RPGT-Making Power Move

RPG Transmission-Making Power Move

CMP Rs 160

Not only is Power scarce in India, the means to move it are scarce as well. Ideally placed between the Utilities, Power producers and the consumers are Engineering companies that help move power and light up India.

After two years of financial re-structuring, RPG Transmission Limited (RPGTL) is emerging as a strong infrastructure play within the domestic power T & D space. Having turned around operations profitably during FY06, RPGTL currently enjoys a strong order book worth Rs 3.75bn, and is a pre qualified project T & D contractor with Power Grid Corporation, state run corporations like CSEB,CESC , APTRANSCO and ABB-Alsthom, Escotel, MTNL, BPL and Bharti telecom Ltd.

Pre-qualification status is a very important variable in T & D business since this process is sticky, wherein client relationships get established over a long period of time.

It is now possible that there will be a faster momentum in revenues and EBIDTA for RPGTL over the next 2 years driven by a healthy order book position, largely from the continuation of power sector reforms pursued by the government essentially to raise power generation capacity in the country by 2012.

As per current estimates RPGTL is likely to clock ROCE and RONW of 37 per cent and 17 per cent respectively for FY07E with net profits estimated to grow at a CAGR of 106 per cent over the next 3 years. (FY06-FY08E).

Strong order book to fuel topline growth

RPGTL's present order book stands at Rs 3.75 bn, of which around 60 per cent is executable for Power Grid. This includes projects like the Sipat – Seoni of 765 KV and extending to 166Kms, Tirunelvi-Edamon of 400KV and extending upto 34 kms., which are to be completed in FY08.

Other big orders are from CESC,CSEB. With the government aiming for a power capacity expansion of 60,000 MW in the 11th Five Year Approach Plan against less than 26,000 MW recorded in the 10FYP, the T & D space will benefit significantly.

Improving fundamentals to lead to better return ratios

RPGTL is likely to report EBIDTA margins between 9.5. per cent to 10 per cent over the next 2 years. This would lead to a 55 per cent CAGR in revenue growth and 106 per cent CAGR in bottomline growth.

Consequently RPGTL's earnings per share is likely to increase from Rs 4.8 in FY06A to Rs 20.5 in FY08E with cash earnings per share (CEPS) improving further to Rs 16.07 in FY07E and Rs 23.09in FY08E – showing a CAGR of 106% in EPS from FY06A to FY08E.

RPGTL is a low PE stock, and continued business growth will allow the stock to deliver above market returns during FY07 and FY08.