Buy Kalpataru Power Transmission Ltd : Steady earnings trajectory, attractive valuations - Emkay Global
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Steady earnings trajectory, attractive valuations
* We reiterate Buy on KPTL with a TP of Rs565 (Sep’22E) as we believe that its earnings trajectory remains intact (14% standalone PAT CAGR over FY21-24E). The core EPC (SA) business trades at ~9.0x Sep’23E EPS vs. the five-year average of 12.5x (excluding stake in JMC). In our view, the stock is attractively priced.
* The total pledged shares have been declining steadily since Mar’20 (24.7% in Aug’21 vs. 31.3% in Mar’20).
* We expect KPTL to clock 10% sales growth with margins in the 10-10.5% range and expect JMC Projects to report 20-25% sales growth with ~10% margin. After the sale of the Alipurduar Transmission line in FY22, KPTL is expected to have negligible net debt at the standalone level, which will further strengthen the balance sheet. The sale of its stake in Vindhayal Expressway and the restructuring of Wainganga and Kurukshetra Expressways in FY22 will boost JMC financials.
Strong prospects for KPTL (SA) in T&D, Railways and Pipeline: Proven expertise and track record in the execution of EPC projects helped KPTL (SA) win orders to the tune of ~Rs93bn in the last five quarters. The current order book is robust at ~Rs134bn as of Jun’21 (T&D 60%). Management has guided for inflows of ~Rs80-90bn in FY22. Future growth prospects are strong on the back of healthy momentum in Pipeline and Railways, and an immense scope in international railways. The domestic T&D business will remain buoyant on the back of HVDC and TBCB projects in the medium term.
JMC’s record-high order book supports execution: The record high order book (~Rs159bn exc. L1) implies an order book-to sales ratio of 3.9x, a peak level. The infrastructure space accounts for ~44% of the order book, which should enable a 20%+ sales CAGR for the next 2-3 years for JMC.
JMC – one road stake sale and two restructurings expected in FY22: Management expects to complete the sale of Alipurduar Line as well as the restructuring of Wainganga & Kurukshetra assets in FY22, further strengthening the balance sheet.
Maintain Buy: Our SoTP-based TP of Rs565 (earlier Rs560) comprises Rs516/share for KPTL (SA), based on 13.5x Sep’23E core EPS, and Rs49/share for the stake in JMC projects (30% discount to the current value). The implied PE of the core standalone EPC is 9.0x, which is attractive in our view. KPTL, excluding JMC projects, has traded in a band of 10-15x (5- year av. PE of 12.5x and SD at 2.5x). With the sale of transmission assets, the balance sheet will further improve. Capital allocation issues are already receding, in our view. The overall pledge has come down from 31.3% in Mar’20 to 24.7% in Aug’21. Key risks to our call: sustained commodity inflation and execution challenges.
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