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Delayed payments hurt performance

Kalpataru Projects (KPIL) reported a broadly in-line revenue growth of 16% YoY, while its EBITDA/PAT grew 17%/9% YoY. PAT was hit by higher-than-expected interest expenses, as the collections from Water projects continued to be delayed. The company continues to maintain a 20-25% market share in the T&D opportunity pipeline while it is affected in the near term by delayed payments on the water segment. We expect its T&D, buildings & factories, and oil & gas segments to drive growth going forward. Benign commodity prices provide comfort on margin expansion, and interest expenses are likely to come down after the recent fundraising via QIP. The promoter pledge has already come down to around 8% of the total shareholding, and with the expected IPO of the real estate arm, we expect this to gradually reduce further. We cut our estimates by 13%/12%/11% for FY25E/26E/27E to factor in weaker-than-expected Water segment performance and slightly higher interest costs. We revise our SoTP-based TP down to INR1,200 based on 17x P/E. We reiterate our BUY rating on the stock.

Higher interest expenses lead to a PAT miss

Revenue came largely in line at INR48.2b (+16% YoY), primarily led by healthy execution in T&D/B&F segments (up 42%/26%). Water and Railways declined 42% and 18% YoY, respectively. EBITDA margin was flat YoY (down 10bp QoQ) at 8.4%. EBITDA at INR4b grew 17% YoY/15% QoQ. PAT grew 9% YoY to INR1.6b, below our estimate of INR1.9b, due to higher-than-expected interest costs (+29% YoY), lower other income (-31% YoY), and a higher effective tax rate (27.7% vs. 25.8% YoY). Order inflows at INR83.2b grew 41% YoY. The order book stood at INR614.3b (+19% YoY). NWC was flat YoY at 112 days (118 days in 2QFY25). Management aims to bring it below 100 days by FY25 end. Net debt came down to INR18.2b from INR27.9b in 2QFY25 and INR26b in 3QFY24. Debt reduction happened largely towards the quarter-end, resulting in continued high interest expenses. For 9MFY25, revenue/EBITDA/PAT grew 9%/10%/6% to INR126.8b/ INR10.6b/INR4.1b.

Segmental performance driven by T&D, B&F, and Oil & Gas segments

Segmental performance was driven by T&D, B&F, and Oil & Gas segments. Consolidated T&D revenues rose 34% during 9MFY25 (including subsidiaries LMG and Fasttel). Adjusted with LMG and Fasttel, 9MFY25 T&D revenue growth stood at 11% as both LMG and Fasttel grew at a much faster pace. Going ahead, we expect the growth to be driven more by standalone T&D as inflows have been strong for the company, and we expect Fasttel's growth to be limited. B&F revenue grew 23% for 9MFY25 on improved project execution and a healthy order mix. Oil & Gas revenue jumped 99% for 9MFY25, led by the commencement of execution on the Saudi project. We expect execution to further ramp up for this project during FY26. Water and railways segment revenues declined by 36% each during 9MFY25 due to selective execution and bidding in said segments. We believe water segment execution will revive from FY26, while railways will remain weak.

T&D pipeline poised to double; B&F outlook continues to be sanguine

The pipeline for T&D projects is expected to double, aided by prospects for largescale projects in power transmission, renewable energy, grid upgradation, and expansion in India and international geographies. KPIL foresees a pipeline of USD2.5t-3.5t by 2029. Accordingly, the company is confident of clocking in a 20-25% T&D revenue CAGR over the coming 3-4 years. However, labor availability continues to be a challenge. Even as private capex is yet to see a broad-based recovery, the company has a positive outlook on the B&F segment, which is expected to be a key growth driver going ahead, with opportunities in commercial and residential real estate, airports, industrial capex, et al.

Water projects continue to be a drag on execution and margins

Overall revenue was impacted by the slower execution of water projects, as payments from government utilities in key states are yet to be released. This led to the company reducing its FY25 revenue growth guidance to 12-13%, owing to an ~INR20b shortfall in the Water segment in 9MFY25. KPIL has nearly INR100b of order book from the Water segment, and 40% of this order book is from Uttar Pradesh, while the rest is spread across other states. Nearly 80% of the Water segment’s order book is from the Jal Jeevan Mission (JJM). Going forward, while the company will maintain its cautious approach towards water opportunities in the near term, it remains positive on the long-term prospects, given the higher budgetary allocation in FY26 for JJM and other projects.

International subsidiary’s performance a mixed bag

LMG has clocked ~100% execution growth in 9MFY25 at INR13.4b, while its order book stood at a record INR31.4b. The company expects PBT margins of 3.5-4% in FY26 for LMG. Fasttel’s 3QFY25 revenue grew 18% YoY, with the order book at INR10b. Its profitability was impacted by the sharp depreciation of the Brazilian Real. This entity is expected to break even in FY26

Financial outlook

We cut our estimates to factor in lower Water segment revenue and higher interest costs. We expect KPIL to report a CAGR of 17%/21%/33% in revenue/EBITDA/PAT over FY24-27. This would be driven by: 1) inflows of INR243b/INR277b/INR316b in FY25/FY26/FY27 on a strong prospect pipeline, 2) a gradual recovery in EBITDA margin to 8.4%/8.9%/9.2% in FY25E/FY26E/27E, 3) control over working capital owing to improved customer advances, better debtor collections from water and railways, and claims settlement. Driven by improvement in margins and moderation in working capital, we expect KPIL’s RoE and RoCE to improve to 14% and 12% in FY27E, respectively.

Valuation and view

KPIL is currently trading at 16.1x/12.1x FY26E/FY27E EPS. We reiterate our BUY rating with a revised SoTP-based TP of INR1,200, based on 17x P/E for the core business

Key risks and concerns

A slowdown in execution, lower-than-expected order inflows, a spike in commodity prices, and an increase in promoter pledges are some of the key concerns that can weigh on the company’s financials and valuations.

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