Kalindee Rail Nirman Engineers: Buy

Investments with a two-year perspective can be considered in the stock of Kalindee Rail Nirman Engineers, which is engaged in the business of signalling, telecommunications, gauge conversion and track-laying for the Indian Railways. A direct beneficiary of the higher government spending on rail infrastructure, Kalindee stands to benefit significantly from initiatives such as setting up of dedicated freight corridors, increased outlay for gauge conversion and the rollout of Metro rail projects in major cities.

At current market price of Rs 209, the stock trades at a reasonable valuation of about 12 times its likely FY09 per-share earnings. This is attractive considering that the company's revenues are relatively shielded from slowing economic growth as the investments in rail infrastructure — a must to bolster the economy — may be the last to see any downturn. Given the stock's small-cap status, investors must consider accumulating the stock in lots.

The proposed setting up of dedicated rail freight network across the country's main business centres — from Ludhiana to Dankuni near Kolkata, and from New Delhi to Nhava Sheva near Mumbai — offers a large opportunity for Kalindee, which has an established relationship with Indian Railways in this line of business.

Besides this, Kalindee may also benefit from the Railways' target of setting up new lines and gauge conversion projects. A major growth driver for Kalindee may come from the proposed rollout of metro rail projects. Having successfully implemented the rollout for the Delhi Metro Rail Corporation, Kalindee now stands a good chance of procuring similar orders from Metro rail projects in both Mumbai and Bangalore.

That Kalindee has, in the last two years, managed a compounded growth of 66 per cent and 98 per cent in revenues and profits, lend confidence to its ability to convert opportunity into business. It currently has an order book of Rs 400 crore and expects to add significantly to it in the coming quarters. The company's June quarter numbers have also been strong, amid slowing numbers for many other infrastructure and capital goods majors.

During the quarter, the company posted 42 per cent increase in profits backed by 23 per cent growth in revenues. Operating margins, which had come under pressure the previous quarter due to the rise in steel price, improved this time around. Helped by the reimbursement of the increased raw material expenses incurred last quarter (on contracts that were covered by the price escalation clause), operating margins in the June quarter were pegged at a healthy 13.4 per cent.

In terms of risk, Kalindee's profitability remains susceptible to rising steel and cement prices. Further, there may also be a risk of higher borrowings or equity dilution in the near future, given that the company is looking to raise funds to meet working capital requirements for its new orders.