KEC International - Margin concerns to remain - Way2Wealth

Consolidated order book stood at Rs.85bn, up by 9% implying a revenue visibility of close to 1.5 yrs. Major contribution came from the Transmission segment with 69.9% share of which the SAE Towers contributed 8.8%. Consolidated FY12 revenues grew by a strong 30% led by domestic growth at 44% of total & International contribution at 56%. Operating margins at 8.3% were hit severely due to execution of low margin bids, increased cost of raw material & high employee cost. With high interest cost, PAT margins have remained subdued at 3.7% showing a flat growth of 2% yoy.

Strong topline growth

Consolidated Q4 revenues have grown by 32% with strong growth coming from the international business at 69% for Q4FY12. The SAE Tower division clocked a growth of 15% for the qtr whereas the South Asian geography grew by 19%. The power systems division, which is the second biggest contributor to the overall revenues at 14%, also showed a strong growth of 37% for Q4FY12 and 23 % growth for FY12.

Margins under pressure

Despite strong incremental sales growth KEC failed to preserve its margins on account of intensifying competitive bids in the international and the domestic markets. Cons. Operating margins have reduced from 10.8% to 8.4% for Q4FY12 on account of high raw material cost of 59 % which was partly offset by reduced erection charges of 19% & higher employee cost at 5.52%. With the Koreans & the Chinese players too entering the markets and increased local aggression, the margins are expected to stay at the same competitive levels.

Focus on Balance Sheet Restructuring & Improved Working capital cycle Working capital cycle has improved from 106 days of sales to 73 days of sales on account of payments received from PGCIl. Also KEC has effectively reduced its debt to Rs.12.4bn from Rs.14.3bn with effective rate of interest at 9.5%. The management has indicated that the improved working capital cycle is not expected to improve further with changes in the payment cycle from PGCIL.

Valuations

At its CMP of Rs.55, the stock trades at 6x FY13E EPS of Rs.9.8. Order inflows and revenue growth are expected to be strong but we are cautious on its margins front. We are positive on the company and the stock is worth holding.

Other Key Conference call highlights

- KEC International has entered the African & Central Asian markets by securing Rs 2.13bn worth of order from the DR Congo region.

- The Greenfield Vadodara plant for manufacturing of cables upto 220kV & 400KV with an annual capacity of 4000 cables kms is on schedule & operational by June 2012 end.

- Forex losses or gains are negligible as its forex loans are 100% hedged having an average rate of interest at 9.5%.

- KEC International does not carry any slow moving items in its order book from the Middle East as indicated by the Management.

- The debt levels are expected to stay at current levels & are not expected to go down further from its current levels.

Source : Equity Bulls

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