Diamond Power Infrastructure: 2011 Top Picks: Anagram

Diamond Power Infrastructure

Diamond power infra is the only EPC player with major captive
facilities (80% of the project cost) which gives the company an
advantage (higher margins & lesser volatility, lower cost of carry)
over other EPC player who outsources 60 to 70% of the project
work. With adequate liquidity in place, and experience in T&D
over years DPIL will be able to monetise on $100 bn spend in
T&D sector. Moreover company has not only targeted to increase
top-line but has made constant efforts to improve and sustain
margins through backward integration (Conductors, EPC and
cables).

While long-term looks promising, in medium term PGCIL pending
order finalisation, strong execution and earning surprise could
act as catalyst. We initiate coverage on the stock with "BUY"
rating with target price of Rs 297 ,a potential upside of 43%.

Only EPC player with Integrated Model
Diamond power infra is the only EPC player with major captive facilities
(80% of the project cost) which gives the company an advantage over
other EPC player who outsources 60 to 70% of the project work. We
believe this will not only accelerate the margins but help company to bid
competitively and reduce carrying cost of inventory. Company
commenced EPC business in 2006 and now has healthy order book of Rs
806 cr (2.4x FY10 sales) and L1 bids of another Rs 600 cr. DPIL along
with Skoda has bid for 8 projects. Order wins in 440 kv class would be
an upside to our estimate due to higher margins.

Cash conservation for growth - Equity Infusion & relaxed debt
terms have eased liquidity situation
Due to equity infusion (Rs 132 cr @ Rs 204/share) and easing liquidity
situation Crisil has upgraded rating on DPIL by two notches from BBB+
to A- with a positive outlook, which has resulted in lower interest rate
(by 275 bps) on a Rs 130 cr term loan from ICICI and the debt repayment
has been deferred till 2014. Even the short term working capital, which
was around 13%, is now expected to be at 11%. This will help company
to conserve its cash for its growth for the next three years.

Higher voltage + In-house manufacturing = Higher Margins
The company was present in low voltage products like LT cables and
distribution transformers. Expansion into new product and niche segment
like EHV cables (132 kv to 550 kv), HT cables, Power transformers will
enable company to increase margins. As company starts bidding for
T&D projects we believe benefits from in-house manufacturing will kickin
significantly, which will lead to margins expansion by 100 bps in FY13.


Expansion will accelerate topline while de-risking the product
portfolio
Capacity expansion and foray into transmission project will enable
company to achieve robust growth over coming years. While demand in
high voltage segment remains good, revenue visibility in near term also
remains across the segment. We expect stronger execution on EPC side
in H2 FY11 as compared to H1 FY11.

Valuation
We expect Sales and EPS to grow by 42% CAGR over 2010-13 led by
capacity expansion, entry into new segments, margin expansion and
lower interest cost. At the current market price of Rs 197 the stock
trades at 6.5/4.6x its FY11E/FY12E EPS of Rs 30/42 and 5.1/3.7x its
FY11E/FY12E EBITDA. At our target price of Rs 297 the stock would
trade at P/E of 7 and EV/EBITDA of 5.