Diamond Power: Kotak Research Report

Kotak Securities are very bullish on DIAMOND POWER INFRASTRUCTURE and have recommended a BUY with the following investment rationale:

DIAMOND POWER INFRASTRUCTURE is a virtually fully integrated player in the power distribution projects business. DIAMOND POWER INFRASTRUCTURE has captive facilities to manufacture conductors, cables (LT and HT), transmission towers and transformers. Shortly, DIAMOND POWER INFRASTRUCTURE will also commission its EHV cables plant. DIAMOND POWER INFRASTRUCTURE is mainly a play on the power T&D sector, which is expected to grow significantly in the foreseeable future. The stock of DIAMOND POWER INFRASTRUCTURE 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 of DIAMOND POWER INFRASTRUCTURE

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.

Integrated play in the power transmission and distribution segment provides control on project variables. With the acquisition of DPTL (Western Transformers) in 2007, DIAMOND POWER INFRASTRUCTURE 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, DIAMOND POWER INFRASTRUCTURE will be virtually a fully integrated player in the power T&D segment.

Recently started trial runs on transmission tower facility and plans to commission EHV cables facility in Q4FY11. During Q1 FY11, DIAMOND POWER INFRASTRUCTURE has completed the expansion of its LT and HT cables capacity. DIAMOND POWER INFRASTRUCTURE 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.

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, DIAMOND POWER INFRASTRUCTURE will have adequate capacity for driving growth in the medium-term. DIAMOND POWER INFRASTRUCTURE 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 DIAMOND POWER INFRASTRUCTURE thus enabling it to bid for higher volume of project work.

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.

Valuation DIAMOND POWER INFRASTRUCTURE 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