MORNING INSIGHT

October 1, 2010

INITIATING COVERAGE
Sanjeev Zarbade sanjeev.zarbade@kotak.com +91 22 6621 6305

DIAMOND POWER INFRASTRUCTURE LTD (DPIL)

PRICE : RS.253 TARGET PRICE : RS.318 RECOMMENDATION: BUY FY11E P/E: 9.6X

DPIL is a virtually fully integrated player in the power distribution projects business. The company has captive facilities to manufacture conductors, cables (LT and HT), transmission towers and transformers. Shortly, the company will also commission its EHV cables plant. The company is mainly a play on the power T&D sector, which is expected to grow significantly in the foreseeable future. The stock is trading at attractive valuations of 9.6x and 7.9x FY11 and FY12 earnings respectively. We recommend a BUY with a target price of Rs.318 based on DCF.

Key Investment Rationale

Stock details
BSE code NSE code Market cap (Rs mn) Free float (%) 52-wk Hi/Lo (Rs) Avg. daily volume Shares o/s (mn) (Fully diluted) : 522163 : DIAPOWER : 8500 : 56 : 261/113 : 680000 : 37.24

q Play on the power T&D sector. Being a major consumer of cables and conductors, Power sector is the prime demand driver. While conductors are largely used in transmission lines, the demand for power cables arises at each stage in the chain of power sector. We see sustained growth in demand for conductors and cables as investment in transmission and distribution sector is envisaged to increase by 71% and 29% respectively in the XIIth plan over the XIth plan. q Integrated play in the power transmission and distribution segment provides control on project variables. With the acquisition of DPTL (Western Transformers) in 2007, DPIL has captive control on three critical power transmission and distribution products namely conductors, cables, transmission towers and transformers. With the proposed commissioning of EHV cables facility in Q4FY11, it will be virtually a fully integrated player in the power T&D segment. q Recently started trial runs on transmission tower facility and plans to commission EHV cables facility in Q4FY11. During Q1 FY11, DPIL has completed the expansion of its LT and HT cables capacity. The company is currently implementing the EHV cables facility. The transmission towers will mainly cater to the inhouse requirement of EPC projects in rural electrification. The demand for EHV cables is expected to grow tremendously in the coming years. A large part of the requirement would come from underground distribution cables that would replace overhead lines. Besides, industrial consumption from sectors like steel, cement, petroleum refineries, special economic zones, industrial parks, etc. would substantially drive demand for EHV cables. q Major capex to get completed in FY11. DPIL is at the fag end of a Rs 2.7 bn capex consisting of a expansion in LT/HT cables, transmission towers and EHV cables. Post this, the company will have adequate capacity for driving growth in the medium-term. The company has also strengthened its balance sheet by infusing funds worth Rs 1.5 bn through QIP and warrants. The funds will enhance the working capital of the company thus enabling it to bid for higher volume of project work. q Robust growth in profits. We forecast revenues to grow 66% and 25% in FY11 and FY12 respectively. We expect raw material prices to move in a narrow band. Consequently operating margins to be maintained over FY11 & FY12. Profit after tax is expected to grow 63% and 22% in FY11 and FY12 respectively.

Summary table - Consolidated

(Rs mn)

FY10 FY11E FY12E

Sales 8,477 14,025 17,476 Growth (%) 21.5 65.5 24.6 EBITDA 1,150 1,866 2,390 EBITDA margin (%) 13.6 13.3 13.7 Net profit 601 978 1,188 Net cash (debt) (2,930) (3,600) (4,190) EPS (Rs) (cons) 28.6 26.2 31.9 Growth (%) 6.5 62.6 21.5 CEPS 31.9 29.6 38.7 DPS (Rs) 0.0 0.0 0.0 ROE (%) 24.3 28.8 22.1 ROCE (%) 20.8 22.3 20.4 EV/Sales (x) 1.4 0.9 0.8 EV/EBITDA (x) 10.7 7.0 5.7 P/E (x) 8.8 9.6 7.9 P/Cash Earnings 7.9 8.5 6.5 P/BV (x) 1.8 1.7 1.4 FY10-11 Q2 Q3 Q4 Q1 Net Sales 1,726 2,099 2,953 3,816 EPS (Rs) 3.1 3.8 6.1 8.5 Source: Company & Kotak Securities Private Client Research

Valuation
DPIL is currently trading at 9.6x and 7.9x FY11 and FY12 earnings respectively. On a forward EV/EBITDA basis, the stock is trading at 7.0x. Our DCF based target works out to Rs.318

Kotak Securities - Private Client Research

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For Private Circulation

MORNING INSIGHT

October 1, 2010

Risks
n EPC projects are largely fix priced and there are liquidated damages for time overruns. Thus the company may have to incur higher costs due to material price escalation and penalties on delay in project completion. n The company does not have any operating history either in transmission towers or EHV cables. There may be a risk involving quality and market acceptance of the product.
We Initiate coverage with BUY recommendation on DPIL with a price target of Rs.318

n The company's EPC business is concentrated on rural power distribution projects initiated under Rajiv Gandhi Gramin Vidyutikaran Yojna ('RGGVY'). As of March 31, 2010 DPIL is undertaking projects under RGGY in the state of Gujarat and Assam. Under such contracts, the payments are received after completion of work. Failure to execute the project in a timely manner, or an unanticipated increase in cost of raw material may adversely affect revenues and cash flows.

Kotak Securities - Private Client Research

Please see the disclaimer on the last page

For Private Circulation