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Benefiting from industry tailwinds

We continue to remain positive on Kalpataru Projects International (KPIL) based on its positioning across fast-growing power T&D EPC as well as the Buildings and Factories (B&F) segment. The company has a strong order book of INR606bspread across domestic and international geographies, providing healthy revenue visibility of 2.5-3 years. Following a weak execution in 1HFY25, a ramp-up is expected in the coming quarters, driven by the strong order book and easing payment situation. Benign commodity prices provide comfort on margin expansion, and interest expenses are likely to come down post the recent fund raise via QIP. Promoter pledge has already come down to around 8% of the total shareholding, and with the expected IPO of real estate arm, we expect this to gradually wane down further. We slightly revise our estimates downward and roll forward our TP to Mar’27 estimates. Reiterate BUY on KPIL with an SoTP-based TP of INR1,500, valuing core business at 19x on two-year forward earnings.

Key investment argument

Addressable market remains strong across segments

The addressable market for KPIL continues to remain strong across segments, with increased traction witnessed in transmission projects both domestically and internationally. The domestic tendering pipeline stands at around INR500- 700b, which is expected to be tendered over the next few months. NCT has already recommended projects worth INR460b to the Ministry of Power and 9,000ckm worth of transmission lines are lined up till FY29. By FY29, KPIL foresees an opportunity potential of INR2.5-3.5t from transmission and INR3-4t from distribution. KPIL, being an EPC player, targets an opportunity worth 25- 30% of the project. With a market share of around 15-20% in the domestic T&D market, we expect an yearly potential inflow of nearly INR70-80b. The company is also eying similar inflow opportunities internationally, as reflected in large order wins from international T&D during FY25 to date.

Sharp increase in inflows on T&D thrust and B&F

KPIL has been witnessing improved order inflows across T&D from both domestic and international geographies since FY23. A similar trend has been observed in the B&F division since FY24 from residential and commercial buildings, airports, etc. Together, both these segments form nearly 72-75% of the overall order book. We expect continued traction in these segments, given the renewable push and strong pipeline of projects across both domestic and international geographies. The water segment forms nearly 17% of the overall order book and is currently facing payment pressure from the state government. Company has slowed down execution of water projects till 2QFY25 due to payment delays. However, this situation has gradually started easing. Going forward, we expect T&D and non-T&D to have a mix of 42%:58%

Stable commodity prices provide comfort on margin

Commodity prices, particularly copper and HRC, have corrected by nearly 12%/13% since May’24. The company has around 40-45% of order book on fixed price basis, which will benefit from the softening of commodity prices. Additionally, with the completion of legacy projects, we expect margin expansion to be reflected in the financials

Improving strength of balance sheet post-QIP

KPIL raised funds worth INR10b via QIP in Dec’24. Nearly 75% of the proceeds are planned for debt reduction, while remaining will be utilized for funding capex, working capital, investment in subsidiaries, JVs, or acquisition. This is expected to improve Net D/E to 0.2x in FY25 vs 0.4x in FY24. Net debt in 1HFY25 increased to INR28b due to an increase in receivables from certain water projects. The payment situation for water projects is gradually improving and, hence, we expect the working capital cycle tooto improve from 1HFY25 levels. We have factored in an NWC of 113 days in our estimates for KPIL

Execution ramp-up a key variable to watch out for

KPIL’s order book stood at INR606b at the end of 1HFY25, with an overall inflow of INR153b in FYTD. This order book provides a strong revenue visibility over the next 2-3 years. With a strong order book, fairly stable commodity prices, and a healthy balance sheet post-QIP, the only variable to be monitored is execution improvement across all projects beyond the water segment. We marginally revise our revenue estimates downwards to factor in delays in water projects and, thus, bake in revenues to grow at a 19% CAGR over FY24-27

Real estate entity witnessing improved traction

The real estate entity is currently working on 22m sq ft of ongoing projects across residential and commercial sectors, with an additional 28m sq ft in forthcoming and planned projects. As of 31st Mar’24, the company held land reserves aggregating to 1,888 acres. These land reserves are located in Surat, Pune, Nagpur, Udaipur, and Shirol and will be developed in a phased manner. Debt for this entity increased to INR102b in FY24 from INR95b in FY23. With the IPO proceeds, the company plans to further reduce debt in the coming years.

Comfortable pledging levels

KPIL’s pledging came down to 8.7% at the end of 2QFY25, compared to 23.1%/12.8% in FY23/FY24, correspondingly loan against shares has also come down. This amount was utilized to support the real estate arm, which has started witnessing improved traction across projects and is expected to receive OCs for pending projects. We expect real estate arm to get funding support from the expected IPO, and hence we expect a reduction in promoter-level pledging for KPIL over time.

Financial outlook

We expect growth for KPIL to be driven by a healthy prospect pipeline, an improvement in execution, a stable-to-improving margin trajectory, and comfortable leverage. We expect revenue/EBITDA/PAT to grow at 19%/24%/38% over FY24-27.

Valuation and recommendation

KPIL is currently trading at 19.5x/14.8x FY26E/FY27E EPS. We cut our estimates slightly but roll forward our valuation to Mar’27E earnings. We maintain our SOTPbased TP of INR1,500, based on 19x P/E for the core business. Reiterate BUY.

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