Buy Kalpataru Power; target of Rs 280: Sharekhan

Sharekhan's report on Kalpataru Power Transmission

"Shree Shubham Logistics (SSL), a subsidiary of Kalpataru Power & Transmission Ltd (KPTL), is coming out with an IPO to fund its growth plans, capitalise the recently acquired NBFC, and repay part of its debt. The company intends to raise Rs210 crore from the issue to use Rs50 crore each for capacity addition and capitalisation of its NBFC, Rs70 crore for loan repayment and the remaining amount for general requirement. We believe the listing of SSL could unlock substantial value for KPTL as most analysts have been conservative in assigning value to KPTL’s stake in SSL."

"SSL has a sound track record of profitability with a sustainable EBITDA margin of around 13-15%. With a significant expansion plan on the cards, its earnings could jump significantly in the next three years. SSL has chalked out an aggressive expansion plan to add 3.87 lakh MT of storage capacity to the existing capacity of 3.5 lakh MT. Further, it plans to capitalise the recently acquired NBFC, Punarvasu Holding and Trading Company, which supplements its agricommodity business by providing funding facilities to market participants against a collateral of stocks. Partial repayment of its debt would add value to the bottom line too."

"There is no comparable listed entity in the agri-commodity logistics space to benchmark the valuation but the leading integrated general logistic companies are trading currently at 20-25x their FY2017E earnings and 12-15x their FY2017E EBITDA. Given that the business is small and centred around agri-commodities, the market is likely to value SSL at a discount to the leading logistic companies. Nevertheless, given the strong earnings growth ahead and its ability to generate RoE of 20-25%, SSL could fetch market capitalisation of around Rs1,000-1,200 crore (KPTL’s market capitalisation stands at Rs3,600 crore at present), translating into a value of around Rs650 crore (on diluted equity) for KPTL’s post-issue stake in SSL. Moreover, after providing a 25% holding discount we arrive at a value of Rs 33 per share for SSL. Incorporating the potentially higher valuation of SSL in our SOTP valuation, we revise upward our price target for KPTL to Rs 280 and retain our Buy rating", says Sharekhan research report.

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