Maintain BUY on KEC International - Near term challenges persist - HDFC Securities

Mr. Parikshit D Kandpal, CFA, HDFC Securities and Mr. Chintan Parikh, Institutional Research Analyst, HDFC Securities

KEC reported robust execution with revenue at Rs 43.6bn (10% beat), driven by non-T&D segments. However, margin contracted by 197/95 bps to 8.1% due to SAE EBIDTA loss of ~Rs 0.7bn (higher commodity prices and overhead/idling costs). Margins could deteriorate further if commodity prices inches up further. FY21 order inflow stood at Rs 119bn, taking the order book (OB) to Rs 191bn (Rs 250bn with L1). Despite the lockdown, all sites are operating. With robust prequalification in domestic/international markets and across sectors, KEC is well-placed for a re-rating. However, sustained higher commodity prices could impact the margins. We maintain BUY on KEC with reduced target price of Rs 452/sh (Rs 476 earlier), 14x Mar-23 EPS.

Execution outperformance negated by margin miss: KEC reported revenue at Rs 43.6bn (+19/+33% YoY/QoQ). While execution in T&D segment (Rs 23.2bn) declined 6% YoY, revenue growth was driven by non-T&D segments, mainly from Railways (Rs 12bn, +39% YoY) and Civil (Rs 5bn, ~3x 4QFY20) segments. EBITDA declined 4.4% YoY as margins shrunk by 197bps to 8.1%. (vs est. of 9.1%) owing to losses at SAE ~Rs 700mn. Consequently, APAT was flattish YoY at Rs 1.5bn. With the current OB, we expect double digit revenue growth in FY22. However, high commodity prices could impact margins. 35-40% of the OB is fixed price and only 10% of OB is exposed to metals commodity prices.

International T&D and Domestic non-T&D to drive the ordering: KECI received Rs 119bn of orders in FY21, primarily driven by International-T&D, civil and railways. International T&D pipeline remains strong as ordering has picked up in MENA and SAARC region. Growth in railways would come from metros, DFC and high-speed rail. Order wins in newer segments like water pipeline, hydrocarbon, warehouse, FGD and chemical would allow civil business to scale up. KEC gave double digit rev growth guidance.

Sharp reduction in Debt/NWC days: Consolidated net debt, including the interesting bearing acceptances, reduced to Rs 32bn (Rs 37.4bn at the end of Dec-20). Better credit terms on switching to large railways vendors from MSME suppliers, led to decline in NWC from 144 to 112 days QoQ. Debt is likely to remain at similar level given the growth prospects.

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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