Stock Pick from Construction & Engineering Sector

Here Is Why:

• The integrated business model is poised to offer value-added service offerings to diverse clientele in new geographies and business verticals.
• Venturing into BOOM project and a good order book gives revenue visibility for the company.
• The company’s stock is available at an attractive valuation considering the expected clearances of its T&D projects.

Ever since the independence of India, although power generation has grown dramatically, the growth of demand has been much higher due to the increasing population, accelerating economic activity and widespread urbanisation. Further, the lack of enough T&D infrastructure increases the transportation cost of power for various state electricity boards. As such, power evacuation is posing a major challenge for the country with the generation capacity recording growth in the last few years.

According to Indian Energy Exchange, about 15 to 20 per cent of electricity generations remain untraded due to an undeveloped transmission network.

Also, the congestion in transmission network becomes a big hurdle to reach out to areas with electricity deficits. Presently various transmission projects are passing through wildlife sanctuaries which require Supreme Court’s clearances. However, the new government is likely to request the court to give a separate treatment to power transmission projects as these do not require large-scale deforestation.

In the light of the above, here’s a leading EPC and turnkey service provider for power T&D. BS (previously BS Transcomm) (BSL) executes more than 2,000 kilometers of transmission lines, 43 sub-station projects and has electrified more than 1,00,000 homes. Some of its notable projects include building the first 1,200 kV transmission line in India, which is also one of the few in Asia. It also owns the transmission system which connects India on a single grid and one frequency. BSL has an integrated business model with its backward integration in tower manufacturing for the power and telecom industry. The company has eight regional and six project offices to service its power and telecom projects across the country. It owns two manufacturing plants in the state of Telangana with an annual installed capacity of 2,40,000 MTPA. The company has forayed into Build–Own–Operate–Maintain (BOOM) project with Patel Engineering and Simplex Infrastructure for establishing a 765 kV transmission system from Raichur to Solapur. The BOOM project was commissioned in June 2014 in a consortium with Patel Engineering and Simplex Infrastructure will offer constant annuity revenues for a period of 35 years. Further, realising the immense potential opportunity arising from coal deficiency, the company has started a strategic venture to trade mineral resources by sourcing high-quality coal from Indonesia.

On the financial front, the company’s consolidated income was Rs 2,327 crore in FY14 as against Rs 1,992 crore in FY13. It achieved a net profit of Rs 70 crore in FY14 compared to Rs 64 crore during FY13. On a positive note, for the last five years the company’s revenues and net profit have grown at a CAGR of 46 and 31 per cent respectively. The focus on power EPC has enabled BSL to build a strong order book of over Rs 1,500 crore. At its current market price the company’s stock is trading at 1.95x of its book value of Rs 11.61 and at a PE ratio of 13.52x. The present order book, strong backward integration, expected clearances of T&D projects, and sturdy revenue from its BOOM project are the major growth drivers for BSL. Hence we recommend buying this stock for a one year period.