Diamond Power Infrastructure (DPIL): Diamond Power to Gain from New Contracts, Expansion

Diamond Power to Gain from New Contracts, Expansion

Co’s RoCE above 18% signals it can create value for shareholders

Recent contracts awarded by power sector majors — NTPC and Power Grid Corporation — are likely to mark the end of the drought in new order flows for mid-sized power equipment makers. 

As more such contracts get awarded, integrated turnkey contractor in power transmission and distribution Diamond Power Infrastructure (DPIL) could be a potential winner.
Diamond Power’s stock valuation has dipped to a multi-year low level, following two consecutive quarters of stagnating performance. In the half year ended June ’11, the company’s revenues grew 5.2% while net profit inched up 2.3%. This was in sharp contrast to the previous half-year period during the July-December 2010 period, when its profits zoomed 86% on a 90% revenue growth.
The scrip, which has lost more than half its worth during the past one year, is now trading at a priceto-earnings of 3.2.
At the end of June ’11 quarter, Diamond Power was sitting on a comfortable order backlog worth . 1,500 crore, most of which will be executed within FY12. This is nearly 45% higher over its revenues from the corresponding nine-month period from last year. And it expects to win further contracts in the near term. The company has recently set up capacities to manufacture
transmission towers, extra high voltage cables and power transformers. It has also entered into strategic JVs with Utkal Galvanizers, Skoda India and Schaltech Automation to increase capabilities for larger EPC projects. All these efforts will enable it to move up the value chain while managing costs better.
The company’s debt has almost doubled between FY09 and FY11. Still, its debt-to-equity ratio remains low at 0.85. The company earns a return on capital employed (RoCE) above 18%, which remains above its cost of debt at close to 13%. This means it will be able to create value for shareholders after servicing its debt obligations.
In spite of its poor stock market performance, the company has been a hit with foreign investors which is reflected in the fact that in the past five quarters, FIIs have doubled their stake in the company to 12.72% as of end-June ’11 from 6.63% as of end of FY10.