Power transmission, distribution hold potential: Edelweiss

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Govt keen on private sector investment in power sector Bidding for transmission projects starts Govt invites tenders for power transmission projects Buy KEC International: Edelweiss Research ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 29/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news KEC International | Kalpataru Power Transmission | RPG Transmission |

Priyanko Panja of Edelweiss comments on the buzz in the power transmission space. According to him, the area, especially the power transmission and tower space has been languishing. However, in the next five years, one can look at approximately a 2.5 lakh crore investment in power transmission and distribution.

 

He also says that Edelweiss likes four companies specifically dedicated to power transmission towers on the project side of the space, namely KEC, Jyoti Structures, RPG Transmission and Kalpataru Power. He gives a buy recommendation on all four.

Excerpts from CNBC - TV18's exclusive interview with Priyanko Panja: 

Q: What's going for the sector now?

A: For quite some time we have seen the space languishing, especially the power transmission as well as the tower space. It looks tremendously secular for the intermediate as well as medium-term horizon.

If we take a look at 11th plan, then for the next five years we should be basically looking at something like 38,000-40,000 crore of opportunity for the tower makers on the projects as well as towers itself. What you are basically looking at is, next five years something like 2.5 lakh crore sort of investment in power transmission and distribution.

The reason why we like power transmission and distribution as a whole space more than a generation is contrary to popular perception that generation or lack of generating capacities what we lack, I think the fundamental problem in India is transmission and distribution and investments in the transmission and distribution space is likely to lead to a lot of traction going forward.

Q: Is it a kind of an opportunity which will spread out pretty secularly? Can you pick any stock in this basket and it would more or less make some money,or are a few companies best equipped to capitalize on this opportunityt?

A: The four companies that are specifically dedicated to this power transmission towers on the project side of the space is what we like. We have a buy recommendation on all four of them. We see a 30-35% growth opportunity for the next two years at least to start with.

Current visibility beyond that remains very intact on a very secular basis and I think that all these four companies will definitely do well from an India/ domestic market standpoint and as on a company-to-company basis as well based on the business models which takes them overseas.

Q: KEC International is the one that's been moving a lot - what do you see in that one in terms of order book and earnings visibility?

A: KEC - what we have seen the stock in terms of stock performance not happening for quite some time and one of the reasons have been improvement in margins which we were expecting for quite some time and not been happening. We have had significant improvement in margins; we have had KEC getting very aggressive on order accretion side, now specifically in Mid East as well as in India.

I think its all bunched up together that the stock has come back to reckoning. If you take a look at it based on our estimates, current stock price would be somewhere around 12 times for a company for 2008 for a company that's at 30% plus return ratios growing at 30%. So it's all got bunched up together that the stock has suddenly come into reckoning and so as the rest of the sector also. In the topical context of last seven days, KEC has outperformed the others but overall the space entirely looks good as such.

Q: What about Jyoti Structures ? What's the call on that?

A: We like Jyoti Structures specifically from a tower business per se. Its not doing anything different from what it has done in the past but it is scaling up capacities. It is now going into Mid East through a very innovative JV route and going forward obviously with better margins and with better growth prospects and a wider market that there will be catering to I think the company's performance will definitely be showing huge surprises from where we are today.

Q: Do you expect KEC and RPG to continue in their independent ways or is there a case for the group to re-look at these two businesses independently or some kind of consolidation?

A: Six months ago the resolution of putting these two companies together was resolved in RPG Transmission 's board meeting. So I am not sure ideally it would make sense for both the companies to be together in the sense as one entity. But then I think it is more of a management call rather than anything else at this point of time. In the interim we definitely do see some sort of fall out on account of that in valuations in terms of KEC as well as in RPG with respect to Jyoti and Kalpataru Power .