Kalpataru Power Transmission Ltd Research Report By Edelweiss

Five factors that make it a compelling Tactical BUY

Kalpataru Power Transmission (KPTL), the global leader offering integrated solutions in T &D space, has over the years diversified into segments like Railways and Oil & Gas pipeline to capture bigger opportunity and grow faster. It has an exposure to the construction space with a 67% stake in JMC Projects, which reported strong order inflow in H1FY21, leading the management to revise upwards its FY21E guidance. On the standalone side, KPTL’s strong order book and healthy bid pipeline offers high revenue visibility with higher profitability potential.

We believe, Transmission Asset sales, deleveraging, merger of KPTL & JMC, and strategic stake divestment in Logistic business will result in a significant re-rating for KPTL over the medium term. Most importantly, management has guided for 40% pledge reduction over next one year which was a major hangover on the stock price over the recent past. We recommend ‘Tactical Buy’ with a target price of INR 500.

Healthy revenue visibility, deleveraging a key trigger

KPTL has an order book of INR 12,292 crore and is L1 in tenders worth INR 2,400 crore which offers healthy revenue visibility of ~1.7 years. The management indicated a healthy bid pipeline across businesses and guided for 5% Revenue growth in FY21E. KTPL has decided to shift from the asset ownership model and started selling its T&D assets. It expects to close divesture of all 4 T&D assets in FY21E and post that, the standalone operation is expected to be debt free. KPTL is expected to maintain ROCE in the healthy 18-19% range over FY20-23E.

JMC sitting on a record high order book

In H1FY21, JMC’s order inflow crossed INR 6,000 crore and the management revised its FY21 order inflow guidance to INR 7,000 crore. It is confident of achieving 0-5% revenue growth and 11% EBITDA margin in FY21E. Disciplined approach in managing the EPC business is visible in the way leverage remained under check even after significant growth over the last 5 years and continuous investment in BOT road assets. Standalone ROCE increased to 17% from 8% over FY15-20. After a flat FY21E, we see 23% revenue growth to INR 4,580 crore in FY22E followed by 14% revenue growth in FY23E. EBITDA margin is expected to reach to 11.3% in FY23E as compared 11.1% Reported in FY20.

Expect deleveraging, Asset sale & Pledge reduction to drive re-rating

At CMP of INR 295, KPTL’s standalone operation is trading at 8x/7x FY22/23E EPS of INR 38/44, a huge discount to its peers, providing a margin of safety. We believe, multiple triggers like T&D asset sales, deleveraging, merger of JMC & KPTL, strategic stake sale in logistic business and promoter pledge reduction will result in a significant re-rating in stock price over the medium term. We recommend ‘Tactical Buy’ with a target price of INR 500.