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Ordering activities to pick up pace in FY20; reiterate LONG
KECI’s 4QFY19 revenues grew ~5% yoy to ~Rs 38.4bn (6% below EE) on flattish yoy execution in the T&D segment. Railways/civil/cable segments performed well, growing ~76%/29%/26% yoy. EBITDAM at ~10.4% expanded ~30bps yoy as margins of non-T&D businesses inched up. FY19 order inflows declined 7% yoy to ~Rs 141bn mainly due to weak domestic T&D inflows. We expect order wins to pick up from 2QFY20 onwards as ordering activities gather momentum after election results (domestic order pipeline: ~Rs 250bn). We tweak FY20/FY21 PAT estimates by -3%/-5% and restate LONG with a Jun’20 TP of Rs 360 (rolled over from a Mar’20 TP of Rs 356) at 15x TTM P/E (unchanged).
T&D execution, order inflows to improve sharply in FY20:
T&D revenues were flattish in 4QFY19 on account of (a) delays in environmental approvals for two projects in Brazil and (b) execution headwinds in the domestic private project of a customer. However, with ~Rs 140bn of the T&D order book in place, execution is set to gain momentum in FY20, especially on the international front (Brazil, SAARC and SEA). On the domestic side, FY20 would see heightened ordering activities with renewables tenders (PGCIL + TBCB) worth Rs 130bn-140bn and SEB tenders worth ~56bn in the pipeline. Management has guided for FY20 order intake of ~Rs 170bn with ~70% coming from T&D.
Railways, civil segment to continue to outstrip T&D growth rates:
Railway/civil businesses have grown by ~127%/86% in FY19, with their contribution set to further increase in the overall revenue pie (FY19: ~17%/5%). With ~33K km of Railway Electrification still to be done in India, the government has set its FY20 target at ~10.7K km. On the civil front, with the acquisition of many new clients in FY19, KECI has successfully diversified its client base to include FMCG, cement, real estate and automobile players. Management has guided for 20-25%/100% growth in railways/civil segments in FY20. In cables (FY19 revenues up ~17%), growth would largely stem from product mix improvements (higher EHV, exports).
Operating margins to remain stable, interest cost as a % of sales to decline:
Operating margins would only inch up marginally from current levels with an improvement in railways and civil margins. However, with the normalization of working capital in 2HFY19, management has guided for interest cost as a percentage of sales to decline to ~2.5% in FY20 from ~2.8% in FY19. With an order book of ~Rs 203bn in place, we expect KECI to clock revenue/EBITDA/PAT CAGR of ~15%/15%/21% during FY19-22E. The stock is valued attractively at FY20E/FY21E P/E of 13x/10x with FY20E/FY21E ROEs of ~22% each. Reiterate LONG with a Jun’20 TP of Rs 360 set at 15x TTM P/E.
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