Is Kalpataru Power-JMC Projects merger a good value proposition?

Analysts have price targets that suggest 16-34 per cent upside for the stock over Wednesday’s intraday values.

As per the details, JMC Projects shareholders will be issued fresh shares of Kalpataru in the swap ratio of 4:1, which means for every four shares, JMC shareholders would be entitled to one share of Kalpataru share.

Edelweiss said that building in Kalpataru’s 68 per cent holding in JMC implies additional 1.3 crore Kalpataru shares will be issued, a dilution of 8 per cent.

“The merged entity is likely to drive operational synergies and scale effectiveness in areas such as procurement, supply chain and technology, apart from manpower cost. Interest cost savings of Rs 50 crore is likely too. Overall, initial cost savings of Rs 100 crore has further upside potential as Kalpataru leverages synergies and streamlines systems and processes,” it said.

The merger will create one of India’s largest EPC companies having a global footprint that caters to various sectors such as power transmission (T&D), building & factories (B&F), oil & gas (O&G), railways, Water, urban infra and heavy civil, among others.

IIFL Securities noted that the merger would cut Kalpataru’s T&D exposure to about 25 per cent in the merged entity and would add 30 per cent exposure each to the B&F and water (& urban infra) segments.

Another brokerage Prabhudas Lilladher sees the order book of the combined entity including L1 stood at Rs 37,000 crore as sees T&D accounting for 24 per cent, B&F 30 per cent, Railways 10 per cent, O&G 6 per cent and water 30 per cent.

“The combined entity has an order book in excess of Rs 37,000 crore including L1 providing revenue visibility for the next couple of years. The merger will enhance Kalpataru’s portfolio, while JMC will be able to leverage its expertise, global business access and financial flexibility to expand the business and bid for large-size infrastructure projects,” Prabhudas Lilladher said.

With the merger, said IIFL Securities, Kalpataru would be able to consolidate its presence in the Civil EPC business nurtured for over a decade and augment the growth prospects, which otherwise were constrained by the balance-sheet size of JMC.

“This merger will also address growth concerns in the core standalone Kalpataru portfolio and direct the asset monetisation proceeds across the diversified civil EPC portfolio, rather than finding its way into new infra assets,” IIFL said.

This brokerage has a target of Rs 501 for the stock. Edelweiss sees the stock at Rs 540.

Kotak Institutional Equities finds the stock Rs 500 worthy but said that the significant rerating from current levels would also be dependent on resolution on loss making road projects and T&D revival.

In comparison with its immediate peer in KEC, the company’s diversification across projects will become better across T&D and non-T&D segments with improved leverage ratios, Kotak said while adding that KEC still is bigger in size in terms of revenues, and is growing faster than and with better return ratios.

Meanwhile, Prabhudas Lilladher has a target of Rs 465 on the stock. The price targets suggest 16-34 per cent potential upside for the stock.