KEC International - 4QFY2013 Result Update - Angel Broking

For 4QFY2013, KEC International's (KEC) top-line and bottom-line performance was below our expectations. KEC reported a subdued 3.9% yoy growth in its top-line to Rs. 2,150cr. Margin pressure along with elevated interest cost (partly due to capitalization of Vadodara facility) and higher tax rate (since the company was unable to take tax benefit on deduction from overseas business) led to a loss of Rs. 14cr.

Margin pressure intensifies: The consolidated EBITDAM for the quarter contracted by 406bp yoy to 4.1%. Although transmission segment margins continue to be ~8%, cable segment and relatively new segments of railway and water are currently operating at low/negative margin which is exerting pressure on the company's operating margin. Cost escalation in some of these projects has led to a Rs. 45cr hit on EBITDA in the quarter. The company had aggressively bid for some of these low margin projects to get a foothold in these segments; the margins are expected to improve gradually as new orders are being booked at higher margins. The company also booked a forex loss of Rs. 12cr in the quarter.

Robust order book: The order intake during the quarter stood at Rs. 1,704cr, a decline of 7.7% yoy. However, strong order accretion over FY2013 has led to a robust order backlog of Rs. 9,470cr (1.4x trailing 4 quarter revenues). The Management has indicated shifting its priorities from aggressive order accretion to margin improvement.

Outlook and valuation: KEC has a geographically diversified business model which insulates itself from slowdown in any particular region. Further, the company has also ventured in new businesses of railway and water, which have fared well with order inflows and revenues picking up at measurable pace. The only concern is continued margin pressure. However, considering management's assurance that new orders are being booked at higher margins and attractive valuations (stock is trading at 5.6x FY2015E EPS), we maintain Buy on the stock with a revised target price of Rs. 63.

Source : Equity Bulls

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