Kalindee Rail Nirman Engineers

Long-term investments can be considered in the stock of Kalindee Rail Nirman Engineers, which operates in the field of railway signalling, telecommunication and track, including gauge conversion and laying of new rail lines. A direct beneficiary of the higher government spending on rail infrastructure, Kalindee stands to benefit significantly from initiatives such as setting up dedicated freight corridors, increased outlay for gauge conversion and the rollout of metro rail projects.

In this regard, the company’s long-standing relationships with Indian Railways, Delhi Metro Rail Corporation (DMRC) and Rail Vikas Nigam (RVNL) also lend confidence. That it has in the past executed several projects for these organisations is good reference for the company’s execution capabilities and delivery commitments. At the current market price of Rs 145, the stock trades at about 14 times its likely FY10 per share earnings.

Even though the valuations aren’t exactly cheap, it is perhaps a premium for the company’s ability to bag railways orders, given its experience and expertise. Investors may, nevertheless, consider accumulating the stock in lots, given its small-cap status.

The government’s focus on improving rail infrastructure in the country, what with an increased outlay in the latest Railway Budget towards laying new lines and gauge conversion, bodes well for Kalindee.
Promising potential

The Budget has set aside Rs 2,921 crore for new lines outlay, an increase over the Rs 1,100 crore allocated in the Interim Budget, while increasing the provision for gauge conversion by 24 per cent to Rs 1,750 crore.

Since Kalindee had earlier undertaken many gauge conversion projects for RVNL as well as some zonal railway authorities, it appears well placed to capitalise on the planned outlays. Its presence in the metro rail space may be yet another revenue spinner for the company.

The company has been involved in laying metro rail tracks for DMRC and has even won repeat orders from them, including a relatively difficult work order of laying tracks on partly elevated and partly underground link.

With many cities such as Mumbai and Chennai looking to establish Metro Rail links, the company’s business liaison with DMRC may also serve as a reference point for future orders.

The proposed setting up of dedicated freight corridors spanning over 2,762 km, entailing an overall investment of over Rs 40,000 crore, also holds business potential for the company.

Though no orders have so far been awarded in the track works, initial tendering is likely to begin by the end of this year.

Even so, it merits note that the work orders in these projects, despite their long gestation, may typically be of higher value that entails better margins.
Order book & challenges

The company’s current order book stands at about Rs 400 crore, over 1.4 times its FY-09 revenues.

Though this doesn’t provide Kalindee with a healthy revenue visibility for the year, the company expects to add significantly to its order-book by December 2009, by when there would be more clarity on orders pertaining to dedicated freight corridors as well as from Bangalore Metro Rail, for which it plans to bid in the meanwhile.

While that may subject the company’s order book and revenues to lumpiness, it also relatively shields its revenues from the slowing economic growth, as the investments in rail infrastructure — a must to bolster the economy — may be the last to see any downturn.

Over the last three years, the company managed a compounded growth of 46 per cent and 47 per cent in revenues and profits, respectively, albeit on a low base.

The company’s margins too have more or less remained stable at about 9-10 percentage points.

For the year ended March 2009, though the company grew its revenues by 14 per cent, net profits fell by 19 per cent, led by pressure due to high input costs and interest outgo. Even though railway orders do offer price escalation clauses, their ambit is limited, leaving the company’s profitability susceptible to significant rise in prices of commodities such as steel and cement.

Further, even as Kalindee’s associations with global players in the field of telecommunication, signalling, civil and track works lend confidence, a lot would also hinge on the company’s ability to scale up its operations, especially given the huge opportunity available.

via BL