FY13E


                                                                                                 T&D Revenue-LHS            Share in Total Revenue - RHS

                                                                Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                            Page 53
ICICI Securities Limited

                                                               Asset ownership: Moving up the value chain
                                                               KPTL is trying to move up the value chain from being an EPC contractor
                                                               to an asset owner. With a consolidated net worth of over | 1,000 crore,
   The company has achieved financial closure of its first
                                                               the company is pre-qualified to bid for large BOOT projects. It has
   power transmission BOOT project. KPTL plans to expand its
                                                               secured three PPP projects till date, one each in the domestic power
   BOOT portfolio over the next few years
                                                               transmission, roads and highways (by subsidiary JMC Projects) and
                                                               logistics (by subsidiary Shree Shubham Logistics Ltd) sectors. According
                                                               to the management, KPTL plans to secure two or three power
                                                               transmission BOOT projects over the next few years.
                                                               Recently, KPTL achieved financial closure of the transmission BOOT
                                                               project of SPV (Jhajjar JT Transco Pvt Ltd). It is for a 400 KV, 100 km
                                                               power transmission line project secured from Haryana Vidyut Prasaran
                                                               Nigam. The | 450-crore project will be executed by KPTL and Techno
                                                               Electric (51% stake of the former in the JV) over a period of 18 months.
                                                               Exhibit 12: Details of BOOT project

                                                               Location                                    Jharli-Bawana (Haryana)
                                                               Project Cost                                |450 crore
                                                               Grant                                       |92 crore
                                                               Debt                                        | 270 crore
                                                               Equity contrinution                         | 90 crore
                                                               Concession Period                           25 years
                                                               Length & Voltage                            100 kms -400Kv
                                                               Annutiy to be received                      | 54 crore
                                                               Terminal Value                              20 months rentals

                                                               Source: Company, ICICIdirect.com Research



                                                               Sufficient funding to finance BOOT projects due to QIP receipts
                                                               In Q1FY11, KPTL raised | 450 crore from equity dilution through the QIP
Although currently small in scale, KPTL’s oil & gas pipeline   route. The objective of the QIP was to finance capex for a new
EPC business has high growth potential                         transmission line facility, equity requirements of existing and future BOOT
                                                               projects and investment in subsidiaries. Hence, we believe funding will
                                                               not be a constraint in case KPTL secures any new BOOT projects in the
                                                               near future.
                                                               Big potential from oil & gas pipeline business
                                                               Pipeline network addition by domestic oil & gas companies is expected to
                                                               grow strongly during the next few years fuelled by the current low
                                                               penetration of pipelines in India, high growth of natural gas usage and the
                                                               recent oil & gas discoveries. This opens up an opportunity of over |
                                                               45,000 crore over the next few years as pipeline laying contracts of
                                                               ~10,000 km are expected to be offered by domestic public and private
                                                               sector companies (KPTL estimates).
                                                               KPTL has a presence in this sector and has laid 1,800 km of pipelines over
                                                               the last five years. It has secured large projects from Bharat Oman
                                                               Refinery, GAIL, HPCL-Mittal Energy JV and OIL India in recent years.
                                                               Although the segment contribution in the order book is currently low at
                                                               7.5% in Q3FY11, we believe the segment holds attractive growth
                                                               prospects given the scale of investment planned. The management is also
                                                               eyeing opportunities in the international markets in addition to executing
                                                               projects across the full value chain of the oil & gas pipeline business
                                                               (upstream and downstream).




     ICICIdirect.com | Equity Research
                                                                                                                                     Page 54
ICICI Securities Limited

                                                               Diversified infra exposure through subsidiary JMC Projects…
                                                               Through its listed subsidiary, JMC Projects, KPTL has an exposure
                                                               towards opportunities in the civil construction space in factories &
                                                               building, power, roads & bridges and railways sectors. With an order book
                                                               of | 4,300 crore, JMC Projects enjoys strong sales visibility (book-to-bill
                                                               ratio of 3.4x). Fuelled by the robust growth of domestic infrastructure
                                                               spending, the company’s order book has grown to | 4300 crore in
 Strong performance expected from JMC Projects in FY11E-       Q3FY11 (vs. | 1,162 crore in FY07).
 12E                                                           JMC Projects has been awarded toll-road concessions by NHAI in
                                                               Haryana. The project was secured by the JV of JMC and Srei
                                                               Infrastructure (51:49, respectively) in March 2010, to construct a four-lane
                                                               highway in the Rohtak-Bawal section in Haryana under NHDP-III. The
                                                               project cost is | 1000 crore with a concession period of 27 years,
                                                               including the construction period of three years. The EPC portion of the
                                                               project is placed with JMC and is included in the current order backlog.
                                                               The JV has achieved financial closure of the project to the tune of | 820
                                                               crore. The remaining will be contributed in the form of equity wherein the
                                                               share of JMC would be pegged at | 60 crore.

                                                               Exhibit 13: Project details of BOOT project

                                                               Rhotak- Bawal Project
                                                               Highway & NHDP Phase                            NH-71 & NHDP III
                                                               Length                                          83 Kms
                                                               Total Project cost                              | 995 crore

                                                               Debt Funding                                    | 820 crore

                                                               Equity Funding                                  | 175 crore

                                                               JMC 's stake in JV                              51%

                                                               Source: Company, ICICIdirect.com Research


                                                               The management is bullish on the growth prospects of this business and
                                                               expects to achieve 25-30% topline growth in FY11E-FY12E and margin
                                                               expansion. The margins are expected to expand driven by the higher
                                                               diversity of the company’s order book (as opposed to mainly the factories
                                                               and building sector earlier – that had low margins).


Exhibit 14: Trend in order backlog                                                        Exhibit 15: Order backlog as of Q3FY11

                                                                    4,300
                   4,400                                                                                                               16%

                                                       3,100
                   3,300
       (| crore)




                                   2,088                                                                      47%
                   2,200                     1,809
                           1,162
                   1,100
                                                                                                                                             37%

                      0
                           FY07    FY08      FY09      FY10        9MFY11
                                                                                                   Power             Roads & Water           Factories & Buildings

Source: Company, ICICIdirect.com, Research                                                Source: Company, ICICIdirect.com, Research




   ICICIdirect.com | Equity Research
                                                                                                                                                          Page 55
ICICI Securities Limited

                                     …and further diversification through logistics subsidiary
                                     KPTL has a small presence in the logistics sector through its subsidiary,
                                     Shri Shubham Logistics Ltd (SSLL). In FY10, SSLL accounted for ~3% of
                                     the consolidated revenues. We believe SSLL has robust growth and
                                     margin expansion potential. In addition to the 190,000 MT storage area
                                     spread across 12 locations in Gujarat and Rajasthan, SSLL has signed an
                                     agreement with Rajasthan State Warehousing Corporation (RSWC) to
                                     manage the latter’s 38 warehouses across the state (total capacity of
                                     405,000 MT). Thus, SSLL will get access to RSWC’s large warehousing
                                     facilities at relatively low capex. Additionally SSLL plans to set up
                                     warehouses in Madhya Pradesh and Maharashtra.
                                     According to management estimates, SSLL is expected to clock revenues
                                     of | 150 crore in FY11E (vs. | 88 crore in FY10) and generate positive PBT
                                     margins of 5% (vs. –6% in FY10). For 9MFY11, SSLL clocked revenues of
                                     | 90 crore while PBT and PAT stood at | 2 crore and | 1.6 crore,
                                     respectively.




 ICICIdirect.com | Equity Research
                                                                                                       Page 56
ICICI Securities Limited

                                     Risks and concerns

                                     Lower profitability due to rupee appreciation
                                     KPTL’s profitability is exposed to fluctuations in foreign currency due to
                                     the high share of overseas projects in the overall order book (~40%).
                                     Margin contraction due to higher commodity prices
                                     With ~20-25% of the order book on a fixed price basis, the company’s
                                     margins are susceptible to volatility in commodity prices. In FY10, steel
                                     and zinc accounted for ~45% of the total raw material expenses.
                                     High working capital requirements
                                     KPTL has high working capital requirements (42.5% of net sales in FY10)
                                     due to high share of government projects in the order book (back
                                     payment and high proportion of retention money). Majority of borrowings
                                     constitute working capital loans. Hence, a higher-than-expected rise in
                                     interest rates would result in higher interest expenses and lower
                                     profitability.
                                     Increased competition
                                     The company’s margins could come under pressure due to higher
                                     competition in the sector. KPTL’s competitions (domestic and
                                     international) have in the past bid aggressively for PGCIL and state utilities
                                     projects.
                                     Other risks
                                     Since the projects undertaken by KPTL have a relatively long gestation
                                     period, risk of lower-than-expected revenues exists from execution
                                     delays. Factors that can result in delays include unavailability of skilled
                                     manpower, external factors like right of way, natural calamities, change in
                                     government regulations, etc.




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                                                                                                          Page 57
ICICI Securities Limited

                                                         Financials

                                                         Revenues to grow at 15% in FY10-13E
                                                         We estimate standalone revenues will grow at 15% CAGR in FY10-13E to
                                                         | 3,902 crore driven by the strong order book position of KPTL (TTM
                                                         book-to-bill ratio of 1.8x in Q3FY11) and positive outlook for new orders.
                                                         The T&D segment is expected to continue to dominate standalone
                                                         revenues with a share of 89% in FY13E. We project the company’s order
                                                         book will grow at 10% CAGR in FY10-13E to | 6,625 crore.
Standalone revenues are expected grow at 15% CAGR         Exhibit 16: Revenues to grow at 16% CAGR in FY10-13E
over FY10-FY13E to | 3902 crore. Transmission revenues
are expected to be at 89% of overall revenues                             5,000

                                                                                                                                                                      3,902
                                                                          4,000
                                                                                                                                                          3,329
                                                              .


                                                                                                                                               2,856
                                                                          3,000                                           2,596
                                                              (| Crore)




                                                                                                                1,882               1,956
                                                                          2,000                         1,738
                                                                                              1,524

                                                                          1,000


                                                                                      0
                                                                                              FY07      FY08    FY09      FY10     9MFY11      FY11E      FY12E       FY13E

                                                          Source: Company, ICICIdirect.com Research




                                                         EBITDA margin to sustain at current levels
                                                         We have modelled stable EBITDA margins in the 11-11.5% range in FY10-
                                                         13E. In our view, the margins are sustainable given the projects in the
                                                         order book and with KPTL bidding for only those projects that fulfil the
                                                         minimum return criteria. Also, as of Q3FY11, 75-80% of the order book
                                                         has price variation clause built in it exposing it to only 20% rise in
                                                         commodity prices. We believe this will keep margins at 11-11.5% over
                                                         FY10-13E.
 We expect EBITDA margins to be in the range of           Exhibit 17: KPTL expected to maintain EBITDA margins in 11.5-12% range
11.5% over FY10-13E. Though the company has
exposure to international projects, only 25% of the                                              17.1
                                                                                      500                                                                      20.0
order book is exposed to a rise in commodity prices
                                                                                                         14.1
                                                                                      375                       10.8     11.7     11.4                         15.0
                                                                                                                                            10.6       10.6
                                                                          (| crore)




                                                                                      250                                                                      10.0
                                                                                                                                                                      (%)




                                                                                      125                                                                      5.0

                                                                                          0                                                                    0.0
                                                                                                FY07     FY08   FY09     FY10     FY11E     FY12E      FY13E

                                                                                              EBITDA (LHS)              EBITDA Margins (RHS)

                                                          Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                                     Page 58
ICICI Securities Limited

                                                          PAT expected to grow at 14% CAGR over FY10-13E
                                                          With a pick-up in execution in FY12E and FY13E due to a pick-up in order
                                                          inflow and commissioning of new capacity, we expect the profitability to
                                                          pick up. We have built in 15% YoY and 20% YoY PAT growth for FY12E
                                                          and FY13E.
                                                          Exhibit 18: PAT to grow at 14% CAGR over FY10-13E

                                                                          300
                                                                                                                                                                  255
                                                                          250
                                                                                                                                                  212
                                                                          200                                                    184
                                                                                                    171




                                                              .
                                                                          150                                  129.01

                                                              (| crore)
                                                                                    94
                                                                          100

                                                                           50

                                                                            0
                                                                                    FY09           FY10       9MFY11            FY11E             FY12E          FY13E


                                                          Source: Company, ICICIdirect.com Research




                                                          Return ratios to decline in FY11E-13E
                                                          We expect return ratios (RoCE and RoNW) to decline in FY11E as a result
                                                          of the equity dilution during the year (raised | 450 crore in Q1FY11 under
                                                          the QIP route) and higher leverage levels. Borrowings could increase
                                                          further due to higher working capital requirements with the execution of
                                                          BOOT projects.
Recent fund raising via QIP would lead to dilution and
would pressurise the return ratios for FY12E and FY13E.
                                                           Exhibit 19: Return ratios expected to decline in FY11E-13E on higher capital and borrowings
We have built in RoEs of 12.6% and 13.6% in FY12E and
                                                                            50
FY13E, respectively

                                                                                           39.4
                                                                            38


                                                                            25        35.3           21.6
                                                                  (%)




                                                                                                                               18.7
                                                                                                               13.7                        14.6           13.6      14.5
                                                                            13                     21.3                    17.2
                                                                                                              11.8                         14.3           12.6          13.6

                                                                                0
                                                                                    FY07          FY08      FY09        FY10           FY11E        FY12E        FY13E

                                                                                                            RoCE          RoNW

                                                           Source: Company, ICICIdirect.com Research




     ICICIdirect.com | Equity Research
                                                                                                                                                                 Page 59
ICICI Securities Limited

                                                      Valuations
                                                      At the CMP of | 135/share, the stock is trading at 11.3x and 9.8x FY11E
We have valued the core business at | 133 per share
                                                      and FY12E earnings, respectively. With reasonable sales visibility,
(80% weight to FY12E with a multiple of 10x and 20%
                                                      continued traction in domestic and international orders and higher capex
weight to FY12E book value at 1x) and also added |
                                                      by domestic oil & gas companies, we estimate standalone revenues and
14/share arising out of JMC’s stake (67%). The SOTP
                                                      PAT will grow at a 15% and 14% CAGR, respectively, over FY11E-13E.
target works out to | 147/share
                                                      We have valued the stock at | 147/share. We are initiating coverage on
                                                      the stock with ADD rating.
                                                      We have valued the core business at | 133 per share (80% weight to
                                                      FY12E with a multiple of 10x and 20% weight to FY12E book value at 1x)
                                                      and also added | 14/share arising out of JMC’s stake (67%). The SOTP
                                                      target works out to | 147/share. We have ascribed lower earnings multiple
                                                      to KPTL as the present macro headwinds and recent dilution that the
                                                      company has done will be RoE dilutive in the medium term.

                                                      Exhibit 20: Valuation for KPTL
                                                      KPTL                                                                                                              Bull Case                                Base Case                                        Bear Case
                                                      (| per share)
                                                      FY12E EPS                                                                                                                   13.8                                         13.8                                           13.8
                                                      FY12E BV                                                                                                                   115.3                                        115.3                                          115.3

                                                      FY12E Target P/E Multiple (x)                                                                                                  12                                                10                                             8
                                                      FY12E Target P/BV Multiple (x)                                                                                                1.1                                                 1                                           0.8

                                                      Holdco discount for JMC                                                                                                      10                                              20                                            30
                                                      Per share value of JMC in KPTL                                                                                               15                                              14                                            12
                                                      SOTP Target as per construct                                                                                                181                                             147                                           113
                                                      Upside potential (%)                                                                                                        34.1                                            9.0                                         -16.1
                                                      Source: Company, ICICIdirect.com Research




                                                       Exhibit 21: P/E Band Chart
                                                                        400


                                                                        300
                                                            (|/share)




                                                                        200


                                                                        100


                                                                         0
                                                                                                Nov-04




                                                                                                                                                                                                                                                                                    Nov-10
                                                                              Mar-04
                                                                                       Jul-04


                                                                                                         Feb-05
                                                                                                                  Jun-05
                                                                                                                           Sep-05
                                                                                                                                    Jan-06


                                                                                                                                                      Aug-06
                                                                                                                                             May-06



                                                                                                                                                                        Mar-07
                                                                                                                                                                                 Jul-07
                                                                                                                                                                                          Oct-07
                                                                                                                                                                                                   Feb-08
                                                                                                                                                                                                            Jun-08
                                                                                                                                                                                                                     Sep-08



                                                                                                                                                                                                                                                Aug-09
                                                                                                                                                               Dec-06




                                                                                                                                                                                                                              Jan-09
                                                                                                                                                                                                                                       May-09


                                                                                                                                                                                                                                                         Dec-09
                                                                                                                                                                                                                                                                  Apr-10
                                                                                                                                                                                                                                                                           Jul-10


                                                                                                                                                                                                                                                                                             Mar-11




                                                                                                                               Price                           5.0x                       10.0x                          15.0x                           20.0x

                                                       Source: Company, ICICIdirect.com Research




  ICICIdirect.com | Equity Research
                                                                                                                                                                                                                                                                           Page 60
ICICI Securities Limited


                                     Exhibit 22: P/BV band chart

                                         700
                                         600
                                         500
                                         400
                                         300
                                         200
                                         100
                                           0



                                               Apr-05




                                                                           Apr-06




                                                                                                      Apr-07




                                                                                                                                  Apr-08




                                                                                                                                                              Apr-09




                                                                                                                                                                                         Apr-10
                                                         Aug-05

                                                                  Dec-05



                                                                                    Aug-06

                                                                                             Dec-06



                                                                                                               Aug-07

                                                                                                                         Dec-07



                                                                                                                                           Aug-08

                                                                                                                                                     Dec-08



                                                                                                                                                                       Aug-09

                                                                                                                                                                                Dec-09



                                                                                                                                                                                                  Aug-10

                                                                                                                                                                                                           Dec-10
                                                                                    Share Price                     1x                2x                 3x                4x                5x


                                     Source: Company, ICICIdirect.com Research




                                      Exhibit 23: EV/EBITDA band chart

                                                       7000
                                                       6000
                                                       5000
                                           (| crore)




                                                       4000
                                                       3000
                                                       2000
                                                       1000
                                                           0
                                                               Nov-06




                                                               Nov-08




                                                               Nov-10
                                                                Jul-04
                                                               Oct-04
                                                               Feb-05



                                                               Dec-05
                                                               Apr-06
                                                                Jul-06

                                                               Feb-07



                                                               Dec-07
                                                               Apr-08
                                                                Jul-08

                                                               Feb-09
                                                               Jun-09

                                                               Dec-09
                                                               Apr-10
                                                                Jul-10

                                                               Feb-11
                                                               Mar-04




                                                               May-05
                                                               Sep-05




                                                               May-07
                                                               Sep-07




                                                               Sep-09
                                                                              EV                  5.0x                    8.0x                      10.0x                   13.0x                   16.0x


                                      Source: Company, ICICIdirect.com Research




 ICICIdirect.com | Equity Research
                                                                                                                                                                                                       Page 61
ICICI Securities Limited


                                     Exhibit 24:Profit & loss account*
                                     | Crore                                             FY09       FY10   FY11E   FY12E   FY13E
                                     Total Revenues                                     1,882      2,596   2,856   3,329   3,902
                                     Growth (%)                                            8.3      37.9    10.0    16.6    17.2
                                     Op. Expenditure                                    1,679      2,292   2,524   2,942   3,440
                                     EBITDA                                               204        304     332     388     461
                                     Growth (%)                                         -17.1       49.1     9.3    16.7    19.0
                                     Depreciation                                           27        38      46      52      66
                                     EBIT                                                 176        266     286     335     395
                                     Interest                                               87        80      82      93     102
                                     Other Income                                           31        42      50      51      60
                                     Extraordinary Item                                      0         0       0       0       0
                                     PBT                                                  121        228     254     293     353
                                     Growth (%)                                         -40.2       88.7    11.5    15.4    20.4
                                     Tax                                                    26        57      70      81      98
                                     Other items                                             0         1       0       0       0
                                     Rep. PAT before MI                                     94       171     184     212     255
                                     Adjustments                                             0         0       0       0       0
                                     Adj. Net Profit                                        94       171     184     212     255
                                     Growth (%)                                         -37.1       81.7     7.5    15.0    20.4
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




                                     Exhibit 25:Balance sheet*
                                     | Crore                                             FY09       FY10   FY11E   FY12E   FY13E
                                     Equity Capital                                        27         27      31      31      31
                                     Reserves & Surplus                                   810        962   1,559   1,739   1,956
                                     Shareholder's Fund                                   837        988   1,590   1,770   1,987
                                     Borrowings                                           485        513     647     727     767
                                     Unsecured Loans                                      169         92      92      92      92
                                     Deferred Tax Liability                                13         14      14      14      14
                                     Source of Funds                                    1,504      1,606   2,343   2,603   2,859
                                     Gross Block                                          359        471     471     586     686
                                     Less: Acc. Depreciation                              101        136     182     235     301
                                     Net Block                                            258        335     289     352     385
                                     Capital WIP                                           10          4     118     104     104
                                     Net Fixed Assets                                     268        338     407     455     489
                                     Intangible Assets                                      0          0       0       0       0
                                     Investments                                          127        127     423     423     423
                                     Cash                                                  45         37     436     450     473
                                     Trade Receivables                                    977      1,322   1,228   1,563   1,661
                                     Loans & Advances                                     312        428     523     719     852
                                     Inventory                                            237        269     283     396     469
                                     Total Current Asset                                1,926      2,385   2,851   3,570   3,964
                                     Current Liab. & Prov.                                816      1,243   1,339   1,846   2,017
                                     Net Current Asset                                  1,109      1,141   1,512   1,724   1,947
                                     Expenses not W/O                                       0          0       0       0       0
                                     Application of Funds                               1,504      1,606   2,343   2,603   2,859
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




 ICICIdirect.com | Equity Research
                                                                                                                           Page 62
ICICI Securities Limited

                                     Exhibit 26:Cash flow statement*
                                     | Crore                                             FY09       FY10   FY11E   FY12E    FY13E
                                     Net Profit before Tax                                121        228     254     293      353
                                     Other Non Cash Exp                                     0          0       0       0        0
                                     Depreciation                                          27         38      46      52       66
                                     Direct Tax Paid                                       26         57      70      81       98
                                     Other Non Cash Inc                                    31         42      50      51       60
                                     Other Items                                           87         80      82      93      102
                                     CF before change in WC                               178        247     262     306      364
                                     Inc./Dec. In WC                                     -423        -40      29    -198     -200
                                     CF from Operations                                  -245        207     291     108      164
                                     Pur. of Fix Assets                                   -71       -106    -115    -100     -100
                                     Pur. of Inv                                           21          0    -297       0        0
                                     Other Items                                           31         42      50      51       60
                                     CF from Investing                                    -19        -63    -362     -49      -40
                                     Inc./(Dec.) in Debt                                  329        -50     134      80       40
                                     Inc./(Dec.) in Net Worth                               0          0     439       0        0
                                     Others                                              -111       -106    -103    -125     -140
                                     CF from Financing                                    218       -157     470     -45     -100
                                     Opening Cash Balance                                  89         45      37     436      450
                                     Closing Cash Balance                                  45         37     436     450      473
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




                                     Exhibit 27:Key ratios*
                                                                                         FY09       FY10   FY11E   FY12E    FY13E
                                     Raw Material (%)                                    54.3       44.5    46.5    47.9     47.9
                                     Employee Expenditure (%)                             5.8        6.2     6.7     6.1      6.0
                                     Effective Tax Rate (%)                              21.7       25.1    27.5    27.7     27.7

                                     Profitability Ratios (%)
                                     EBITDA Margin                                       10.8       11.7    11.6    11.6     11.8
                                     PAT Margin                                           5.0        6.6     6.4     6.4      6.5

                                     Per Share Data (|)
                                     Revenue per share                                  142.1      195.9   186.1   216.9    254.2
                                     Book Value                                          63.2       74.6   103.6   115.3    129.5
                                     Cash per share                                       3.4        2.8    28.4    29.3     30.9
                                     EPS                                                  7.1       12.9    12.0    13.8     16.6
                                     Cash EPS                                             9.2       15.8    15.0    17.2     20.9
                                     DPS                                                  1.5        1.7     1.2     1.8      2.2
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




 ICICIdirect.com | Equity Research
                                                                                                                           Page 63
ICICI Securities Limited

                                     Exhibit 28:Key ratios*
                                     Return Ratios (%)                                   FY09       FY10    FY11E    FY12E     FY13E
                                     RoNW                                                11.8       18.7     14.3     12.6      13.6
                                     ROCE                                                13.7       17.2     14.6     13.6      14.5
                                     ROIC                                                 4.8        9.1      7.0      6.9       7.6
                                     Financial Health Ratio
                                     Operating CF (| Cr)                                 -245        207      291      108       164
                                     FCF (| Cr)                                          -316        101      177         8        64
                                     Cap. Emp. (| Cr)                                   1,492      1,592    2,329    2,588     2,845
                                     Debt to Equity (x)                                    0.8        0.6      0.5      0.5       0.4
                                     Debt to Cap. Emp. (x)                                 0.4        0.4      0.3      0.3       0.3
                                     Interest Coverage (x)                                 2.0        3.3      3.5      3.6       3.9
                                     Debt to EBITDA (x)                                    3.2        2.0      2.2      2.1       1.9
                                     DuPont Ratio Analysis
                                     PAT/PBT (%)                                         78.3       74.9     72.5     72.3      72.3
                                     PBT/EBIT (%)                                        68.3       85.7     88.7     87.3      89.3
                                     EBIT/Net Sales (%)                                   9.4       10.2     10.0     10.1      10.1
                                     Net Sales/Total Asset (x)                            1.4        1.7      1.4      1.3       1.4
                                     Total Asset/NW (x)                                   1.8        1.6      1.5      1.5       1.4



                                     Working Capital                                     FY09       FY10    FY11E    FY12E    FY13E
                                     Working Cap./Revenues (%)                           58.9       44.0     52.9     51.8     49.9
                                     Inventory turnover                                  37.9       35.6     35.3     37.2     40.4
                                     Debtor turnover                                    157.8      161.6    162.9    153.0    150.8
                                     Creditor turnover                                   98.9      110.1    125.7    135.5    142.0
                                     Current Ratio                                        2.4         1.9     2.1      1.9      2.0



                                     FCF Calculation (| crore)                           FY09       FY10    FY11E    FY12E     FY13E
                                     EBITDA                                               204        304      332      388       461
                                     Less: Tax                                             26         57       70       81        98
                                     NOPLAT                                               178        247      262      306       364
                                     Capex                                                -71       -106     -115     -100      -100
                                     Change in working cap.                              -423        -40       29     -198      -200
                                     FCF                                                 -316        101      177        8        64



                                     Valuation                                           FY09       FY10    FY11E    FY12E     FY13E
                                     PE (x)                                              18.9       10.5     11.3      9.8       8.1
                                     EV/EBITDA (x)                                       13.2         8.7     7.1      6.3       5.3
                                     EV/Sales (x)                                         1.4         1.0     0.8      0.7       0.6
                                     Dividend Yield (%)                                   1.1         1.3     0.9      1.3       1.6
                                     Price/BV (x)                                         2.1         1.8     1.3      1.2       1.0
                                     Source: Company, ICICIdirect.com Research, *Standalone financials




 ICICIdirect.com | Equity Research
                                                                                                                              Page 64
ICICI Securities Limited

Initiating Coverage
                                                                                                                                                                                     March 31, 2011
Rating Matrix
Rating                                            :        Buy
                                                                                                                         KEC International Limited (KECINT)
Target                                            :        | 97
                                                                                                                                                                                              | 82
Target Period                                     :        12 months                                  Global aspirations…
Potential Upside                                  :        18%
                                                                                                      KEC International Ltd (KEC) is rapidly improving its competitive
YoY Growth (%)                                                                                        positioning by undertaking strategic M&As and boosting capabilities to
                                                                                                      execute larger size T&D projects. With the positive global
                                                FY10             FY11E         FY12E          FY13E   macroeconomic environment, strong tendering activity expected from
Total Revenue                                   14.0              18.5          25.0           18.4   PGCIL and state utilities and higher focus on the American market, we
EBITDA                                          34.9              20.9          20.6           19.5
                                                                                                      project KEC will post robust growth of the order book (23% in FY10-13E
Net Profit                                      62.4              12.8          16.6           25.7
                                                                                                      to | 10,711 crore) and revenues (21% to | 6,853 crore). We are initiating
Current & Target Multiple (x)                                                                         coverage on the stock with a BUY rating.
                                                FY10             FY11E         FY12E          FY13E
PE                                              11.1               9.9           8.5            6.7   Robust growth in orders: Banking on domestic and international markets
EV/ EBITDA                                       7.3               6.4           5.6            4.2   KEC has the second-largest global manufacturing capacity in transmission
P/BV                                             2.7               2.2           1.8            1.5   towers (post acquisition of SAE Towers). With strong domestic tendering
Target P/E                                      11.7              10.3           8.9            7.0
                                                                                                      activity expected in Q4FY11E and FY12E-FY13E and traction in Middle
Target EV/ EBITDA                                 7.2              6.8           5.8            4.8
Target P/BV                                      2.8               2.3           1.9            1.5
                                                                                                      East and Africa transmission orders, we expect robust growth of KEC’s
                                                                                                      order book in FY12E-13E. KEC’s acquisition of SAE Towers (leadership
Stock Metrics
                                                                                                      position in Americas) strengthens the former’s market position and client
Bloomberg Code                                                                              KECI:IN   base in large developed markets (as opposed to its earlier focus on
Reuters Code                                                                            KECL.NS       emerging markets). Consequently, we project KEC’s consolidated order
Face Value (|)                                                                                    2   book and revenues will grow to | 10,711 crore (23% CAGR in FY10-13E)
Promoters Holding                                                                           41.7      and | 6,853 crore (21% CAGR in FY10-13E), respectively.
Market Cap (| crore)                                                                       1,902
52 week H/L                                                                             117.6/73
                                                                                                      Capabilities enhancement initiatives
Sensex                                                                                    17,900      KEC enjoys a robust competitive positioning due to its captive supplies of
Average volumes                                                                           71,228      cables (merger with RPG Cables business in Q3FY10) and strategic
Price movement                                                                                        acquisitions (Jay Signalling – now undertakes full range of railway infra
                                                                                                      projects). These capabilities allow KEC to bid aggressively for projects.
    8000                                                                                      150     Lastly, in our view, KEC could become a formidable player in the T&D EPC
    6000                                                                                              space having recently secured its largest substation segment order till
                                                                                              100     date in Kazakhstan.
    4000
    2000
                                                                                              50      Valuations
       0                                                                                      0       At the CMP of | 82, the stock is trading at a P/E of 9.7x and 8.3x on
                                                                                                      FY11E and FY12E EPS, respectively. With higher T&D orders in India and
                                                                 Nov-10
                                      Jun-10
                                               Jul-10
           Jan-10
                    Feb-10
                             Apr-10



                                                        Sep-10


                                                                          Dec-10
                                                                                   Feb-11




                                                                                                      abroad, increasing focus on non-power related businesses, strong
                                                                                                      execution capabilities and stable EBITDA margins, we project KEC’s
                             Nifty(|)                     Share Price (|)                             consolidated revenues and EPS will grow at 21% and 18% CAGR in
Comparable return matrix (%)
                                                                                                      FY10-13E, respectively. We have valued the stock at 10x FY12E EPS to
                                                                                                      arrive at a fair value of | 97/share. We are initiating coverage on the
                                         1M               3M                  6M              12M     stock with a BUY rating.
Jyoti Structures                          0.4            -16.4               -18.6              -31
KEC International                         5.4             -5.6                -9.4            -24.1
Kalpataru Power                           8.6            -17.6               -25.9            -36.1   Exhibit 1: Key Financials*
                                                                                                      (| Crore)                                  FY09        FY10           FY11E   FY12E    FY13E
Crompton Greaves                        -8.6             -26.2              -17.8              -1.2
                                                                                                      Total Revenues                            3,429       3,908           4,631   5,789    6,853
Areva T&D                               -9.4             -10.4                -4.7              3.9   EBITDA                                      302         407             492     593      709
Analyst’s name                                                                                        Net Profit                                  117         190             214     249      314
                                                                                                      PE (x)                                     17.3        11.1             9.9     8.5      6.7
 Chirag Shah
                                                                                                      Target PE (x)                              20.5        13.1            11.7    10.0      8.0
 shah.chirag@icicisecurities.com
                                                                                                      EV/EBITDA (x)                                9.7         7.3            6.4     5.6      4.2
                                                                                                      P/BV (x)                                     3.6         2.7            2.2     1.8      1.5
 Sanjay Manyal
                                                                                                      RoNW (x)                                   22.2        28.2            24.5    23.4     24.1
 sanjay.manyal@icicisecurities.com
                                                                                                      RoCE (%)                                   24.6        27.6            22.9    21.4     22.6
                                                                                                      Source: Company, ICICIdirect.com Research, *Consolidated financials




   ICICIdirect.com | Equity Research
  ICICI Securities Limited

Shareholding pattern (Q3FY11)
                                                                                 Company Background
Promoters                                                                41.7
                                                                                 Established in 1945, KEC International Ltd (KEC) is one of India’s leading
Institutional Investors                                                  43.1    EPC players in the infrastructure engineering space. With an order book of
Public                                                                    10.7   | 8,000 crore (Q3FY11), the company undertakes projects in the power
Others                                                                     4.5   transmission, power distribution, railways and telecom sectors. KEC has a
                                                                                 sizable international presence after executing power transmission projects
Promoter & Institutional holding trend (%)                                       in over 20 countries. International projects constituted over 54% of the
                                                                                 total order book in Q3FY11.

        60
                                                                                 The company’s revenues have grown at 23% CAGR in FY06-10 to | 3,908
                42 45              42 44          42 43          42 43           crore driven by robust international expansion and higher power sector
        45
        30
                                                                                 spending in India. In Q3FY11, transmission projects accounted for ~72%
  (%)




        15
                                                                                 of the order book (including SAE Towers), followed by the power systems
                                                                                 (20%), railways (5%) and cables (2%) segments. The company has the
         0
                Q4FY10            Q1FY11        Q2FY11       Q3FY11
                                                                                 capability to undertake turnkey transmission line projects up to 800 KV
                                                                                 and design and engineering of substations up to 500 KV.
          Promoters                    Institutional Investors
                                                                                 FY10-11 has been marked by a series of events that have strengthened
                                                                                 KEC’s manufacturing capabilities. These include the acquisition of the US-
                                                                                 based SAE Towers (largest lattice tower manufacturer in the Americas),
                                                                                 merger with RPG Cables (formation of cables SBU) and acquisition of Jay
                                                                                 Signalling Pvt. Ltd. (adding capabilities for railways signalling projects).
                                                                                 Headquartered in Mumbai, the company has staff strength of 3,200
                                                                                 personnel. It was acquired by the RPG Group in 1982.
             Exhibit 2: Robust growth of KEC’s revenues in FY06-10                                   Exhibit 3: Order book stood at | 8,000 crore in Q3FY11

                                                                                         3,908                                                                8,000
                               4,000                                                                                         8,000
                                                                                 3,429
                                                                         2,815                                                                       5,707
                               3,000                                                                                         6,000           5,163
                                                          2,041                                                                      4,200
                                                                                                                 (| Crore)
                   (| Crore)




                               2,000       1,728                                                                             4,000

                               1,000                                                                                         2,000

                                  0                                                                                             0
                                           FY06           FY07           FY08    FY09    FY10                                        FY08    FY09    FY10     9MFY11



             Source: Company, ICICIdirect.com Research                                               Source: Company, ICICIdirect.com Research




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                                                                                                                                                               Page 66
ICICI Securities Limited

   Exhibit 4: Event Timeline

                                                                                                                                        Acquisition of SAE Towers


                                  First Indian company to                                                                             Merger of RPG Cables and KEC
                                     secure a railways            First 400 KV line
                                                                                                                                          – Cables SBU formed
         Establishment of          electrification project         project in India          First 765 KV tower
                KEC                                                   executed                 project in India
                                                                                                                                      Largest tower testing station
                                                                                                                                        (1,200 KV) inaugurated in
                                                                                                                                                Nagpur

                1945         1960          1961          1968          1975           1982         1999           2007         2010




                         Secured first            Full EPC transmission       Acquired by RPG          Telecom, railways and
                          international          line project secured in           Group                  distribution SBU
                        order from New                    Sudan                                                formed
                             Zealand


   Source: Company, ICICIdirect.com Research




 ICICIdirect.com | Equity Research
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ICICI Securities Limited

                                                                    Investment Rationale

                                                                    Strong sales visibility; robust order inflows likely from India and abroad
KEC’s order book is projected to grow at 23% CAGR in                With an order book of | 8,000 crore (Q3FY11), KEC enjoys strong sales
FY10-13E to | 10,711 crore driven by higher order inflows           visibility (TTM book-to-bill ratio of 1.8x). We expect robust order intake in
from domestic and overseas markets                                  FY12E-FY13E driven by higher tendering activity by PGCIL and state
                                                                    utilities to meet their XIth and XIIth Plan targets along with a positive
                                                                    outlook for T&D projects in Africa and the Middle East. KEC’s acquisition
                                                                    of SAE Towers in Q2FY11 provides the former a leading position in the
                                                                    lucrative Americas market in addition to a strong client base – providing
                                                                    attractive opportunities for KEC to grow its order book. Lastly, the railway
                                                                    sector is expected to emerge as a sunshine sector with the company’s
                                                                    enhanced capabilities. It will be in a position to undertake the entire
                                                                    gamut of railway sector infra projects with a recent strategic acquisition.
                                                                    We project KEC’s order book will grow at 23% CAGR in FY10-13E to |
                                                                    10,711 crore dominated by the power transmission sector. Consequently,
                                                                    revenues are estimated to grow at 21% CAGR in FY10-13E to | 6,853
                                                                    crore.
   Exhibit 5: KEC’s order book projected to grow at 23% CAGR in FY10-13E to Exhibit 6: …driving revenues at a 21% CAGR in FY10-13E to | 6,853
   | 10,711 crore…                                                          crore

                 12,000                                                    10,711                           7,500                                                         6853
                                                                  10,080
                                                        8,687                                                                                                      5789
                                                                                                            6,000
                     9,000
                                                                                                                                                          4631
                                                                                                .




                                            5,707                                                           4,500                           3908
                     6,000     5,163                                                                                                 3429
                                                                                                (| crore)




                                                                                                                                                   2978
         (| Crore)




                                                                                                                           2815
                                                                                                            3,000
                                                                                                                    2041
                     3,000
                                                                                                            1,500
                        0
                               FY09         FY10       9MFY11E    FY11E    FY12E                               0
                                                                                                                    FY07   FY08      FY09   FY10 9MFY11EFY11E FY12E FY13E

   Source: Company, ICICIdirect.com Research                                             Source: Company, ICICIdirect.com Research


 Exhibit 7: Order backlog in terms of business verticals (Q3FY11)                        Exhibit 8: Geographical diversification of order book (Q3FY11)

                                                                                                                    Central Asia &
                          Substation &      Railways
                                                                                                                       Africa
                         power systems         5%
                                                                                                                         20%
                             19%

                                                                                                                                                      South Asia
                             Cables                                                                                                                      47%
                                                                                                                    MENA
                              4%                                                                                     15%
                                                            Transmission
                                                                63%
                                      SAE                                                                                    America
                                      9%                                                                                      18%


 Source: Company, ICICIdirect.com, Research                                              Source: Company, ICICIdirect.com, Research




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                                                                                                                                                                    Page 68
ICICI Securities Limited

                                                              Well-placed to secure domestic transmission orders…
                                                              KEC is currently executing over 30 projects each for PGCIL and state
                                                              utilities and private sector clients. With a strong domestic client base and
                                                              execution capabilities and substantial power sector spending planned, we
                                                              believe the company is well placed to capitalise on the domestic
                                                              opportunity. In Q3FY11, the domestic order book in the power
                                                              transmission segment constituted ~46% (including power systems,
                                                              cables and railways) of the overall order book.
                                                              In H1FY11, the domestic order intake was subdued due to bunching of
A pick-up in tendering activity is expected in FY12E-FY13E    orders by KEC’s key client, PGCIL, in the second-half of year. In Q3FY11,
from PGCIL and state utilities                                we have already seen traction in order intake with KEC securing large
                                                              projects from Rajasthan Rajya Vidyut Prasaran Nigam (| 313 crore), PGCIL
Heightened activity was already seen in Q3FY11 with KEC       (two projects worth | 265 crore), Parbati Koldam Transmission Company
securing several orders from state utilities and PGCIL. KEC   (| 95 crore), etc. Furthermore, we expect a strong order intake in FY12E
has also bagged significant orders from the international     as PGCIL and state utilities award contracts to meet their XI Plan targets.
markets
                                                              Lastly, the company is scouting for opportunities in South Asian countries
                                                              (Nepal, Bangladesh and Bhutan) in the T&D space. We expect these
                                                              countries to award large projects over the next few years.
                                                              Exhibit 9: Share of KEC in PGCIL orders across different segments


                                                                        18       16.6
                                                                        16                                                                                           14.4
                                                                        14              12.6                                                        12.8
                                                                                                                                                            11.7
                                                                        12
                                                                        10
                                                                  (%)




                                                                        8
                                                                        6
                                                                        4
                                                                                                                  1.7     1.5
Till YTD FY11, KEC has witnessed robust order inflows to                2
the tune of | 5660 crore. Majority of the growth for KEC                0
has come in from the international markets and                                          FY09                            FY10                               9MFY11
acquisition of SAE Towers (order backlog at $160 million                                                      Tower Package
                                                                                                              Towers, Rural Electrification & Others
as of Q3FY11)                                                                                                 Substations

                                                              Source: Company, ICICIdirect.com Research




    Exhibit 10: Recent order wins by KEC in the domestic T&D markets
                                                                    Order Size
     Date       Project                                             (| Crore)    Project Detail                                                                    Status
     Jan-11     PGCIL, India                                            173      Transmission Lines                                                                Under Execution
     Jan-11     PGCIL, India                                            166      Transmission Lines                                                                Under Execution

     Dec-10     Rajasthan Rajya Vidyut Prasaran Nigam                   313       Construction of 765 kV Transmission line                                         Under Execution

     Dec-10     PGCIL, India                                            130      Supply & Construction of 765 kV single circuit transmission line                  Under Execution

     Nov-10     PGCIL, India                                            135      Transmission line orders on turn key basis                                        Under Execution

     Nov-10     Parbati Koldam Transmission Company                      95      Transmission line orders on turn key basis                                        Under Execution

    Source: Company, ICICIdirect.com Research




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                                                                                                                                                                     Page 69
ICICI Securities Limited

                                                                  …strongly placed to secure orders in Middle East and Africa too
KEC’s traditional overseas markets of Middle East and
                                                                  The international transmission segment has been a major focus area for
Africa are expected to invest US$60 billion in 2007-15 in
                                                                  KEC (~54% of the total order book in Q3FY11). The company has been
the power transmission sector – a substantial market
                                                                  undertaking transmission projects mainly in the Middle East, Africa and
opportunity for transmission tower manufacturers
                                                                  Central Asia for over 60 years. Currently, it is executing projects in over 20
                                                                  countries.
                                                                  With the improved global macroeconomic environment, stable
                                                                  commodity prices and massive power sector capex, KEC has enjoyed
                                                                  robust order inflows from the Middle East and Africa from FY10-YTD
                                                                  FY11. These include several repeat orders from existing clients. With
                                                                  transmission sector capex in the Middle East and Africa pegged at a
                                                                  whopping US$60 billion in 2007-15 (as per industry sources), a large
                                                                  opportunity exists for transmission line manufacturers.
   Exhibit 11: Traction in transmission line projects from Africa and Middle East in FY10-YTD FY11
                                                                       Worth
   Date       Project                                                 (| Crore)   Project Details                                                               Status
                                                                                   The first order is for 21 substations of voltage levels of 1150 KV, 500 KV &
              Kazakhstan Electricity Grid Operating Company                       220 KV. The second order is for 17 substations of voltage levels 500 KV, 220
   Jan-11     (KEGOC)                                                   942       KV & 110 KV.                                                                  Under Execution


   Aug-10     Bhutan Power Corporation(BPC), Bhutan                        62     First order for 200kv substation in SAARC region outside India.             NA
                                                                                  Electrification in 7 blocks, providing connections to approx 22000 below
   Nov-09     Madhya Kshetra Vidyut Vitaran Company Ltd                    74     poverty line families.                                                      NA
   Nov-09     Volta River Authority,Ghana                                  40     Construction of 161 KV substation                                           NA

   Nov-09     Maharashtra State Electricity Distribution Co Ltd         132       Electrification works under infrastructure plan phase-II A project          NA
   Source: Company, ICICIdirect.com Research, *Client name not available


                                                                  …and higher focus on Americas through SAE acquisition
                                                                  With the acquisition of the US-based tower manufacturer SAE Towers in
                                                                  Q2FY11, KEC is expected to increase its focus on the relatively developed
                                                                  markets of North America and Latin America. This is in contrast to its
                                                                  earlier focus on emerging economies with fast growing power sector
                                                                  spending. SAE Towers is one of the largest tower manufacturers in North
                                                                  America and Latin America. It has an annual manufacturing capacity of
                                                                  100,000 MT (Mexico 35,000 MT, Brazil 65,000 MT). With the integration of
                                                                  SAE, KEC has become the world’s second-largest transmission tower
                                                                  manufacturer with a manufacturing capacity of 250,000 MT/annum.
                                                                  The acquisition opens up large transmission sector market opportunities
                                                                  for KEC in North America and Latin America (estimated at US$162 billion
                                                                  in 2007-15) in addition to margin expansion opportunities (SAE has
                                                                  EBITDA margins of 14% vs. ~10% for KEC). KEC plans to increase the
Acquisition of SAE Towers opens up the lucrative                  capacity utilisation of SAE from the current 60% to 100% over the next
Americas market to KEC. Additionally, SAE Towers                  three years. Margin expansion is possible fuelled by higher utilisation
generates ~14% EBITDA margins (vs. ~10% for KEC)                  rates, operational synergies and cost savings in procurement and
                                                                  administration functions.
                                                                  The fruits from the acquisition are already visible with KEC recently
                                                                  securing a large transmission line project from the Canada-based E&C
                                                                  player SNC Lavalin (total project value of | 735 crore; executable over the
                                                                  next five years).




  ICICIdirect.com | Equity Research
                                                                                                                                                                   Page 70
ICICI Securities Limited

            Exhibit 12: KEC’s international focus expands to large Americas markets with acquisition of SAE Towers


                                                                       Year 2007-15 (US$ bn)*                                       Year 2016-30 (US$ bn)*
             Region                            Capacity (GW)          Generation            Transmission           Capacity (GW)   Generation          Transmission
             North America                                 215              379                     121                      480       1,136                  238
             Europe                                        221              457                      93                      465       1,048                    94
             Pacific                                       78               146                      65                      163        283                     71
             E.Europe/Eurasia                              137              180                      55                      159        274                     51
             Asia                                          781              794                     433                    1,170       1,379                  596
             Middle East                                   78                59                      32                      160        135                     71
             Africa                                        59                59                      28                       91        159                     47
             Latin America                                 121              123                      41                      149        230                     72
             Total                                     1,691              2,197                     867                    2,837       4,644                 1,239
            Source: Company, ICICIdirect.com Research, *Estimated investment expected in the generation and transmission sector


                                                                 Largest-ever substation projects secured in Kazakhstan in Q4FY11
                                                                 KEC also undertakes projects related to substations (up to 500 KV) and
                                                                 rural electrification. In Q3FY11, the segment accounted for ~19% of the
                                                                 total order book. With the government increasing its budget allocation for
                                                                 rural electrification under RGGVY and KEC’s success in securing
                                                                 substation projects in India and abroad, we have a positive outlook for
                                                                 FY11E-13E.
                                                                 In Q4FY11, KEC secured its largest substation segment order till date from
                                                                 Kazakhstan Electricity Grid Operating Co (KEGOC) valued at | 942 crore.
The KEGOC substation order can position KEC as a turnkey         The order has been secured in consortium with a local player and is for
supplier catering to the T&D space –there is a large             supply of 38 substations (varying voltage levels up to 1,150 KV)
domestic opportunity for such players in the XII Plan            executable over 33 months. In our view, successful execution of this large
ordering                                                         project will position KEC as a turnkey supplier catering to the T&D sector
                                                                 (substantial opportunities for such players in the XII Plan when key
                                                                 domestic clients shift to EPC ordering). Till date, KEC has executed
                                                                 relatively smaller scale substation projects in India and abroad.
                                                                 Additionally, till YTD FY11, the company has secured two projects from
                                                                 PGCIL for constructing 400 KV substations in West Bengal and Orissa.




     ICICIdirect.com | Equity Research
                                                                                                                                                        Page 71
ICICI Securities Limited

                                                            Capabilities to cater to entire gamut of railway infra sector projects
Captive cable supplies set apart KEC from its competitors   In our view, KEC is well placed to secure railways sector orders given the
(Jyoti Structures and Kalpataru Power Transmission)         capabilities gained (signalling work) following the acquisition of Jay
                                                            Railways Signalling in Q2FY11. KEC is now an integrated player catering
                                                            to the entire gamut of railway sector infra projects (ranging from civil
                                                            infrastructure and track work, railway electrification and signalling work).
                                                            Currently, the company has an order visibility of | 450 crore (including
                                                            composite railway construction and overseas contracts in Malaysia).
                                                            Aggressive capex plans of Indian Railways on electrification of rail
                                                            network, expansion of track length and implementation of metro rail
                                                            projects in major cities provide attractive opportunities for companies like
                                                            KEC.
                                                            Captive source of cable requirements add to competitive advantage
                                                            We believe KEC’s captive capabilities to manufacture high and low-
                                                            tension power cables and telecom and railways cables provide it a natural
                                                            edge vis-à-vis competitors in bidding for projects. This advantageous
                                                            position stems from the merger of RPG Cables with KEC in Q3FY10. With
                                                            a positive demand outlook for cables (| 77,000 crore in XI Plan) driven by
                                                            increased underground cable laying projects, 3G network rollout
                                                            (increased fibre optic cables demand), and export opportunities in the
                                                            Middle East and Africa, we expect strong traction in cable segment
                                                            revenues in FY11E-13E.
                                                            KEC plans to set up a greenfield facility in Baroda, Gujarat at a capex of |
                                                            120 crore over the next two years. Currently, the company has three
                                                            manufacturing facilities in Mysore, Thane and Silvassa.
                                                             Exhibit 13: KEC has large captive cable manufacturing capabilities
                                                             Type                                                                 Installed Capacity
                                                             High tension power cables                                                    1,000 km
                                                             Telecom & Railway Cables
                                                                 - Jelly filled Telecom                                                1.2mm CKM
                                                                 - Optic fibre cables                                                 0.36mm CKM
                                                                 - LT power cables                                                        5,000 km
                                                                 - Railway cables                                                         1,000 km
                                                                 - Instrumentation cables                                                 2,400 km
                                                             Low tension power cables                                                    10,000 km
                                                             Source: Company, ICICIdirect.com Research


                                                            Increasing focus on telecom towers business
                                                            KEC has leveraged its strength in transmission towers for offering telecom
                                                            services like turnkey telecom sites using angular, tubular and hybrid
                                                            towers to operators and tower management companies. Currently, the
                                                            company is managing ~400 telecom sites on a build operate & own
                                                            (BOO) basis in Chhattisgarh, Meghalaya and Mizoram. Going forward, it is
                                                            well poised to enjoy robust growth in the telecom segment on account of
                                                            new tower demand from 3G and BWA services.




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                                                                                                                                           Page 72
ICICI Securities Limited

                                     Risks and concerns
                                     Forex risk
                                     With KEC’s sizable international operations (~54% of order book in
                                     Q3FY11), the company is vulnerable to lower revenues and profitability
                                     due to the appreciation of the rupee against major international
                                     currencies.
                                     Fluctuations in commodity price
                                     Commodities (steel, zinc and copper) accounted for ~40% of the total
                                     raw material costs in FY10 (standalone entity). With majority of overseas
                                     projects secured by KEC being fixed cost contracts, the company’s
                                     profitability could decline due to higher commodities prices. As of
                                     Q3FY11, 30% of the overall order book is fixed price contracts and is
                                     exposed to fluctuations in commodity price.
                                     Operations in potentially sensitive geographies
                                     With KEC executing a significant proportion of its projects in potentially
                                     sensitive geographies (Africa, Middle East, Central Asia), the company’s
                                     projects could face execution delays due to terrorist attacks, political
                                     unrests, sudden changes in regulatory policies and labour laws (w.r.t.
                                     foreign companies), etc. Any of the above scenarios could result in lower-
                                     than-expected revenues and earnings for the company. As of Q3FY11, |
                                     30 crore of orders each are based in the troubled areas of Middle East and
                                     North Africa i.e. Egypt and Libya
                                     High working capital requirements
                                     KEC has high working capital requirements (21% of net sales in FY10) as
                                     majority of its domestic clients are government entities (back payment
                                     and high proportion of retention money). Working capital requirements
                                     are funded by the company through borrowings. A higher-than-expected
                                     rise of interest rate in could result in higher interest expenses for KEC
                                     (and lower profitability).
                                     Other factors
                                     Since transmission projects have long gestation periods, certain factors
                                     like manpower shortage, natural calamities, lower infra investment due to
                                     economic slowdown, etc. could result in lower-than-expected project
                                     execution and order intake for the company.




 ICICIdirect.com | Equity Research
                                                                                                       Page 73
ICICI Securities Limited

                                     Financials

                                     Revenues to grow at 21% CAGR in FY 10-13E
                                     With an order book of | 8,000 crore, KEC enjoys strong sales visibility
                                     (TTM book-to-bill ratio of 1.8x). With a positive outlook for order inflows in
                                     FY12E-FY13E across segments (transmission, power system, railways,
                                     etc) and the company’s strong execution capabilities, we project
                                     consolidated revenues will grow at a 21% CAGR in FY10-13E to | 6,853
                                     crore. KEC’s order book is projected to grow at 23% CAGR in FY10-13E to
                                     | 10,711 crore.
                                      Exhibit 14: KEC’s consolidated revenues to grow at 21% CAGR in FY10-13E

                                                           7,500                                                                                                                                                    6853

                                               .                                                                                                                                                        5789
                                                           6,000

                                                                                                                                                                                         4631
                                               (| crore)



                                                           4,500                                                                                  3908
                                                                                                                           3429
                                                                                                    2815                                                                 2978
                                                           3,000
                                                                              2041

                                                           1,500


                                                                 0
                                                                              FY07                  FY08                   FY09                   FY10               9MFY11E             FY11E         FY12E        FY13E

                                      Source: Company, ICICIdirect.com Research




                                     Exhibit 15: Trend in order backlog and book to bill ratio

                                               2.1                                                                                                                                                          10000
                                                                                                                                                                                                   1.8
                                               1.9                                                                                                                                                          9000
                                               1.7                                                                                                                                                          8000
                                                                     1.6                                                                                       1.6              1.4       1.7
                                               1.5                                  1.5            1.5            1.5                           1.5
                                                                                                                                 1.4                                                                        7000
                                               1.3                                                                                                                   1.4
                                         (x)




                                                                                                                                                                                                                    (| crore)
                                                                                                                                                                                                            6000
                                               1.1
                                               0.9                                                                                                                                                          5000
                                               0.7                                                                                                                                                          4000
                                               0.5                                                                                                                                                          3000
                                                            Q1FY09

                                                                           Q2FY09

                                                                                          Q3FY09

                                                                                                         Q4FY09

                                                                                                                        Q1FY10

                                                                                                                                       Q2FY10

                                                                                                                                                      Q3FY10

                                                                                                                                                                     Q4FY10

                                                                                                                                                                                Q1FY11

                                                                                                                                                                                          Q2FY11

                                                                                                                                                                                                   Q3FY11




                                                                                      Order backlog                                                                       Book to Bill Ratio

                                     Source: Company, ICICIdirect.com Research




 ICICIdirect.com | Equity Research
                                                                                                                                                                                                            Page 74
ICICI Securities Limited

                                     Stable EBITDA margins expected in FY11E-13E
                                     We have modelled stable EBITDA margins at ~10.4-10.6% over FY11E-
                                     13E. Our confidence stems from the margins expected on current
                                     projects in the order book and price variation clause on domestic projects
                                     (~70% of the overall order book carries price variation clause). Integration
                                     of SAE Towers provides an upside to our assumptions as the company
                                     generates higher margins (~14%) than KEC.
                                     However, KEC’s margins could come under pressure due to intense
                                     industry competition (aggressive bidding for projects) and significantly
                                     higher commodity prices (30% of overall order book come is fixed price
                                     contracts).
                                      Exhibit 16: EBITDA margins expected to sustain at ~10% in FY11E-13E


                                                                                                                                  709      14.0

                                                .
                                                            750
                                                                                                                          593
                                                                                                                                           12.5
                                                            575                                                     492
                                                (| Crore)

                                                                                             407
                                                                            355                                                            11.0




                                                                                                                                                  (%)
                                                            400                      302                 310.0
                                                                   253
                                                            225                                                                            9.5


                                                            50                                                                             8.0
                                                                   FY07     FY08    FY09     FY10        9MFY11 FY11E     FY12E   FY13E

                                                                          EBITDA              EBITDA Margins - RHS


                                      Source: Company, ICICIdirect.com Research



                                     Return ratios to decline in FY11E due to higher borrowings
                                     We expect the return ratios (RoCE and RoNW) to decrease in FY11E as a
                                     result of higher borrowings to fund the acquisition of SAE Towers (entire
                                     acquisition price of US$95 million funded through debt). Nevertheless,
                                     KEC’s return ratios are expected to remain higher than peers (Jyoti
                                     Structures and Kalpataru Power).
                                      Exhibit 17: High RoCE and RoNW expected to be generated
                                                            55.0
                                                                     45.6          44.9
                                                            45.0


                                                            35.0
                                              (%)




                                                                     37.2          37.8
                                                                                                  24.6             28.2
                                                                                                                          22.9          23.4        24.1
                                                            25.0
                                                                                                                   27.6   24.5
                                                                                              22.2                                                  22.6
                                                                                                                                        21.4
                                                            15.0
                                                                     FY07          FY08           FY09           FY10     FY11E      FY12E          FY13E


                                                                                           RoCE             RoNW

                                      Source: Company, ICICIdirect.com Research




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ICICI Securities Limited

                                                           Valuations

We have valued the core business at | 97 per share (80%    At the CMP of | 82, the stock is trading at a P/E of 9.7x and 8.3x in FY11E
weight to FY12E with a multiple of 11x and 20% weight to   FY12E earnings, respectively. With higher T&D orders in India and abroad,
FY12E book value at 1.2x)                                  strong execution capabilities and stable EBITDA margins (SAE Tower
                                                           acquisition will add to the margin profile for KEC), we project KEC’s
                                                           consolidated revenues and EPS will grow at 21% and 18% CAGR in FY10-
                                                           13E, respectively. The company also offers the best return ratios in the
                                                           sector. The RoEs are expected to be in the range of 23-24% over FY10-
                                                           13E. We rate KEC as our top pick in the sector with a return potential of
                                                           18% over 12-18 months time frame.
                                                           We have valued the core business at | 97 per share (80% weight to FY12E
                                                           with a multiple of 11x and 20% weight to FY12E book value at 1.3x). The
                                                           key downside risk apart from the macro headwinds would be lengthening
                                                           of the political crisis in the MENA region causing slippages to the existing
                                                           order book and inflow of fresh orders from that region.


                                                           Exhibit 18: Valuation for KEC
                                                           KEC                                                                                    Bull Case                      Base Case                        Bear Case
                                                           (| per share)
                                                           FY12E EPS                                                                                       9.7                                 9.7                            9.7
                                                           FY12E BV                                                                                       45.5                                45.5                           45.5

                                                           FY12E Target P/E Multiple (x)                                                                     13                                 11                                9
                                                           FY12E Target P/BV Multiple (x)                                                                   1.5                                1.3                              1.1

                                                           Targets as per construct                                                                       126                                   97                             69
                                                           Upside potential (%)                                                                           53.8                                18.5                          -16.3
                                                           Source: Company, ICICIdirect.com Research




                                                           Exhibit 19: P/E band chart

                                                                           250

                                                                           200

                                                                           150
                                                               (|/Share)




                                                                           100

                                                                           50

                                                                            0
                                                                                                   Nov-06




                                                                                                                                                                                                                           Nov-10
                                                                                                                                                 May-08




                                                                                                                                                                            May-09
                                                                                 Mar-06

                                                                                          Jul-06



                                                                                                             Mar-07

                                                                                                                      Jun-07

                                                                                                                               Oct-07

                                                                                                                                        Feb-08



                                                                                                                                                          Sep-08

                                                                                                                                                                   Jan-09



                                                                                                                                                                                     Sep-09

                                                                                                                                                                                               Dec-09



                                                                                                                                                                                                                 Aug-10
                                                                                                                                                                                                        Apr-10




                                                                                                                                                                                                                                    Mar-11




                                                                                                            Price              4.0x               8.0x                12.0x                   16.0x               20.0x

                                                           Source: Company, ICICIdirect.com Research




     ICICIdirect.com | Equity Research
                                                                                                                                                                                                                          Page 76
ICICI Securities Limited
                                     Exhibit 20: P/BV band chart


                                         300.0

                                         250.0

                                         200.0

                                         150.0

                                         100.0

                                          50.0

                                           0.0




                                                                                                                                    Apr-08


                                                                                                                                                  Sep-08


                                                                                                                                                                Feb-09
                                                                   Aug-06
                                                      Mar-06




                                                                                  Jan-07


                                                                                                    Jun-07


                                                                                                                  Nov-07




                                                                                                                                                                                  Jul-09


                                                                                                                                                                                                Dec-09


                                                                                                                                                                                                                  May-10


                                                                                                                                                                                                                                 Oct-10


                                                                                                                                                                                                                                                Mar-11
                                                                                           Share Price                              2x                 3x                  4x                    5x                        6x


                                     Source: Company, ICICIdirect.com Research




                                      Exhibit 21: EV/EBITDA band chart

                                                      6500
                                                      5500
                                                      4500
                                          (| crore)




                                                      3500
                                                      2500
                                                      1500
                                                         500
                                                       -500
                                                                                                                           Nov-07
                                                               Mar-06




                                                                                                                                             May-08


                                                                                                                                                               Dec-08
                                                                                                                                                                         Mar-09


                                                                                                                                                                                             Sep-09
                                                                        Jul-06
                                                                                 Oct-06
                                                                                           Jan-07
                                                                                                      Apr-07
                                                                                                               Aug-07


                                                                                                                                    Feb-08


                                                                                                                                                      Aug-08




                                                                                                                                                                                    Jun-09


                                                                                                                                                                                                         Jan-10
                                                                                                                                                                                                                  Apr-10
                                                                                                                                                                                                                            Jul-10
                                                                                                                                                                                                                                      Oct-10
                                                                                                                                                                                                                                               Feb-11
                                                                                               EV                       3.0x                   5.0x                      7.0x                   9.0x                        11.0x

                                      Source: Company, ICICIdirect.com Research




 ICICIdirect.com | Equity Research
                                                                                                                                                                                                                                     Page 77
ICICI Securities Limited
                                     Exhibit 22: Profit & loss account*
                                     | Crore                                              FY09       FY10    FY11E     FY12E     FY13E
                                     Total Revenues                                      3,429      3,908    4,631     5,789     6,853
                                     Growth (%)                                           21.8       14.0     18.5      25.0      18.4
                                     Op. Expenditure                                     3,128      3,501    4,140     5,196     6,144
                                     EBITDA                                                302        407      492       593       709
                                     Growth (%)                                          -14.9       34.9     20.9      20.6      19.5
                                     Depreciation                                           23         27       40        54        65
                                     EBIT                                                  279        380      452       539       644
                                     Interest                                              100         86      119       175       187
                                     Other Income                                            0          0        0         0         0
                                     PBT                                                   179        293      332       364       458
                                     Growth (%)                                          -31.8       64.2     13.3       9.6      25.7
                                     Tax                                                    62        104      110       115       144
                                     Rep. PAT before adj.                                  117        190      222       249       314
                                     Adjustments                                             0          0       -8         0         0
                                     Adj. Net Profit                                       117        190      214       249       314
                                     Growth (%)                                          -32.2       62.4     12.8      16.6      25.7
                                     Source: Company, ICICIdirect.com Research, *Consolidated financials




                                     Exhibit 23: Balance sheet*
                                     | Crore                                              FY09       FY10    FY11E     FY12E     FY13E
                                     Equity Capital                                         49         51        51        51        51
                                     Reserves & Surplus                                    509        736       910     1,118     1,380
                                     Shareholder's Fund                                    558        787       962     1,170     1,431
                                     Borrowings                                            584        776     1,398     1,498     1,598
                                     Unsecured Loans                                        38         11        11         6         6
                                     Deferred Tax Liability                                 30         46        46        46        46
                                     Source of Funds                                     1,210      1,620     2,417     2,720     3,082
                                     Gross Block                                           383        584       584       784       864
                                     Less: Acc. Depreciation                                70         92       119       160       211
                                     Net Block                                             313        492       465       624       653
                                     Capital WIP                                            54         41       241       121       121
                                     Net Fixed Assets                                      368        533       706       746       775
                                     Intangible Assets                                     194        187       173       160       146
                                     Investments                                             0          0         0         0         0
                                     Cash                                                  141         70       266       289       380
                                     Trade Receivables                                   1,866      1,962     2,535     2,935     3,496
                                     Loans & Advances                                      303        396       474       594       708
                                     Inventory                                             226        250       482       374       446
                                     Total Current Asset                                 2,536      2,677     3,757     4,192     5,031
                                     Current Liab. & Prov.                               1,888      1,778     2,495     2,653     3,146
                                     Net Current Asset                                     648        900     1,262     1,539     1,885
                                     Misc expense not W/O                                    0          0       276       276       276
                                     Application of Funds                              1,209.7    1,619.9   2,417.3   2,720.2   3,081.6
                                     Source: Company, ICICIdirect.com Research, *Consolidated financials




 ICICIdirect.com | Equity Research
                                                                                                                                Page 78
ICICI Securities Limited

                                     Exhibit 24: Cash flow statement*
                                     | Crore                                             FY09       FY10    FY11E   FY12E    FY13E
                                     Net Profit before Tax                                179        293      324     364      458
                                     Other Non Cash Exp                                     0          0        0       0        0
                                     Depreciation                                          23         27       40      54       65
                                     Direct Tax Paid                                       62        104      110     115      144
                                     Other Non Cash Inc                                     0          0        0       0        0
                                     Other Items                                          100         86     -156     175      187
                                     CF before change in WC                               240        303       98     478      565
                                     Inc./Dec. In WC                                       81       -323     -166    -254     -255
                                     CF from Operations                                   321        -20      -68     225      310
                                     Pur. of Fix Assets                                  -146       -191     -200     -80      -80
                                     Pur. of Inv                                            0          0        0       0        0
                                     CF from Investing                                   -146       -191     -200     -80      -80
                                     Inc./(Dec.) in Debt                                   30        165      623      95      100
                                     Inc./(Dec.) in Net Worth                             -10          2        0       0        0
                                     Others                                              -129       -123     -159    -216     -239
                                     CF from Financing                                   -109         44      464    -121     -139
                                     Opening Cash Balance                                  68        141       70     266      289
                                     Closing Cash Balance                               141.1       69.8    265.9   289.3    380.4
                                     Source: Company, ICICIdirect.com Research, *Consolidated financials




                                     Exhibit 25: Key ratios*
                                      Y-o-Y Growth (%)                                   FY09       FY10    FY11E   FY12E    FY13E
                                     Total Revenues                                       21.8      14.0     18.5    25.0     18.4
                                     EBITDA                                              -14.9      34.9     20.9    20.6     19.5
                                     Adj. Net Profit                                     -32.2      62.4     12.8    16.6     25.7
                                     Cash EPS                                            -29.1      48.7     17.3    19.5     24.5
                                     Net Worth                                            12.7      41.0     22.2    21.6     22.3
                                     Source: Company, ICICIdirect.com Research




                                     Exhibit 26: Key ratios*
                                                                                         FY09       FY10    FY11E   FY12E    FY13E
                                     Raw Material (%)                                    57.6       51.5     50.7    51.1     51.4
                                     Employee Expenditure (%)                             4.1        4.3      6.8     7.0      7.0
                                     Effective Tax Rate (%)                              34.6       35.3     33.9    31.5     31.5

                                     Profitability Ratios (%)
                                     EBITDA Margin                                         8.8       10.4    10.6    10.3     10.4
                                     PAT Margin                                            3.4        4.9     4.6     4.3      4.6

                                     Per Share Data (|)
                                     Revenue per share                                  139.0      152.0    180.2   225.2    266.6
                                     Book Value                                          22.6       30.6     37.4    45.5     55.7
                                     Cash per share                                       5.7        2.7     10.3    11.3     14.8
                                     EPS                                                  4.7        7.4      8.3     9.7     12.2
                                     Cash EPS                                             5.7        8.4      9.9    11.8     14.7
                                     DPS                                                  1.0        1.2      1.3     1.4      1.7
                                     Source: Company, ICICIdirect.com Research, *Consolidated financials




 ICICIdirect.com | Equity Research
                                                                                                                            Page 79
ICICI Securities Limited

                                     Exhibit 27: Key ratios*
                                     Return Ratios (%)                                   FY09       FY10    FY11E    FY12E     FY13E
                                     RoNW                                                22.2       28.2     24.5     23.4      24.1
                                     ROCE                                                24.6       27.6     22.9     21.4      22.6
                                     ROIC                                                 7.5        9.8      7.4      7.8       8.6
                                     Financial Health Ratio
                                     Operating CF (| Cr)                                  321        -20      -68      225       310
                                     FCF (Rs Cr)                                          175       -211        16     145       230
                                     Cap. Emp. (| Cr)                                   1,180      1,574    2,371    2,674     3,035
                                     Debt to Equity (x)                                    1.1        1.0      1.5      1.3       1.1
                                     Debt to Cap. Emp. (x)                                 0.5        0.5      0.6      0.6       0.5
                                     Interest Coverage (x)                                 2.8        4.4      3.8      3.1       3.5
                                     Debt to EBITDA (x)                                    2.1        1.9      2.9      2.5       2.3
                                     DuPont Ratio Analysis
                                     PAT/PBT (%)                                         65.4       64.7     66.1     68.5      68.5
                                     PBT/EBIT (%)                                        64.1       77.2     71.7     67.6      71.1
                                     EBIT/Net Sales (%)                                   8.1        9.7      9.8      9.3       9.4
                                     Net Sales/Total Asset (x)                            3.0        2.8      2.3      2.3       2.4
                                     Total Asset/NW (x)                                   2.2        2.1      2.5      2.3       2.2



                                     Working Capital                                     FY09       FY10    FY11E    FY12E     FY13E
                                     Working Cap./Revenues (%)                           18.9       23.0     27.2     26.6      27.5
                                     Inventory turnover                                  23.0       22.2     28.9     27.0      21.9
                                     Debtor turnover                                    175.5      178.9    177.3    172.5     171.3
                                     Creditor turnover                                  165.4      166.5    163.6    157.7     149.9
                                     Current Ratio                                         1.3        1.5     1.5      1.6       1.6



                                     FCF Calculation (| crore)                           FY09       FY10    FY11E    FY12E     FY13E
                                     EBITDA                                               302        407      492      593       709
                                     Less: Tax                                             62        104      110      115       144
                                     NOPLAT                                               240        303      382      478       565
                                     Capex                                               -146       -191     -200      -80       -80
                                     Change in working cap.                                81       -323     -166     -254      -255
                                     FCF                                                174.7     -210.6     16.2    144.6     229.9



                                     Valuation                                           FY09       FY10    FY11E    FY12E     FY13E
                                     PE (x)                                              17.1       11.0      9.7      8.3       6.6
                                     EV/EBITDA (x)                                         9.6       7.3      6.3      5.6       4.1
                                     EV/Sales (x)                                         0.8        0.8      0.7      0.6       0.4
                                     Dividend Yield (%)                                   1.2        1.5      1.6      1.7       2.1
                                     Price/BV (x)                                         3.6        2.6      2.2      1.8       1.5
                                     Source: Company, ICICIdirect.com Research,*Consolidated financials




 ICICIdirect.com | Equity Research
                                                                                                                              Page 80
ICICI Securities Limited


RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;
Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

                                  Pankaj Pandey                                        Head – Research                                     pankaj.pandey@icicisecurities.com

                                                                        ICICIdirect.com Research Desk,
                                                                        ICICI Securities Limited,
                                                                        7th Floor, Akruti Centre Point,
                                                                        MIDC Main Road, Marol Naka,
                                                                        Andheri (East)
                                                                        Mumbai – 400 093

                                                                         research@icicidirect.com

ANALYST CERTIFICATION
We /I, Chirag Shah PGDBM, research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views
about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this
report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.


Disclosures:
ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading
underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of
companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities
generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts
cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and
meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without
prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and
employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities
from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities
policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This
report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their
receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific
circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate
the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any
loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the
risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to
change without notice.

ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received
compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment
banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three
months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific
transaction. It is confirmed that Chirag Shah PGDBM, research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding
twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business.

ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the
research report.

It is confirmed that Chirag Shah PGDBM, research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies
mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use
of information contained in the report prior to the publication thereof.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,
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described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and
to observe such restriction.




        ICICIdirect.com | Equity Research
                                                                                                                                                                                                     Page 81

				
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