Lower debt levels to strengthen outlook for Kalpataru Power Transmission

After the Sadbhav group, it was Kalpataru Power Transmission’s turn to ink a binding agreement to sell stake in three of its transmission projects, to reduce debt. In line with its view to strengthen its balance sheet, the company announced plans to sell stakes in its Alipurduar Satpura and Kohima projects.

While Satpura had contributed Rs 26.8 crore to revenues in FY19 after achieving COD (projects completion), Alipurduar had contributed just Rs 5.2 crore and was scheduled to receive COD shortly, while Kohima was expected to be completed next year. However, the company is receiving good valuations for the projects.

The stake sale is for an enterprise value of Rs 3,275 crore (debt of Rs 2,000 crore). Adjusting for the 26 per cent stake held by Techno Electric in one project, the company will receive Rs 1,150 crore in equity over the next 12 months (staggered payments). The company has invested Rs 550 crore in the projects, against which it is getting twice the valuations (price/book value of 2x), which comes as a surprise.

Further, the company’s consolidated debt stood at close to Rs 3,550 crore, which could reduce by about a third. Operations are steady, with March quarter revenues rising 29 per cent year-on-year (YoY) which was ahead of estimates.

This was led by strong execution in transmission and distribution (T&D), oil and gas, as well as railways. The company, which posted 23.1 per cent YoY growth in revenues during FY19, and 30.6 per cent growth in profit, has an order book of Rs 14,068 crore. This offers good revenue visibility.

The management had maintained its order inflow guidance at Rs 10,000 crore for FY20 to analysts recently, as it expects domestic T&D tendering to gain pace from the September 2019 quarter. They also expect healthy traction in railways, as well as oil and gas, to continue. The full-year revenue guidance stood at 15-20 per cent YoY.

Considering the company’s positive business outlook and the expected asset divestment, analysts at Sharekhan had already increased the valuation multiple of the company’s core business, and revised their target price upwards, at the end of June. The stock had touched its 52-week high earlier this month.

Following the deal announcement, analysts at Edelweiss said that the 35 per cent gain over the past six months may lead to the stock cooling a bit. They, however, remain constructive and believe valuation re-rating will sustain.