Buy Kalpataru Projects Ltd for the Target Rs. 1,550 by Emkay Global Financial Services Ltd
We reiterate our BUY rating on Kalpataru Projects International (KPIL), with SOTP-based target price of Rs1,550/sh (Unchanged). In our recent interaction, the management sounded positive on the tendering environment across key business verticals (T&D and B&F to be main growth drivers) and geographies, and maintained its guidance on revenue growth of 20% and on PBT margin range of 4.5-5% for FY25. Profitability is likely to see an uptrend, given that new orders entail double-digit margin. On the divestment of non-core assets, management expects ~Rs5.5bn cashflow (Vindhyachal Expressway and Indore Real Estate) and improving ROCE. With the cyclical turnaround being in favor of engineering players, KPIL stands to benefit the most among peers, owing to its disciplined approach in order picking and impeccable execution track-record
T&D and B&F to drive the order inflow growth While KPIL’s tender pipeline remains healthy across business segments, FY25 OI guidance of Rs230bn would be led by T&D (Rs500-600bnpa tendering for the next 4-5 years) and B&F (a Rs800-900bn annual opportunity). YTD order inflow stands at Rs70bn (-5% YoY, on a higher base), led by the T&D/water segments registering 30%/82% YoY growth, respectively. Order backlog was maintained at Rs571bn (BB ratio: 2.9x), along with L1 position of Rs50bn; 75% of L1 pertains to the T&D and B&F segments.
Profitability to see gradual improvement with new orders at double digit margin KPIL’s management is confident of margin improvement, especially H2FY25 onward, and achieving its guidance on PBT/EBITDA margin range of 4.5-5%/8.5-9% for FY25. As per management, new orders in the T&D and B&F segments (~65% of the order book) are booked at a better margin (>10%). We expect the margin to increase, from 8.2% in FY24 to 9.7% in FY27E.
Recent road arbitration win is positive; non-core divestment on track KPIL has recently won the ongoing arbitration case against the NHAI for two road boot assets: 1) Kurukshetra Expressway Private; and 2) Wainganga Expressway; this is a positive. Also, KPIL is well on track to divest Vindhyachal Expressway (VEPL) and Indore Real Estate. The management has been approached by a large global investor regarding VEPL, which has the largest exposure among road assets, of ~70%. Collectively from these two assets, the company is likely to receive cash flow worth Rs5.5bn in FY25.
Revenue visibility improving among international subsidiaries Linjemontage (Sweden) has an all-time order book of Rs31bn (BB ratio: 2.5x). KPIL’s robust international T&D order pipeline provides conviction toward the mgmt delivering ~25% YoY topline growth (FY24/25: Rs10bn/13bn), with EBITDAM expected to log at 5- 6%. Fasttel successfully reported breakeven PBT during Q1FY25, with order backlog growing to Rs12bn. With focused progress on closure of legacy orders, Fasttel is expected to register EBITDAM in the range of 8-9%, and deliver positive PBT by H2FY25.
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