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Outlook remains strong across segments

KPIL’s 4QFY24 result was slightly lower than our estimates. Revenue/EBITDA/PAT grew 17%/29%/52% YoY in 4Q. Revenue growth was led by healthy project execution in the T&D, water and urban infra segments. KPIL continues to benefit from an improved prospect pipeline across key segments of T&D and B&F. Post-merger synergies are getting reflected in larger-sized order inflows in the tunneling, B&F, industrial plants, data center and oil and gas segments. We expect KPIL to continue to focus on healthy growth in inflows and revenues, managing efficient working capital, improving margins by 50bp, and maintaining interest costs at around 2% of net sales. Valuation re-rating for Kalpataru is being driven by constant reduction in pledging as well as large-sized oil and gas order win. We tweak our estimates and revise our SOTP-based TP to INR1360, implying 17x P/E for the core business. Maintain BUY rating on the stock as we expect KPIL to continue to benefit from the improved domestic T&D pipeline.

4QFY24 result reflects election-related weakness

KPIL’s revenue at INR51.5b was up 17% YoY/24% QoQ, mainly led by healthy execution in the T&D, water and urban infra segments. EBITDA grew 29% YoY/ 16% QoQ, while margin expanded ~70bp YoY to 7.8%. Adj. PAT came in at INR1.7b (+53% YoY), aided by higher other income (+45% YoY) and a lower effective tax rate (28.6% vs. 30.9% in 4QFY23). During the quarter, order inflows grew 108% YoY to INR119.6b, including an order from Saudi Aramco. This takes the order book to INR584.1b (+27% YoY). International subsidiaries, LMG (Sweden) and Fasttel (Brazil), posted FY24 revenue of INR10.3b and INR7b, while the order book stood at INR20.6b and INR14.8b, respectively, with a strong ordering outlook.

Segmental inflows remain strong from T&D, B&F and Oil & Gas

KPIL continues to witness huge impetus on T&D capex in India, Europe, Africa, Latin America and the CIS region. This has resulted in 47% YoY growth in India T&D order inflows to INR43.4b and an L1 of INR13.5b. The spending outlook has also started improving for LMG and Fasttel, which were going slow until last year. Higher margin is also targeted from Fasttel. B&F is diversifying its presence across residential, commercial, data center and industrial projects, leading to 74% YoY growth in order inflows. Order inflows were weak in the water and railways segments, but oil & gas order inflows jumped ~3x on large order win from Saudi Aramco. We have already baked in this order in our estimates and expect revenue to commence in 3QFY25 and then scale up in FY26. The execution period is 36-42 months, with EBITDA margin of 8-10% and a much lower working capital cycle than that of the domestic segment.

Focus remains on working capital reduction

KPIL continues to focus on reducing working capital and is targeting NWC below 100 days in FY25. The management is focusing on rebalancing the portfolio in areas where working capital is lower. Civil projects, such as B&F and water, have lower NWC and these segments now contribute to 37% of the order book. The increase in net debt during 4QFY24 was mainly due to higher working capital requirements, which will come down in the coming quarters, as the Saudi Aramco packages are less WC intensive. We bake in NWC of 115 days for FY25E/FY26E. OCF grew by 28% in FY24. With an annual capex run rate of ~INR5b, FCF will remain subdued going ahead.

Financial outlook

We expect KPIL to report a CAGR of 26%/34%/51% in revenue/EBITDA/PAT over FY24-26. This would be driven by: 1) inflows of INR266b/INR305b in FY25/FY26 on a strong prospect pipeline, 2) a gradual 100bp recovery in EBITDA margin to 8.9%/9.2% in FY25/FY26, 3) control over working capital owing to improved customer advances, better debtor collections from railways, and claims settlement. Driven by improvement in margins and moderation in working capital, we expect KPIL’s RoE and RoCE to improve to 17% and 14% in FY26, respectively.

Valuation and view

KPIL is currently trading at 22.1x/16.0x FY25E/FY26E EPS. We raise our SOTP-based TP to INR1,360, based on 17x P/E for the core business as pledge reduction is leading to valuation re-rating for the company. This is still at a discount to its immediate peer. Reiterate BUY.

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