Transmission line companies KEC International and Kalpataru Power Transmission are among the few good investment opportunities within the infrastructure sector.

After power transmission and distribution opportunities (led by states and private sector), Railways (government’s plan of 100 per cent electrification of the existing network targeted by FY21) has emerged as the next big growth driver for companies in the domestic market. Both companies are also present in other segments within the power sector as well as T&D (transmission and distribution).

According to Elara Securities, the railway network of 38,000 route kilometre would be electrified over FY18-22 (capex of ₹32,600 crore), implying average annual addition of 7,600 rkm, a five-fold jump from 1,560 rkm over FY13-17.

Besides electrifying the existing network, there is another huge opportunity of ₹2 lakh crore for network expansion (including electrification) out of total ₹8.56 trillion capex by the Railways in the next five years, said analysts.

Order flows to grow

“The Railways segment offers very robust opportunity with the government planning to electrify 4,000 km lines in FY18 and 8,000 km lines (double) in FY19,” said Motilal Oswal.

KEC’s management told Motilal Oswal that it expects order inflows to grow 15-20 per cent and aims to achieve 20 per cent revenue growth over the next few years and railways to contribute meaningfully. Reliance Securities expects 25 per cent earnings CAGR for KEC between FY16-19E.

KEC has more than 25 per cent share in the overhead electrification segment, and Railways currently forms 10 per cent of its total order book (₹14,000 crore).

Kalpataru is also set to record CAGR of 16 per cent and 20 per cent in revenue and earnings over FY17-FY20E, according to IIFL Wealth Management. The infrastructure segment, including railways, is expected to register robust performance and boost overall growth over the next three years.

“The collective order book for Railways and O&G pipeline has jumped to ₹2,450 crore in H1FY18 from ₹1,400 crore in FY17,” said IIFL. It expects a revenue CAGR of 46.7 per cent and 32.8 per cent for railways and O&G pipeline, respectively, between FY17-20E.

Kalpataru executes civil infrastructure, track laying, signalling and electrification projects for Railways. Railways accounted for 12.5 per cent of total order book as on September 30.

Leading players too

With high growth potential, the share of Railways in the total order book of both companies could shoot up in the coming years. Apart from KEC and Kalpataru, companies such as L&T,CG Power, Siemens India and ABB India would also gain from strong traction in the Railways. Additionally, KEC and Kalpataru would gain fromrevival in the global market as international orders form 48-52 per cent of their total order book.

While the KEC stock has risen 175 per cent in the last one year, Kalpataru’s shares have doubled. KEC hit a new 52-week high on Fridaytoday and has already breached analysts’ target price. Kalpataru offers 23 per cent upside potential.

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