Stock Fundamentals

Why you should buy Kalpataru Power shares

Maulik Madhu BL Research Bureau | Updated on October 09, 2021

Revenue visibility, low debt and reasonable valuations are positives for the stock trading at ₹406.35

The government’s big push on infrastructure development, backed by a planned asset monetisation pipeline has spurred interest in infrastructure companies.

In this backdrop, those backed by strong balance sheets, large and diversified order books and a strong execution track record are well-positioned to participate in the country’s infrastructure growth.

What works

Kalpataru Power Transmission (KPTL), a ₹6,100 crore power transmission and infrastructure EPC company has a well-diversified business, both sector-wise and geographically. The company’s current order book provides revenue visibility over the next 18 – 21 months. An expected pipeline of domestic and international power transmission, oil and gas and railway project tenders, among others will bolster this. In addition, KPTL’s stronger-than-before balance sheet puts it on a strong footing.

The business positives along with reasonable stock valuations, make the KPTL stock a good buy for long-term investors. At the current market price of ₹406 a share, the stock trades at a one-year forward P/E multiple of 8.5 times, below its 3-year average P/E multiple of 9.5 times (based on Bloomberg consensus estimates).

Good growth prospects

KPTL offers EPC (engineering, procurement, and construction) solutions across several infrastructure segments such as power transmission, oil and gas, and railways. Its key subsidiary, JMC Projects (India) undertakes urban infrastructure, buildings and factories and water-related EPC projects. Geographically too, the company is diversified - domestic and international operations contributed 63 per cent and 37 per cent of the FY21 revenue. International orders account for 32 per cent of the order book.

KPTL has steadily grown its order book over the past several years. As of June-end 2021, it had a consolidated order book of ₹29,313 crore (see chart) or book-to-bill ratio of 2.26 times and another ₹2,550 crore worth of projects where it was the lowest bidder. This offers ample revenue visibility over the next couple of years. In addition to this, KPTL expects to participate in tenders worth ₹40,000-45,000 crore during the remaining fiscal. Its subsidiary, JMC Projects (India) bagged new orders worth ₹3,300 crore in Aug–Sep 2021.

As per the National Infrastructure Pipeline, capital expenditure of ₹3 lakh crore is estimated to be incurred on power transmission projects, ₹13.7 lakh crore on railways and ₹1.9 lakh crore on petroleum and natural gas pipelines during FY20-25, among other infrastructure segments. Railways and power transmission also figure among the top sectors for asset monetisation. With monetisation of brownfield projects freeing up resources for funding new infrastructure, the order pipeline for KPTL should remain robust.


Lighter and stronger

With a focus on EPC contracts, KPTL has been divesting its stakes in its road projects and power transmission assets and non-core real estate and logistics businesses, thereby deleveraging its balance sheet. As of Mar-21, KPTL had a consolidated net debt to equity ratio of 0.66 times, down from just under 1 time a year ago. This is likely to go down further as cash flows from the sale of the Kohima-Mariani Transmission project, the last of its four power transmission assets, and the Indore Real Estate Project are expected in FY22.

Apart from this, the percentage of pledged promoter stake too is down - from 57.5 per cent as of September-end 2020 to a tad under 46 per cent as of June-end 2021. Promoters hold around 55 per cent stake in KPTL.

Between FY16 and FY20, KPTL grew its operational revenue at a compound annual rate of 15.2 per cent to ₹12,676 crore, operating profit at 20.6 per cent to ₹1,200 crore and net profit at 52.8 per cent to ₹413 crore. The acquisition of Swedish EPC company, Linjemontage i Grastorp AB in March 2019 aided this growth. The EBITDA margin went up from 10.5 per cent in FY16 to 12.1 per cent by FY20. While the net profit margin too went up from 1.1 per cent to 3.2 per cent during this period, it was significantly lower on account of higher fixed costs.

In FY 21, Covid-related disruptions and raw material price increases impacted revenue and operating profit, though one-time gain from sale of assets, and lower finance costs bumped up net profit (see table). Helped by better project execution, KPTL’s revenue growth picked up in the June 2021 quarter. Rising commodity prices and international freight charges, and supply chain issues, however, continued to pose a challenge in the June quarter.

According to the company, a combination of cost pass through for 90 per cent of JMC Project (India)’s projects and 40 per cent of KPTL’s projects along with forex hedging and provisioning should help it deliver 10 per cent EBITDA margins in FY22.

Published on October 09, 2021

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