Recommendation from Engineering - Construction Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.
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KALPATARU PROJECTS INTERNATIONAL: RIDING THE INFRASTRUCTURE WAVE 

HERE IS WHY
✓   Growth in construction market to benefit the company
✓   Diversified interests to add to revenue streams
✓   Focus on selective bidding with cash flow optimisation 

India’s infrastructure industry is predicted to experience a global boom, with investments expected to reach USD 600 billion annually by 2030. The country is projected to become the world’s third-largest construction market within three years, with a value of USD 1.4 trillion by 2025. The Union Budget 2024-25 has increased capital outlay for infrastructure development by 11.1 per cent, with key rail infrastructure projects like Metro Rail and Namo Bharat expanding to more cities. Railways are also investing at least ₹7 trillion over the next decade to lay new tracks and modernise the networks. 

Owing to this, our choice scrip recommendation for this issue is Kalpataru Projects International Limited, which is part of the Kalpataru Group established in 1969. The company is amongst the leading engineering, procurement and construction (EPC) organisations with proven experience and expertise. It is a diversified conglomerate with interest in real estate, power generation, agriculture logistics and EPC in major infrastructure segments. It generates most of its income – around 92 per cent – from EPC contracts. The remaining 8 per cent comes from tower parts and components (4.1 per cent), and others (2 per cent). 

Kalpataru Projects International is poised for future growth due to its strong financial performance and strategic initiatives. The company has seen double-digit growth in revenue and net profit in the last 10 years, providing a solid foundation for expansion. Its strong order book, valued at ₹51,753 crore, secures a significant portion of its targeted revenue for FY25. The company prioritises large projects with sustainable margins and better cash conversion, ensuring financial health and profitability. It is expanding its portfolio by entering new sectors like underground tunnelling, airports, design-build industrial plants and data centre. 

The company’s strategic initiatives include selective bidding, cash flow optimisation, and a strong sustainability commitment, with ambitious goals like water neutrality by 2032, a fully circular economy for construction waste by 2035, and carbon neutrality by 2040. In Q3FY24, on a consolidated basis, the company reported net sales at ₹4,896 crore, a QoQ increase of 8.37 per cent to ₹4,004 crore and a YoY increase of 22.38 per cent. The total expenditure of the company stood at ₹4,472 crore as compared to ₹3,630 crore, an increase of 23.30 per cent in the same quarter of the previous year and sequentially increased by 7.81 per cent. 

The net profit of the company stood at ₹144 crore, which increased by 32.11 per cent as compared to ₹109 crore in the same quarter of the previous year and sequentially increased by 60 per cent. On the valuation front, the shares of the company are trading at a PE of 41.6 times, which is very much higher as compared to its three-year median PE of 17.2 times, suggesting the stock might be priced at a premium but is less than the industry PE of 62.8 times. 

If we look at its PBV, it is currently at 3.75 times, which is lower than the industry PBV of 7.26 times. Considering all these factors and taking into account the government’s focus on infrastructure development, we recommend BUY.

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