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Pipeline remains strong across segments

KPIL, in its annual report, emphasized its strategy to strengthen its presence in existing geographies by tapping into large and complex EPC projects, diversify into newer geographies and foray into newer businesses such as data centers, airports, tunneling, urban mobility, hydrocarbons, etc. The company continues to be a key beneficiary of the domestic and global upswing in upgradation and expansion of the T&D network, driven by increasing urbanization, electrification, and the shift toward cleaner sources of energy. Additionally, the government’s thrust on infrastructure in the past few years has created robust opportunities for KPIL, translating into a record high order book, revenues, and EBITDA in FY24. Notably, the merger with JMC has enabled the company to participate in large-sized EPC projects both in India and internationally. We maintain our BUY rating on the stock.

Domestic T&D segment has robust growth visibility

For the T&D segment, KPIL received inflows of INR101b/INR111b in FY23/FY24, far ahead of the previous year’s inflows, mainly driven by continued investments in T&D for renewable projects in both domestic and international markets. This is in line with the expected investment of INR2.4t envisaged by FY30 for enhancing the transmission network domestically. In the coming 2-3 years, KPIL foresees domestic tendering worth ~INR500b to materialize.

Spreading wings in international geographies across segments

KPIL has a presence in 73 countries, and it has ventured into Madagascar, Poland, Niger and Tanzania for supply of tower parts. In international geographies such as Europe, Africa and LatAm, there was a substantial growth in T&D ordering. Notably, subsidiaries Linjemontage and Fasttel also reported 104%/30% growth in the order book in FY24. The company plans to grow across geographies, driven mainly by the T&D segment, followed by other segments. We expect KPIL to continue to target incremental investments in the following geographies:

*  Europe is pursuing one of the world’s most ambitious climate and energy goals, resulting in almost doubling of the existing share of renewable energy in the EU. This is expected to require investments of ~EUR584b in T&D grids by 2030.

* Africa is witnessing an increase in electricity demand, a shift toward renewables and regional integration. These factors are driving the T&D infrastructure market’s expansion in Africa. The annual spending on T&D infra is estimated to be more than USD45b in the next eight years.

* The Middle East region has embarked on a journey to increase the share of renewables in the energy mix with a view to decarbonize the power sector. Accordingly, countries such as UAE, Saudi Arabia, Oman, etc. have lined up massive investments in solar, wind, and nuclear energy. The overall GCC pipeline for T&D stands at ~USD50b by 2030.

* Latin America and Caribbean countries are expected to see investments worth USD577b by 2030, out of which USD397b would be for building greenfield generation and T&D infrastructure and the rest for replacement and upkeep of existing assets.

Improved traction across non-T&D segments too

KPIL’s B&F segment saw a 74% YoY increase in order inflows to INR65.3b and the company is increasingly focusing on residential, commercial and institutional buildings, data centers, industrial plants, and airports. The company expects healthy double-digit growth in revenues to continue in the B&F segment. For the urban infrastructure segment, KPIL has forayed into underground metro rail tunneling with two project wins and would also be ramping up capex in this segment. The company’s oil & gas segment has also bagged an order worth over USD900m for carrying out EPC work for three packages of the MGS-3 network in Saudi Arabia. Execution of these projects would commence in FY25 with a rampup expected in FY26. We also expect KPIL to benefit from water projects from Namami Gange, Jal Jeevan mission and water treatment and irrigation projects, while we expect the company to remain cautious on the railways segment.

Margins to improve from current levels

With the completion of low-margin domestic T&D projects, we expect improvement in EBITDA margin to 8.9%/9.2% in FY25E/FY26E. The company is also building up its employee base and resources for the execution of projects in the Middle East. It is also investing in building capabilities in other segments, which we believe would limit further margin gains. Commodity prices have also started moving up in the last three months, which can also impact fixed-price contracts adversely.

Balance sheet remains healthy; NWC days at stable level

During FY24, KPIL successfully commissioned the scaffolding capacity (12,000 MTPA) at its Raipur plant for captive consumption. Further, the company has added a third line (10,000 MTPA) to Customized Formwork for urban infrarelated projects such as pier, pier caps and U girders, for captive consumption. Going forward, the company intends to scale up the formwork operations with a view to venture into third-party sales. NWC remained stable at 113 days, through a reduction in receivable days. Receivable days improved by 10 days to 120. The management aims to further optimize NWC days by ensuring timely collection of payments and prompt filing of invoices. Net debt increased by 16%, in line with revenue growth of 17%. We do not see a material reduction in debt going ahead because of the strong growth expected in coming few years. Divesting non-core assets to aid RoCE improvement KPIL has nearly invested INR11-12b in non-core assets (such as roads, Indore real estate, Shubham Logistics, etc.);

divesting these assets is critical for freeing up capital and consequently, RoCE improvement.

We expect the company to release capital worth INR5-6b from the completion of the Indore real estate project and the sale of the Vindhyachal road project in the next one year

Outlook

Over the years, KPIL has evolved from being a T&D EPC player to a welldiversified entity straddling segments and geographies, which mitigates the cyclical nature of the T&D business to an extent. The company now has an established presence across businesses such as oil & gas, water, urban infra, construction, railways, metros, data centers, etc., spanning 73 countries. The merger with JMC has equipped KPIL with synergies and capabilities to tap large and complex projects, which augurs well going forward.

Valuation and view

KPIL is currently trading at 21.5x/15.7x FY25E/FY26E EPS. We maintain our BUY rating with an SoTP-based TP of INR1,385, based on 17x P/E for the core business. Any further reduction in the level of promoter pledge will be positive for core business valuations.

Key risks

Key downside risks: 1) slowdown in order inflows, 2) a spike in commodity prices, 3) higher crude prices, 4) higher inflation, 5) increase in receivables and working capital, and 6) intensified competition.

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