Record Order Inflows Of INR 20,181 Crores And Strong L1 Position Will Improve Future Prospects

Key Takeaways

• Record order inflows and a strong L1 position bolster future revenue visibility in key segments, improving working capital and revenue prospects.
  
• International market participation and potential debt reduction enhance revenue growth and strengthen the balance sheet, supporting net profit margins.
  
• Challenges in collections, geopolitical issues, interest costs, currency risks, and execution risks threaten cash flow, margins, and revenue growth across key sectors.

Catalysts

Provides engineering, procurement, and construction (EPC) services for power transmission and distribution, buildings and factories, water, railways, oil and gas and urban infrastructure sectors in India and internationally.

• The allocation of ₹67,000 crores for FY '25-'26 under the Jal Jeevan Mission (JJM) is expected to improve collections and execution in Kalpataru's water business, potentially enhancing revenue and improving working capital management.
  
• Record order inflows of ₹20,181 crores and a healthy L1 position of over ₹2,500 crores bolster future revenue visibility, particularly in the flagship Transmission and Distribution (T&D) and Building & Factories (B&F) segments.
  
• The company's focus on optimizing its competitive position and improving fundamentals through a diversified business profile and disciplined capital management can contribute to sustaining healthy net margins.
  
• Successful participation in international markets like Sweden's HVDC space and Brazil provides revenue growth opportunities, while currency stabilization could mitigate previous earnings impacts from currency fluctuations.
  
• Potential debt reduction due to improved working capital days and significant upcoming inflows from non-core asset sales, like the VEPL road asset, could strengthen the balance sheet and enhance net profit margins through lower finance costs.

Kalpataru Projects International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kalpataru Projects International's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 4.3% in 3 years time.
• Analysts expect earnings to reach ₹12.9 billion (and earnings per share of ₹76.89) by about April 2028, up from ₹5.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹8.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.6x on those 2028 earnings, down from 30.3x today. This future PE is greater than the current PE for the IN Construction industry at 21.2x.
• Analysts expect the number of shares outstanding to grow by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.02%, as per the Simply Wall St company report.

Kalpataru Projects International Future Earnings Per Share Growth

Risks

• The company faces significant challenges in the water business due to slow collections from JJM projects, impacting cash flow and overall revenue growth. This can create pressure on working capital and delay anticipated revenue increases.
  
• Geopolitical issues and labor shortages pose risks to project execution, potentially affecting margins and earnings if project timelines are extended or costs increase unexpectedly.
  
• High interest costs due to significant capital deployment, especially in the water business, have impacted net margins and could continue to do so if projects are delayed or further unforeseen expenses arise.
  
• Currency depreciation, particularly the Brazilian real, highlights exposure to foreign exchange risks, adversely affecting earnings from international subsidiaries like Fasttel Brazil, which could also result in increased financial costs.
  
• Dependence on large, possibly long-duration, projects in the T&D and oil & gas sectors might expose the company to execution risks. Any delays or cost overruns in these projects could dampen expected revenue growth and profitability.

Valuation

• The analysts have a consensus price target of ₹1246.688 for Kalpataru Projects International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1570.0, and the most bearish reporting a price target of just ₹935.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹302.3 billion, earnings will come to ₹12.9 billion, and it would be trading on a PE ratio of 25.6x, assuming you use a discount rate of 15.0%.
• Given the current share price of ₹931.9, the analyst price target of ₹1246.69 is 25.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.