Diamond Power Infrastructure - Cutting Edge

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Power remains one of the central issues for the development of any economy and more so for emerging economies like India that are power deficient. Recognising this well, the Government of India has launched various programmes like the APDRP (Accelerated Power Distribution and Reform Program), RGGVY (Rajiv Gandhi Grameen Vidyutkaran Yojana), and the National Grid Project to improve its position on the power front. Diamond Power and Infrastructure (DPIL), which in its earlier avatar was known as Diamond Cables, is all set to exploit this opportunity.

DPIL offers a comprehensive range of products such as power cables, integrated units for power, and distribution transformers. It also provides complete turnkey services in transmission and distribution of power and is the country’s largest integrated power solutions provider. What really differentiates DPIL from its competitors is that it is the only EPC player with captives as high as 80 per cent of the project cost.This helps the company to keep a tight control over project cost and time resulting into better margins. This is reflected in the net margins of the company which are around 7-8 per cent compared to its peers like KEI Industries and RPG Cables that have margins below 2 per cent. After establishing itself in the distribution business, the company is now foraying into the transmission tower business. This will help it to add a new stream of high margin revenue.

DPIL has even entered into an agreement with Skoda (India) and Schaltech Automation for the execution of contracts up to 400 KV.Generally this business has 2-3 per cent more margins compared to the 220 KV class. This JV will also help the company to fulfill the tough pre-qualification requirements necessary for bidding for such projects. DPIL will start bidding for transmission projects from FY12. To fund its future growth the company has raised capital of 132 crore through a QIP and preferential share allotment at Rs 203.8 per equity share in the second quarter of FY11.

As far as the financial performance of the company is concerned, for the nine months ending December 2010 it has posted sales of Rs 1,110 crore compared to Rs 552 crore during the same period last year, showing a growth of 101 per cent. Similarly, profit grew by 120 per cent on a yearly basis to Rs 86 crore. Going forward we feel that the company will maintain its growth momentum with its healthy order book of Rs 1,502 crore at the end of December, 2010 which is 1.72 times its FY10 earning and is to be executed in the next 12-18 months. This also gives clear visibility to the future earnings of the company.

As for the valuation, the stock trades at 4.4 times its FY11E earning based on the annualised EPS for 9MFY11. This looks quite cheap compared to some of its peers that are trading at double-digit PE ratios. Even on an EV/EBITDA basis, the  company is trading at 4.7 times. Hence we advise our readers to make the stock a part of their portfolio and expect 25-30 per appreciation in the next one year.