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KEC International - Robust execution boosts revenue - Edelweiss
Posted On : 2012-08-03 20:42:40( TIMEZONE : IST )
KEC International's (KEC) Q1FY13 revenue grew 33%, ahead of our and Street estimates, on back of strong execution in transmission. Adjusting for gain on account of INR depreciation, revenue grew 30%. Margin (adjusted for forex loss) continued to remain under pressure and stood at 8.7%, down 70bps YoY. Despite weak operating performance, PAT (Adj. for Forex) surged 49% on low base effect. Order book improved 17% on strong intake, up 53% to INR20bn. Maintain 'HOLD' with TP of INR60 (earlier INR57).
Strong execution and margin pressure continue
KEC reported robust revenue growth of 33% to INR13.6bn led by international transmission business, which surged 55% YoY. Adjusting for currency benefit, sales improved 30%. Adjusting for forex loss, EBITDA growth was lower at 24% due to weak operating performance. Margin dipped 70bps to 8.7% because of entry strategy into new business (at lower margin). Despite weak operating performance, the company's PAT (adj. for Forex) surged 49% to INR332mn on low base effect.
Order intake spirals; order backlog improves
The company's order intake surged 53% YoY to INR20bn. It secured orders from all business verticals with a good mix of private and government orders. The backlog grew 17% YoY to INR94.6bn. Transmission and power systems contribute 68% and 18% to total order book, respectively. In terms of geographic spread, KEC has a well diversified order book—while India made up 43% of the backlog, Central Asia and Africa made up 27%, with Americas contributing 14%.
Outlook and valuations: Profitability concerns; maintain 'HOLD'
The company's entry strategy into newer businesses like water and railways has suppressed margin over the past few quarters. However, management has indicated that now margin is likely to improve from the current level to a normal of 8-9% as it finds its feet in the new business. We marginally raise our earnings by 2% , as we build in execution pickup/ increased order intake. On our revised consol earnings, the stock is trading at 6.6x and 5.3x FY13E and FY14E, respectively. We maintain our cautious stance on the margin front and retain our 'HOLD/SP' with a TP of INR 60.
