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Muted growth, stable margins and cashflows

Kalpataru Power & Transmission’s (Kalpataru) Q1FY22 standalone growth at 9% YoY to Rs15.9bn was below our expectations. Standalone order intake too was sanguine at Rs9bn while the same for subsidiary JMC Projects (JMC) was strong at Rs35bn. Kohima-Mariani BOOT asset sale is expected to be concluded by Sep’21 and proceeds from sale of Indore real estate will support overall cashflows. Promoter pledge is currently at 45% and expected to reduce to 40% by Dec’21.

Overseas transmission execution and ordering, revival in railway projects and pipeline is expected to fuel near-term growth. Factoring-in the near-term stress, we cut earnings by 3.4% and 2.6% for FY22E and FY23E respectively. Maintain BUY with a revised SoTP-based target price of Rs570 (earlier: Rs584).

* Commodity prices hit margins; near-term stress in domestic growth: Revenues grew 9% YoY, which was below expectations, while margins shrunk 50bps YoY to 10.2%. In addition to commodity price inflation, there was an impact of higher logistical costs given the shortage of containers for the export market. Higher ‘other income’ and lower finance cost led to 10%YoY growth in earnings for Q1FY22.

* Kohima-Mariani and other asset monetisation to aid debt reduction: (i) KohimaMariani (KMTL), where Kalpataru has 74% stake, has been commissioned in Nov’20, and the company is confident of consummating this deal by Sep’21; (ii) sale of Indore real estate is on cards and expected to be complete by FY22-end; (iii) company is exploring options to sell road BoT assets under JMC Projects.

* Healthy traction expected from overseas markets: There are promising growth opportunities overseas including SAARC, Far East, LatAm and Africa. We expect this to offset the near-term lull in domestic market.

* Strong performance from JMC: JMC posted 139% YoY revenue growth to Rs11.2bn in Q1FY22 resulting in PAT of Rs160mn. The subsidiary had an order intake of Rs35bn in Q1FY22 and Rs47bn YTD resulting in a strong orderbook worth Rs159bn. The restructuring of a couple of road BoTs is on cards and may support the JMC’s overall cashflow.

* Maintain BUY on benign valuation, deleveraging of balance sheet: Given the upside from asset sales, benign valuation and gradual turnaround in subsidiaries, we reiterate our BUY rating on the stock. The recent acquisition of Fasttel will support expansion towards the lucrative LatAm market and Linjemontage has given access to Nordic market. We value the standalone business at 14x FY23E earnings, Linjemontage at 5x CY22E, JMC as per the current listed valuation, and KohimaMariani BOOT assets at 2x its book value. With a holding company discount of 20%, we arrive at an SoTP-based target price of Rs570 for Kalpataru.

Outlook and valuation:

The acquisition of Fasttel will open up opportunities in Brazil and other LaAm markets. Kalpataru has not taken any major risky projects and has better terms of trade and margin profile vs peers. Current standalone orderbook at Rs133bn (1.7x TTM sales) provides revenue visibility, though growth may be slightly delayed due to the impact of covid second wave. Management is confident of achieving asset monetisation of the transmission BOT asset by Sep’21.

We value the standalone business at Rs545 (14x FY23E earnings), JMC Projects at Rs85 (market capitalisation as on 4th Aug’21), Linjemontage at Rs9 (5x CY22E earnings), and KMTL BOOT assets at Rs28. With a holding company discount of 20%, we arrive at an SoTP-based target price of Rs570. We assign a BUY rating given benign valuation, growth prospects and value unlocking from asset monetisation.

Given the near-term challenges and uncertainties, we do not assign any value to the logistics subsidiary, Shubham Logistics, though it has turned profitable recently. Given the issues in terms of stress in the unlisted group real estate entities and promoter pledge, we have given the standalone a multiple, which is ~30% discount to KEC.

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