KEC International - Muted performance - HDFC Securities

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

KEC reported in-line execution with revenue at INR 25.4 (1.6% beat), driven by non-T&D segments. The Q1FY22 order inflow stood at INR 44bn, taking the order book (OB) to INR 204bn (INR 260bn with L1). Margin contracted by 254/184 bps YoY/QoQ to 6.3% due to the SAE EBITDA loss of ~INR 750-800mn and higher commodity prices. The KEC diversification gambit seems to be paying off with local non-T&D segments like railways and civil continuing to witness strong traction. A well-diversified order book, strong bid pipeline of INR 700bn, and likely improvement in margins from here on may lead to further rerating. We roll forward our estimates to Jun-23E and maintain BUY on KEC with increased target price of INR 485/sh (14x, INR 452 earlier, Mar- 23E).

Q1FY22 financial highlight: KEC reported revenue of INR 25.4bn (+15/-42% YoY/QoQ, 1.6% beat). While execution in T&D segment (INR 14bn) declined 4% YoY, revenue growth was driven by non-T&D segments, with railways at INR 6bn (+14% YoY), civil at INR 3bn (~3x YoY), cables at INR 3.3bn (~2x YoY) and solar/smart infra at INR 28mn (+48% YoY). EBITDA at INR 1.6bn declined 18% YoY as margins shrunk by 254bps to 6.3% (vs est. of 4.9%), owing to losses at SAE of ~INR 750-800mn and high commodity prices. APAT at INR 461mn declined by 35% YoY (~2.3x beat).

Domestic T&D to compensate SAE underperformance; margins to improve from here on: KEC received orders of INR 44bn in Q1FY22, primarily driven by T&D (excl. SAE), railways, civil and cables. The order book stands at INR 204bn with INR 60bn of L1 order, majority of which is coming from its international business. Domestic T&D, railways and civil are expected to drive the growth/profitability for the remaining year. KEC has a strong order pipeline of INR ~450/110/110bn in T&D/railways/civil. The two bleeding projects in Brazil (with 15-30% execution left) are expected to be completed by Q3FY22. The improvement in macro and political stability would lead to normalisation around Q3FY22 for SAE. KEC has 100k tonnes of steel at an elevated fixed price, of which 20-30% are accounted for in this quarter and a similar quantum is expected to be consumed in Q2FY22. SAE is expected to bleed for two more quarters before turning profitable by Q4FY22. KEC expects FY22E EBITDA margin at ~8%.

Increase in debt/NWC days; interest cost improves: The consolidated net debt, including the interesting bearing acceptances (at Rs 14bn), jumps to INR 39bn (INR 32bn at the end of Mar-21). The net debt (excl. acceptances) commitment for full year is targeted at INR 25bn. NWC was at 135 days vs 112 days in last quarter, mainly because of stretched payment from railways hit by passenger trains not fully operational during the quarter. The interest cost for the quarter declined to 2.6% of sales (vs 3% in Q1FY21).

Shares of KEC International Ltd. was last trading in BSE at Rs. 415.6 as compared to the previous close of Rs. 419.2. The total number of shares traded during the day was 13671 in over 724 trades.

The stock hit an intraday high of Rs. 422.45 and intraday low of 414.95. The net turnover during the day was Rs. 5713563.

Source : Equity Bulls

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