Kalindee Rail Nirman: Buy

Investors with a high-risk appetite and a three-four year investment horizon can consider buying the stock of Kalindee Rail Nirman, a leading turnkey project execution company in the railway sector.

Involved in the field of signalling, telecommunications, gauge conversion and track-laying for the Railways, Kalindee is likely to emerge as a leading beneficiary of the increasing capex by the Railways in recent years.

For the financial year 2008, the Railway Ministry has proposed the largest-ever Annual Plan of Rs 31,000 crore dedicated to modernisation, development and investment in new railway lines.

The company’s solid earnings growth, growing order-book and robust business outlook inspire confidence. At the current market price of Rs 298, the stock trades at about 17 times its likely FY-09 per share earnings.

However, given the volatility in the broader markets, investors can consider buying the stock in lots.

Investment rationale

The increased focus on improving railway infrastructure is likely to have a direct impact on the growth prospects for Kalindee, which derives most of its revenues from projects executed for the Railways.

One, given Kalindee’s expertise in laying rail tracks, it is likely to reap significant benefits from the proposed expansion in network by the Railways.

Two, the introduction of metro rail projects in cities such as Mumbai, Chennai and Bangalore could open up new sources of revenue.

Notably, Kalindee had, with the help of technology from its foreign partner, laid the tracks for the Delhi Metro Rail project. Kalindee’s established market presence backed by its execution skills could give it an edge in bagging orders.

The recently-won repeat order from Delhi Metro Rail for the construction of 33 km of track in Phase-II of its expansion, could also serve as a reference point for future orders.

In terms of order flow, the government’s decision to convert most of the existing metre gauge rail lines to broad gauge by the end of the Eleventh Plan could also translate into a healthy order book for this company, as it has experience in already completing about 450 km of gauge conversion

Besides, revenues could benefit from incremental business due to the setting up of the eastern and western dedicated freight corridors. Notably, the Government has allocated a sum of Rs 30,000 crore for this project.

Foray into rail sidings

While Kalindee’s foray into building rail sidings for steel and cement plants may not contribute to revenues in a big way now, it has the potential to be scaled up, given the ongoing capex investments undertaken by leading companies in these sectors.

Kalindee has already undertaken projects for companies such as Vedanta and Dalmia Cement, and is in talks with other players to get more such business.

For the quarter-ended June 2007, Kalindee reported a three-fold growth in earnings backed by a 148 per cent growth in revenues. Operating margins dipped marginally to 11.55 per cent. Its order-book, pegged at Rs 500 crore, is about 2.6 times its FY-07 revenues.

However, the management expects a chunk of the orders to be executed by 2008, with the rest spread over 2009.

Any delay in the rollout of the expansion plans charted out by the Railways could pose a risk to our recommendation. Also, since Kalindee is a small-cap stock, it enjoys limited liquidity. Purchases must be carefully timed and made in lots to obtain better prices.