KEC International - Strong growth, healthy cashflow - ICICI Securities

KEC International has witnessed strong growth of 18% YoY in Q4FY21, led by civil (up 189% YoY), railways (up 39% YoY) and cables (up 60% YoY), offsetting 45% YoY drop under Mexican subsidiary SAE. Rs65bn of L1 position and strong orderbook of Rs191bn (1.5x TTM sales) lend growth visibility. Increase in commodity prices have impacted margins and the company is taking correct actions to address the same. Cashflow has improved due to reduction in working capital especially due to higher creditors resulting in lower interest outgo. Factoring in muted domestic growth and impact on margins from increased commodity prices, we cut earnings by 21.5% and 16.7% for FY22E/23E, respectively, and maintain BUY with a revised target price of Rs440 (previously: Rs426).

- Rail and civil segments offset weakness in T&D: Civil, railways and cables continue with their growth momentum offsetting the weakness in T&D segment, especially from SAE. Growth from domestic T&D is likely to be impacted due to the second covid wave; however, overseas market execution will be healthy. Despite headwinds, the management is confident of a double-digit growth in FY22E.

- Higher mix in non-T&D and high commodity prices impact margins: EBIDTA margin declined 200 bps YoY to 8.1% impacted by higher mix of relatively low margin non-T&D contribution. Commodity price has increased recently and hence, overall margins are likely to be impacted, especially fixed price contracts.

- Healthy cashflow: Cashflow has recovered from December 2020 levels and the working capital has eased due to increase in creditors. Hence, KEC was able to witness healthy net cash of Rs8.4bn from operations vs Rs840mn in FY20 and free cashflow is also strong at Rs6.8bn. This has resulted in reduction in debt and interest cost.

- Maintain BUY on healthy growth prospects: Railways and civil segments are expected to be in high growth phase in near to medium term. Normalisation of margins, control on working capital and lower interest rates will support earnings growth. Given healthy growth prospects, strong balance sheet and return on capital, we maintain our BUY rating on the stock with a revised target price of Rs440 (previously: Rs426).

Shares of KEC INTERNATIONAL LTD. was last trading in BSE at Rs.388.4 as compared to the previous close of Rs. 381.8. The total number of shares traded during the day was 48732 in over 1662 trades.

The stock hit an intraday high of Rs. 402 and intraday low of 381.8. The net turnover during the day was Rs. 19067958.

Source : Equity Bulls

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