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Moderation in FY24 estimates but outlook remains strong

Kalpataru Projects International’s (KPIL) 2QFY24 standalone PAT at INR 1.13bn missed estimate of INR 1.27bn (consensus: INR 1.21bn) due to lower margins. NWC reduced sharply by 36 days YoY to 104 days but net debt was higher by INR 1.7bn YoY to INR 22.2bn (flat QoQ) given the continued capex and investments/support for subsidiaries. Consolidated order inflows are INR 122bn YTD (L1: INR42bn; FY24 target: INR 250bn). KPIL has lowered its FY24 revenue growth guidance from 30% to 25% due to slower than expected execution ramp up in 1HFY24. PBT margin guidance is also moderated from 4.5-5% to c.4.5%. However, we note that bid pipeline for both domestic and international T&D projects (37% of KPIL’s OB) remains robust and provide strong growth opportunities. KPIL’s margin and NWC/cash flow management has also been fairly resilient. With real estate (RE) sector seeing strong recovery, any reduction in promoter pledges (done in favour of RE business) can be a re-rating catalyst. We estimate 25% EPS CAGR over FY23-26E. Maintain BUY with TP of INR 750.

* Standalone earnings missed estimates due to lower margins: Revenue grew by 17% YoY to INR 38.4bn, marginally below estimate of INR 39.2bn. EBITDA grew by 12% YoY to INR 3.1bn (estimate: INR 3.35bn). EBITDA margins declined by 40bps YoY to 8% (estimate: 8.6%) due to adverse revenue mix. Interest costs grew by 13% YoY to INR 850mn (estimate: INR 800mn). Standalone PAT grew by 8.7% YoY to INR 1.13bn and missed estimate of INR 1.27bn due to lower margins.

* Consolidated backlog strong at INR 473bn; lowers revenue and margin guidance: KPIL received consolidated order inflows of INR 122bn in YTD and targets inflows of INR 250bn in FY24 backed by robust bid pipeline. Domestic T&D bid pipeline is at INR 500- 700bn of which KPIL expects awarding of atleast 50% of projects in FY24. Order backlog stood at INR 473bn (2.7x TTM revenues) as on Sept-23. KPIL has lowered its revenue growth guidance from 30% to 25% and PBT margin guidance from 4.5-5% to c.4.5% for FY24. We have cut FY24/25 earnings by 9.5%/6.2% to factor lower revenue/margins.

* Road monetization delayed; to complete sale of Indore real estate by Dec-24: Sale of Vindhyachal road asset has been delayed as the earlier non-binding offer did not proceed. KPIL will look to sign another non-binding offer in next 2-3 months. The Indore real estate inventory of INR 2.6bn is likely to be fully sold by Dec-24 (1H sale: INR400mn; cash flow: INR 250mn). Loans to subsidiaries (net) increased by INR 1.36bn in 1H comprising of INR 450mn in road assets, INR 750mn in Chile project SPV and balance in other entities.

* Maintain BUY with price target of INR 750: We estimate robust revenue/EPS CAGR of 19%/25% over FY23-26E for KPIL on standalone basis. KPIL trades at attractive valuations of 12.8x/10.8x FY25/26E standalone EPS. Currently, c.44.6% of promoter holding (41.1%) is pledged towards the promoter’s real estate business, which acts as an overhang on the stock. Material reduction in these pledges can drive multiple re-rating. We value standalone EPC business at 13x Sept’25E EPS and investments in BOT assets, international subsidiaries at INR 49/share. Maintain BUY with price target of INR 750.

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