Maintain BUY on KEC International - Accelerated recovery - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities.

(TP Rs 322, CMP Rs 265, MCap Rs 68bn)

The key takeaways from KEC's FY20 AR are as follows: (1) a geographically well-diversified order book and robust pipeline; International T&D (SAARC/MENA, ex-SAE) and Civil & Railways would continue to drive growth in FY21E; (2) moderate profitability, dipped in FY20; (3) incremental borrowing cost (current interest rate <7%) has come down (FY20 finance cost at 2.8%; -20 bps YoY); ~55% debt is in forex; (4) sustained increase in WC intensity has led to lower CFO/EBITDA over past two years, but NWC is stable. Our channel checks for capital goods suggest that well-diversified companies are witnessing accelerated recovery in execution as international operations remain mostly unaffected while the labour situation is improving locally. We have increased FY21/22E revenue/PAT by 8/10.3% and 22.9/17.2% respectively. We roll forward 12x P/E based valuation to Jun-22E and maintain BUY with an increased target price of Rs 322/sh. The key risks to our call: (1) adverse currency/commodity movement, (2) further delay in capex recovery, (3) slowdown in government T&D spend, and (4) labour shortage.

Order pipeline robust: KEC is bidding for projects worth Rs 50bn in the Middle East and Rs 90-100bn from Indian Railways. It will also be the beneficiary of TBCB ordering of Rs 150-200bn from PFC/REC/PGCIL in 1HFY21E, besides the Rs 60-bn ordering from SAARC nations like Bangladesh and Nepal. KEC is already L1 in orders worth Rs 40bn (majorly International T&D) and has won Rs 7.4bn new orders for FYTD21; this is quite a feat considering FY20 was a miss on ordering. Its bid pipeline is strong at Rs ~500bn (domestic at Rs 350bn and international at Rs 150bn).

International T&D/Railways/MRTS to drive growth in FY21E: The shortfall of ~Rs 5bn worth of billing due to Mar-20 lockdown has led to lower revenue growth (of 9%) against guidance (of ~15%). The Railway ramp-up has progressed quite well and may see growth of ~30%+ for FY21E as well. Civil OB comprising primarily 3 MRTS and 1 RRTS projects, apart from the buildings segment, would contribute significantly (~Rs 15bn) FY21E onwards. While India-T&D and SAE continue to face headwinds in the near term, the International-T&D, especially MENA (the UAE, Oman and Saudi), will continue to drive order and revenue growth in FY21E. KEC is expected to lever the newly-acquired Dubai facility for securing orders. SAE would remain flat/negative, at best, in FY21E.

Balance sheet stable; deleveraging required: The reported debt is in line with FY20 guidance of Rs 22bn. With acceptances, net debt is Rs 33.3bn (1.13x net D/E). FY20 also witnessed a reduction in interest cost on account of higher foreign debt (50%+) in the borrowing mix as a result of robust execution in the international markets. Finance costs would come down further by 20bps to 2.6% due to lower incremental borrowing cost in FY21E.

Shares of KEC INTERNATIONAL LTD. was last trading in BSE at Rs.262.5 as compared to the previous close of Rs. 264.95. The total number of shares traded during the day was 7379 in over 417 trades.

The stock hit an intraday high of Rs. 265.6 and intraday low of 259.2. The net turnover during the day was Rs. 1940251.

Source : Equity Bulls

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