Kalpataru Power: strong revenue visibility masks subsidiary troubles
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Kalpataru Power Transmission Ltd’s shares have lost ground in the last four trading sessions despite it reporting better-than-expected performance for the December quarter. That suggests the positives are already priced in.
The stock closed at a new 52-week high early this month as the company announced a large order win and indicated good growth momentum. The December quarter results closely tracked the upbeat commentary. Stand-alone revenues are up 29%. Profits rose 57% as finance costs fell.
Kalpataru did not receive any major orders in the December quarter. But it made up with new order wins in the first half of this quarter. It is seeing strong business opportunities from state electricity boards, Indian Railways and the international market.
The company is favourably placed for Rs3,000 crore worth of contracts and expects to start the next fiscal year with an order backlog of Rs10,000 crore, 1.4 times the 2015-16 consolidated revenues. On stand-alone revenues, the order backlog would be 2.3 times the previous fiscal year’s revenues. According to IDBI Capital Market Services Ltd, it takes six months to convert the order backlog into revenue stream. This should ensure good revenue momentum and analysts are confident the management will comfortably meet the lower end of the 15-20% growth in the current and next fiscal years.
The optimism is captured in the stock—up around 60% in the last one year. For it to continue to do well, Kalpataru will have to impress the Street with more than revenue growth.
Profitability is one aspect it can improve upon. Despite strong revenue growth, the company’s profitability did not see any major improvement (see chart). Also, earnings expectations are being weighed down by continuing troubles at its subsidiaries.
Growth at one of them, JMC Projects (India) Ltd, is undermined by slow moving orders from the real estate sector. It is not expected to post any revenue growth in the current fiscal year. Another unit Shree Shubham Logistics Ltd, which offers agri-logistics services, is hit by under-utilization of assets and is estimated to post losses for the current fiscal year. According to HDFC Securities Ltd, the logistics firm may require financial support (cash infusion) from Kalpaturu next fiscal year.
These issues are not unknown and strong growth in the core power transmission and infrastructure EPC business is making up for the weakness in subsidiaries. EPC is short for engineering procurement and construction. According to HDFC Securities, the strong order backlog should give Kalpataru leeway in picking projects with better margins. For the stock to outperform, it is crucial the company impresses on profitability and earnings front.