KEC International - 4QFY2012 Result Update - Reliance Securities

Top-line grows strong, margins disappoint

Key highlights of the result

- Net Sales up ~33% yoy; healthy order book visible: KEC International's consolidated Net Sales for 4QFY2012 was up ~33% yoy at Rs2,069cr (Rs1,559cr in 4QFY2011), whereas, it was up ~42% qoq (Rs1,460cr in 3QFY2012). The company has witnessed strong jump in revenues during the quarter owing to the robust growth in various business verticals viz. Transmission business (up ~37% yoy to Rs1,516cr), Power System (up ~37% yoy to Rs291cr) and Railways ( up 23%). In the Transmission business, Transmission International reported an impressive growth of ~69% yoy to Rs711cr. The company's reported order inflow in 4QFY2012 was ~Rs1,800cr. The consolidated order backlog for the company as on 4QFY2012 stood at ~Rs8,572cr (~69.9% from Transmission segment, ~17.9% from Power Systems segment, ~1.7% from Cables, ~4.0% from Railways and the balance from Telecom & Waters), thereby, increasing the revenue visibility for 18-24 months.

- OPMs disappoint: The Company reported consolidated EBITDA of ~Rs170cr in 4QFY2012 (up ~3% yoy). EBITDA margin contracted a significant 241bp yoy on account of higher raw material costs (up 1,740bp yoy), employee costs (up 12bp yoy) and change in product mix (increase in contribution from projects in new verticals, which are of low margin, bagged as an entry strategy), and also due to the pressure of execution of some thin margin orders during the quarter. However, on a sequential basis the EBITDA margin was up 48bp. Moreover, the reduction in erection & sub contracting expenses (down 553bp) and other expenses (down 28bp) prevented further erosion in margins.

- Net Profit declined ~5%: The Consolidated Net Profit for 4QFY2012 decreased ~5% yoy to ~Rs74cr (~Rs79cr in 4QFY2011) due to poor operating performance, higher interest cost (up ~13% yoy to Rs41cr) and higher tax (up 210bp).

Outlook and Valuation

On the top-line front, KEC International, displayed strong performance, whereas, it failed to perform on the bottom-line front owing to strong competition in core T&D EPC business, increasing raw material prices and higher interest cost. As per the management's guidance, the company's top-line would witness a good growth, whereas, it would continue to face difficulty on the margins front due to intense competition from international players (Chinese, Korean) and domestic players.

In our view, KEC International's strong global presence, diversified business portfolio and the current order book worth ~Rs8,572cr would provide reasonable revenue visibility for the company, with a positive outlook for new orders in the short term. We are now rolling over to FY2014 estimates, which gives us a target price of Rs84. At the CMP of Rs54, the stock is trading at a P/E of 6.4x and 5.8x its FY2013E and FY2014E EPS respectively, and hence, we maintain our Buy recommendation on KEC International.

Risks to the view

- Any delay in investment by government or private players may lead to reduction in order book and would impact revenues.

- Increase in input costs, currency fluctuation, delay in execution and interest cost burden would impact profitability.

Source : Equity Bulls

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