Prabhudas Lilladher research has maintained outperformer rating on KEC International.

Prabhudas Lilladher research report on KEC International.

The company plans to merge RPG Transmission and NITEL (a group company) with itself and to also de-merge the investments into a separate company, MP Power Line Ltd (MPPL).

RPGT to be merged with KEC International. It would issue 4 shares of KEC International for every 9 shares of RPGT, ratio of 2.25. Total new shares to be issued 6.94 million

MPPL would hold 10.3% stake in RPGT, presently held by KEC International and would be separately listed. We believe the merger is positive for the company as it creates the largest transmission company in the world (as per the management) and also provides KEC the pre qualification to venture into the fast growing telecom infrastructure business.

Though for FY08, consolidation would take place only for a 6-month period as the merger is effective from the 1st October 2007, however from FY09 as full consolidation begins the transaction would be earnings accretive. At the CMP of Rs 585, it trades at 17.9x and 11.6x FY 08E and FY09E earnings. Maintain Outperformer. 

Valuation

We believe the merger is positive for KEC International as it creates the largest transmission company in the world and also provides KEC the prequalification to venture into the fast growing telecom infrastructure business. Though for FY08, consolidation would take place only for a 6-month period as the merger is effective from the 1st October 2007, however from FY09 as full consolidation begins the transaction would be earnings accretive. Our earnings estimates for KEC have been impacted by 7% for FY08 and increased by 15.8% for FY09. At the CMP of Rs 585, it trades at 17.9x and 11.6x FY08E and FY09E earnings. Maintain Outperformer.