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FY09 will be difficult but earnings
outlook for FY10 has improved as steel
prices and interest rates come down
Stocks trading near trough. Stronger
order book, lower gearing and better
return ratios support higher valuation
Maintain OW(V) on Jyoti Structures and
UW(V) on KEC Int’l. Upgrade Kalpataru
Power to OW(V) from UW(V)
FY09 has been difficult for Indian transmission line
companies and we expect muted Dec-08 quarter results. But
earnings drivers are now turning positive for upside earnings
surprise in FY10 as 1) orders are flowing; 2) steel prices have
corrected substantially; and 3) interest rates are easing.
Jyoti Structures: we raise FY10e net profit by 10%.
Positives are stable EBITDA margin (11.8-12.0%),
better RoIC than peers and strong INR36bn order book.
Kalpataru Power: we raise FY10e net profit by 22%
(stand-alone). Exposure to fixed price contracts supports
consolidated y-o-y margin expansion of 100bps to
10.9% and net profit growth of 50% in FY10e.
KEC International: we raise FY10e net profit by 18%,
expect EBITDA margin to improve 260bps to 11.6%
and earnings growth of 60% in FY10e. Yet we expect
the stock to remain under pressure in the near term as we
forecast H2 FY09 earnings to fall 30% y-o-y.
We value stocks at near-trough PB and PE valuations even
though order book is stronger, gearing is lower and return
ratios are better than in the last downturn of FY02-FY03. We
believe improvement in profitability will come in FY10, but
expect near-term profitability (H2 FY09) to be muted.
The key risk is slowdown in order flows, re-negotiation of
existing orders and higher debt if debtor days increase.
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