Aramco deals can push Kalpataru Projects up the growth ladder

According to news reports, Saudi energy giant Aramco has issued letters of intent for about 16 engineering, procurement and construction (EPC) packages worth about $10 billion for the third phase of its Master Gas System expansion. (Photo: Fayez Nureldine/AFP)
According to news reports, Saudi energy giant Aramco has issued letters of intent for about 16 engineering, procurement and construction (EPC) packages worth about $10 billion for the third phase of its Master Gas System expansion. (Photo: Fayez Nureldine/AFP)

Summary

  • The Saudi energy giant has issued letters of intent for about 16 engineering, procurement and construction (EPC) packages worth about $10 billion, and Kalpataru has qualified for three of these, according to analysts at Nuvama Institutional Equities.

For investors in Kalpataru Projects International Ltd, contract wins always bring excitement. According to news reports, Saudi energy giant Aramco has issued letters of intent for about 16 engineering, procurement and construction (EPC) packages worth about $10 billion for the third phase of its Master Gas System expansion.

“We understand from industry sources that KPIL qualified for three packages in this order (the final award and order value are awaited)," analysts at Nuvama Institutional Equities wrote in a report on 23 February. The broking firm anticipates potential earnings-per-share (EPS) upgrades and a re-rating of Kalpataru’s stock as and when these projects are awarded, given their huge size and prestigious customer.

The potential order wins could also attract more large orders for Kalpataru in the future. As of the end of December, the company’s consolidated order book stood at 51,753 crore. It is focused on large projects with sustainable margins and better cash conversion. Its order pipeline remains strong across segments such as transmission and distribution, water, buildings and factories, oil and gas, and urban infrastructure.

Kalpataru has guided for consolidated revenue growth of 20-25% for FY24. With around 80% of its order book to be executed in two to three years, the company is confident of achieving its revenue growth target. In the first nine months of FY24, revenue was up 19% year-on-year at 13,655 crore.

Amit Anwani, an analyst at Prabhudas Lilladher, said he expects Kalpataru’s revenue to grow at an 18% compound annual growth rate (CAGR) from FY24 to FY26. However, considering the anticipated order wins of 8,000-10,000 crore from Aramco, it has the potential to grow at about 25% over this period, he added.

A strong order pipeline; a focus on geographic expansion in segments such as water, railways and civil; increasing pre-qualification for large contracts; and anticipated benefits from operational and cost synergies due to its merger with JMC Projects are expected to benefit Kalpataru in the long run.

That said, the biggest overhang for the stock has been the promoter pledge. With the real estate sector seeing a strong recovery, promoter pledges have fallen to around 39% in February from 44.5% in September. The company anticipates a significant drop in the next 6 to 12 months.

So, apart from the delivery of incremental pledge reduction, investors should closely track the monetisation of the company’s largest road asset, Vindhyachal Expressway. Kalpataru has a non-binding agreement in place for the asset and believes there should be more clarity on it in the coming months. With the stock surging 90% over the past year, much of the optimism appears to have already been priced in.

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