KEC International - Upturn in margin strengthens - upgrade to BUY - PhillipCapital

KEC International Q214 results beat consensus and our estimates on higher than expected margins. In our view, profitability would continue to improve as the lower margin orders in the order book gets depleted. We revise up our estimates to factor in higher margins over the next 2 years and upgrade our rating on the stock to a BUY with a revised target of Rs40 (earlier Rs30).

Q214 results highlights

- Sales for Q214 at Rs17.8bn (+7% YoY) were below consensus of Rs 18.5bn. This was on account of lower than expected execution in the Power Systems (-56% YoY) and SAE Towers (-32% YoY). The management has cited that project execution remains as per the schedule and there have been no inordinate delays in the same.

- EBITDA margins at 6.3% (5.1% in Q214) were up 120bps YoY primarily on lower contribution from new businesses (Power system, Railways, Cable and water contributed 20% of sales in Q214 vs. 30% of sales in Q213) and have lower margins. EBITDA was at Rs 1.2bn (+30% YoY). There was an MTM forex loss on customer advances of Rs 70mn during the quarter vs. Rs80mn in Q213.

- Management expects margins to continue to improve hereon; lower margin order book of the new businesses stood at Rs2bn and is expected to be completely executed by Q414.

- PAT at Rs 0.22bn against consensus of Rs 0.19bn (+34% YoY); higher interest expenses (+46% YoY) was offset by a lower tax rate (28% in Q214 vs. 44% in Q213).

- Orders in Q214 at Rs 18bn (+20%YoY) and the order book stood at Rs 102bn (Book to bill - 1.4x) from Rs 101bn in Q114. Management has cited that the orders won in the quarter were of a better margin than earlier.

- Standalone revenues at Rs 15.1bn (+17% YoY). EBITDA margins at 5.0% (+120bps YoY) on lower contribution from new businesses. EBITDA was up 53% to Rs 750mn on account of the better execution and margins. PAT at Rs 82mn was hurt by higher interest cost (+59% YoY).

- SAE Towers had revenues of INR1.84bn (-32% YoY) with EBITDA margins of ~10-11%; management has guided to revenues of Rs10bn for FY14 and maintaining the margins at 10% for the full year.

- NWC days stood at 103 days compared to 91 days in Q213 and 72 days in Q413. Debtors are at Rs41bn (200 days of sales); management has guided to debtors returning to ~Rs35bn

Estimates and target price: We raise our earnings estimates for FY14 by 21% to factor in beat on margins and by 35% for FY15 to factor in higher margins as the lower margin orders are exhausted. We assign a target multiple of 6x FY15e EPS (same as before) to derive our target price of Rs40 (earlier Rs 30) and upgrade our rating to BUY. We expect margins to continue to rise as the share of low margin orders is exhausted.

Source : Equity Bulls

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