Kalpataru Power (KPTL) announced the merger of JMC Projects (68% subsidiary) with itself in a share swap ratio of 4:1. Key points: (i) In our view, the merger is a meaningful opportunity to scale up the combined entity’s revenue led by geographical expansion, entry into big-ticket projects and other business synergies. (ii) Operational/financial savings could add up to Rs 1 bn in synergies (6% Ebitda). (iii) The merger is 3% EPS-accretive (post-8% dilution) on FY24E earnings for KPTL. We are upgrading the stock to ‘Buy’ with a TP of Rs 540 (earlier Rs 400) as the expanded addressable market and KPTL’s positioning leads us to raise the target P/E to 12x (50% discount to L&T). High promoter pledge—a key risk—is baked in our assigned valuations.
Outlook: Risk adjusted value at play— KPTL is on track to exit non-core businesses, which are balance sheet-heavy, and investing in core-focused EPC businesses (two acquisitions in last 24 months). This also shows up in the 40% debt reduction over the last 12 months. JMC’s diversification into new civil infra businesses is playing out well. An order book of Rs 310 bn provides 2.5x revenue visibility on FY22e revenues.
With a three-year 15-20% EPS CAGR potential and 15%-plus RoE, KPTL 1Y forward P/E potential is 15x in our view. However, high promoter pledge and near-term headwinds limit the target potential for now. Promoters’ realty firm is eyeing its maiden IPO; if successful, that could lead to pledge reduction and a P/E re-rating. We are upgrading KPTL to ‘BUY/SN’ (from ‘HOLD’).
