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Second half poised to see a healthy uptick

Kalpataru Projects’ (KPIL) 2QFY25 revenue was in line with our estimate. KPIL reported a revenue growth of 8% YoY, while EBITDA/PAT grew 13%/17% YoY. Execution growth was adversely impacted by delayed collections from water projects, which is likely to improve following the state elections. The company foresees an annual pipeline of ~INR600b for domestic T&D projects in the coming few years. We expect KPIL to be a key beneficiary of the robust T&D pipeline across domestic and international geographies, buoyant outlook for B&F projects, and improving international subsidiary performance. KPIL’s focus on margin improvement, working capital management, and non-core asset divestment will augur well going forward. We cut our estimates by 6%/8%/5% for FY25/FY26/FY27 to factor in weaker-thanexpected water segment performance; we roll forward our TP valuation to Dec’26E. We maintain our SOTP-based TP of INR1,500 based on 19x P/E for the core business on an improved prospect pipeline. Reiterate BUY.

Results largely in line

Revenue came in line at INR41.4b (+8% YoY) in 2QFY25, primarily led by robust execution in T&D/B&F segments (up 25%/19% YoY). Water and Railways segment revenues declined 43%/40% YoY. EBITDA margin was flat sequentially at 8.4% (our est. 8.6%) but expanded ~40bp YoY. EBITDA at INR3.5b grew 13% YoY/11% QoQ. PAT at INR1.3b grew 17% YoY, aided by a lower effective tax rate (27.9% vs. 29.4% in 2QFY24), while other income grew 6% YoY. Order inflows at INR48.5b were flat YoY. The order book stood at INR606.3b (+29% YoY). NWC improved QoQ to 118 days in 2QFY25 vs. 124 in 1QFY25. The management aims to bring it down by FY25-end. Net debt eased to INR27.9b from INR29b in 1QFY25. However, it inched up vs. 2QFY24 levels of INR22.1b mainly due to higher working capital. For 1HFY25, revenue/EBITDA/PAT stood at INR78.6b/INR6.6b/INR2.5b, up 5%/7%/4%. 1HFY25 saw order inflows of INR118.6b (down 3% YoY). During 1HFY25, operating cash flows and free cash flows were impacted by higher working capital and capex of INR2.5b.

T&D and B&F outlook continues to be robust

The outlook for T&D will continue to be robust across both domestic and international geographies, with the global focus on renewable energy. In India, there is a renewed interest in thermal power coupled with the ongoing thrust on renewable energy, which will necessitate investments in strengthening the T&D infrastructure. Similarly, B&F is witnessing healthy traction from data centers, real estate, airports, industrial capex, etc. and will be a key growth driver going ahead. Collectively, T&D and B&F segments account for 90% of the overall order inflows of INR118.6b in 1HFY25.

Weakness in water and railways to persist

Water projects have dragged overall performance during the quarter owing to delayed collections by a few states. Some states have already started releasing payments, while collections from the remaining states will increase post-state elections. Execution of water projects thus is impacted by the build-up of working capital, and this may affect overall revenue growth too for FY25. Along with this, we also expect the railways segment to remain weak due to conscious bidding for these projects. Thus, for FY25, we expect both railways and water segments revenue growth to remain weak, leading to a downward revision in our estimates.

Working capital rises YoY

NWC moved up to 118 days in 2QFY25 vs. 104 days in 2QFY24, despite 8% revenue growth owing to delays in payments for water projects. Sequentially, there was a slight improvement from 125 days, and management is confident of bringing it down to ~100 days by 4QFY25. Net debt also increased to INR27.9b from INR22.2b in 2QFY24, and the company expects it to come down in 2HFY25 as execution and customer collections see an uptick.

Fund raise to achieve multiple objectives

The company is planning to raise funds up to INR10b via QIP with a view to fund capacity expansion, meeting working capital requirements, strengthening the balance sheet, and exploring any inorganic opportunities on the manufacturing side.

Financial outlook

We cut our estimates to factor in lower water segment revenue. We expect KPIL to report a CAGR of 20%/25%/37% in revenue/EBITDA/PAT over FY24-27. This would be driven by: 1) inflows of INR264b/INR303b/INR349b in FY25/FY26/FY27 on a strong prospect pipeline, 2) a gradual recovery in EBITDA margin to 8.6%/9.0%/9.3% in FY25E/FY26E/27E, 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 FY27E, respectively.

Valuation and view

KPIL is currently trading at 19.7x/14.9x FY26E/FY27E EPS. We cut our estimates but roll forward our valuation to Dec’26E earnings. We maintain our SOTP-based TP of INR1,500, based on 19x P/E for the core business. Reiterate BUY.

Key risks and concerns

Slowdown in execution, lower-than-expected order inflows, sharp rise in commodity prices, and increase in promoter pledge are some of the key concerns that can weigh on the financials and valuations of the company.

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