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Promoter pledge overhang clouds fundamental growth and valuation uptick

Kalpataru Power & Transmission has witnessed a strong rebound in execution and order intake post Covid-19 pandemic-related challenges; however, the stock has been under pressure due to promoter pledge and issues in the unlisted real estate group entity. In the previous concall in Nov’20, the promoter had shared the timeline for reduction of pledge shares and the company had reversed a corporate decision in terms of buying of property from related party. The sale of Alipurduar transmission asset is complete, while the others are in progress. Cashflow from the sale of these assets will aid in debt reduction and we do not foresee any major equity infusion towards subsidiaries. Hence, given benign valuation, healthy near term order intake and focus on deleveraging, we reinitiate our coverage on the stock with BUY rating and a target price of Rs526.

* Recent order wins provide growth visibility: The company has already won orders worth Rs54bn till Dec’20 largely led by international T&D (which was Rs23bn in H1FY21 ex-Linjemontage) and is L1 in Rs20bn worth orders. Green energy corridor phase-II tenders from PGCIL worth Rs14-150bn are yet to be tendered out. Management guides standalone revenue growth of 5-10% and Rs90bn-100bn of order intake for FY21E.

* ATL and Kohima asset monetisation to aid debt reduction: The company had signed an agreement to sell its transmission BOOT asset – Alipurduar Transmission Limited (ATL) to Adani Transmission for Rs12.9bn. For Kohima-Mariani, Kalpataru is in talks with other domestic suiters given the hurdles in terms of sale to Chinese.

* Status of other asset monetisation: (i) Satpura Transco sale to CLP India was completed where profit from sale was Rs300mn, (ii) Jhajjar KT Transco (50% stake) sale to India Grid Trust at an EV of Rs3.1bn was completed in Q2FY21, (iii) Kohima-Mariani (KMTL), where Kalpataru has 74% stake, has been commissioned in Nov’20 and the company is pursuing domestic suitors, and (iv) exploring options to sell road BOT under JMC projects.

* Promoter pledge overhang to reduce gradually: In Oct’19, the company’s borrowings against pledged shares was Rs8.3bn, which reduced by Rs1.1bn to Rs7.2bn in Oct’20. The company plans to reduce it further by Rs1.5bn by FY21 and by another Rs1.5bn by Dec’21. As of Nov’20, management has bought back 3.8% of shares and promoter pledge stands unchanged (from Mar’20) at 57.5% of promoter holdings.

* Maintain BUY on benign valuation, growth prospects and asset monetisation: Work has commenced at almost all sites and utilisation at factories has improved. Given healthy cashflow and growth outlook, we reinitiate our coverage on the stock with BUY rating. Factoring in the improved scenario and considering the cashflow, we assign PE multiple of 11x FY21E earnings to standalone. We value Linjemontage at 5x FY22E, JMC is as per the current listed valuation and Kohima BOOT assets at 2x book value. With a holding company discount of 20%, we arrive at an SoTP-based target price of Rs526

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