Sujana Towers - Multibagger,

What was a darling stock of the Power sector just 12 months ago, now fetches the price of a junk stock. So much so, that nearly all FIIs which collectively owned 33 per cent of the Equity when Sujana Towers was quoting at Rs 240 per share have sold out. The last few deals were conducted even at Rs 7 per share by funds like Citigroup and even at Rs 15 by many other funds.

In the past six quarters Sujana Towers has had one bad quarter, but otherwise performance has been normal if not extra-ordinary. Even in the quarter to March 2009, the corporate reported an EPS in excess of Rs 1 per share. Thus TTM EPS will exceed Rs 4, and yet the stock struggles to find buyers at Rs 32.

At the CMP of Rs 32, Sujana Towers fetches a market cap of Rs 75 crore or so for a corporate that has Revenues close to Rs 900 crore. So either this corporate is going belly-up and even Rs 32 is an over-valuation or we all have missed a point somewhere caused by distress liquidation of foreign funds.

The thing is, the most visible signs of growth in the country are now emanating from the Power sector where close to 67 GW of fresh power capacity is being created. While this capacity will cost close to Rs 30,000 crore, it is 3 times the capacity that was created in the five years to 2007.

It is inconceivable to believe that this extra power production can move on the existing power grid. Hence in addition to strengthening the existing grid, the grid itself has to be enlarged to include HVDC lines and its reach extended.

GOI circles in Delhi suggest a massive follow-up IPO from Power Grid Corporation, the body set up to over see the setting up, expansion and creation of the National Grid in the country.

So why will Sujana Towers not get any more work, when competitors like KEC, Jyoti and Kalpatru have bulging order books?

New Contracts

Power Grid Corporation of India (PWGR) awarded contracts worth INR 27.5 bn for transmission towers, sub-stations, and rural electrification projects in H1FY09, much higher than in H1FY08, but lower than expectations.

Assuming an average execution period of 22 months for transmission projects, orders for projects expected to be on stream in FY11 are likely to be placed in H2FY09.

PWGR is scheduled to open bids for eight transmission packages and seven sub-station projects in H2FY09. Consequently, we expect order flow of INR 35 bn from PGWR in the same period.

Operating margins of players with fixed-price contracts to improve in FY10

Orders secured in Q1FY09 and Q2FY09 on fixed-price basis are likely to result in higher margins in FY10, given the steep decline in commodity prices (especially steel) since Q1FY09.

Kalpataru Power Transmission (KPP) secured key fixed price orders from the international geography in H1FY09. Hence, its operating margins are likely to be higher in FY10 compared with FY09.

Jyoti Structures (JYS) has higher proportion of variable-price contracts; hence, the decline in steel prices is unlikely to have a significant positive impact on it. Further, competition is likely to moderate due to more stringent pre-qualification norms on critical projects likely to be awarded in H2FY09.

Interest costs for coverage universe to be lower in FY10

In wake of the current liquidity crunch, the government has undertaken several initiatives to ease liquidity in the system and thereby moderate interest rates. Hence, interest costs are likely to be lower in FY10 compared with FY09 for companies under our coverage.

Outlook

Slowdown in order accretion and higher raw material prices were major concerns for the power transmission EPC sector from H2FY08 to H1FY09. Order accretion concerns are likely to be partly addressed in H2FY09, given the expected order flow from PWGR. However, liquidity issues, delay in associated generation projects, and impending elections are likely to elongate execution cycles.

On the positive side, margin pressures are likely to ease in FY10, given the decline in commodity prices and moderation in competition. Margin improvement in FY10 could be greater for companies with higher fixed-price contracts.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.