Kalpataru Power Transmission (KPTL), a ₹6,000-crore market cap engineering, procurement, and construction (EPC) company, announced the merger of its subsidiary, JMC Projects (India) with itself on February 19, 2022.

JMC Projects is a 68 per cent (approx.) subsidiary of KPTL. Post-merger, JMC Projects (standalone entity) will be fully subsumed into KPTL, and its subsidiaries will become the subsidiaries of KPTL. The merger is expected to be completed during the fourth quarter of FY23 subject to requisite approvals.

Shareholders of JMC Projects (India) will be issued one equity share of KPTL for their four shares (4:1 ratio) under the all-equity merger. Going by the companies’ closing share price on February 18 and the last six months’ average price, the swap ratio appears fair.

KPTL and JMC Projects shares closed at ₹389 and ₹93 apiece, respectively, on February 18, a day before the deal was announced. The KPTL stock had gained 3.2 per cent, while the JMC Projects stock was down 3.7 per cent by the end of Monday.

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Existing benefits to strengthen

KPTL offers EPC solutions across several infrastructure segments such as power transmission, oil and gas, and railways. It undertakes urban infrastructure, buildings and factories and water-related EPC projects through JMC Projects, its only material subsidiary in a long list of Indian and overseas subsidiaries.

JMC Projects also owns and operates road assets under the BOOT or build, own, operate and transfer model – financing these projects has added to the company’s debt and interest expense.

Also, as with many other road projects, the toll collections from JMC Projects, too, have had their share of hiccups — collections getting impacted by traffic disruptions, for example, during Covid lockdowns.

The merger presents several positives for both the companies — a larger and more diversified combined order book, higher revenue, lower interest expense for JMC Projects and possible cost efficiencies. The combined entity can also benefit from KPTL’s overseas presence in power transmission and distribution (T&D) projects and JPC Project’s expertise in civil construction to expand into non-T&D areas outside of India.

However, not all these benefits will be additional, some of these already exist under the existing parent-subsidiary arrangement. 

As of December-end 2021, KPTL had a consolidated order book of ₹31,702 crore. JMC Projects, on its own, had an order book of ₹19,192 crore on a standalone basis. JMC Project’s revenue of ₹3,914 crore and EBITDA (earnings before interest, tax, and depreciation) of ₹360 crore for the nine months ended December 2021 (9M 2021), accounted for 37 per cent of KPTL’s revenue and EBITDA.

Lower costs

But, given JMC Project’s high-interest expense, contribution to the parent company’s profit before tax (PBT) excluding exceptional items of ₹449 crore was, however, only 10 per cent during the nine months period. Based on the 9M 2021 numbers, the subsidiary had an interest coverage ratio (earnings before interest and tax divided by interest expense) of only 1.1 times.

While JMC Projects has enjoyed the benefit of KPTIL’s parentage even as its subsidiary, getting merged with the parent is likely to bolster its credit profile and help reduce its cost of financing within the merged entity.

According to an investor presentation on the deal, the merger is expected to result in ₹100 crore of cost synergies in overheads for the combined entity.

Apart from the merger, further progress on restructuring one of JMC Projects’ road assets and the divestment of another, will be something to watch out for.