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Healthy growth to lift earnings
During KEC International (KEC) analyst meet, the management re-iterated their confidence on the overall growth prospects. Three projects that were stuck in Brazil due to environmental clearance issues have commenced execution, which will support growth of subsidiary SAE. On the domestic front, Railways and civil segments are expected to continue with their strong growth. Domestic T&D ordering is expected to get a fillip from ordering by key state electricity boards and green energy corridor opportunities. Overseas T&D demand from SAARC, South-East Asia and MENA continues to be healthy. We raise FY21E earnings by 8% and maintain ADD with a revised target price of Rs341 (previously Rs314).
* T&D execution is poised to improve led by SAE: Company is confident of recovery in T&D execution led by SAE with resolution of environmental clearance hurdles in three projects (in Brazil. Led by a healthy orderbook, overall growth traction in the overseas T&D segment is expected to improve and domestic order intake is poised to gain traction.
* Strong growth under Railways and civil segments to continue: KEC is gradually increasing its addressable pie under the Railways by targeting to enter signalling & telecommunication, metros, etc. Even under civil, the company is expanding towards airports, metros, etc. These two segments continue to promise high growth over the next two to three years.
* Revival of domestic T&D orders led by SEB and GEC: State electricity board (SEB) ordering had been weak during FY19, especially from some of the key SEBs like Karnataka and Tamil Nadu. These orders are expected be revived in addition to traction from other states like Odisha, West Bengal, Gujarat and Uttar Pradesh. Green energy corridor order is also expected to gain traction. Overseas T&D ordering from MENA is expected to pick up, especially from the UAE, Saudi Arabia, etc. Bangladesh is flush with considerable multilateral funding, which should support order uptick.
* Maintain ADD, raise earnings and target price on optimistic growth: With a stable government in place, domestic order intake environment is optimistic while strong ordering from Railways and civil segments will continue. Overseas market growth prospects are healthy led by MENA, SAARC and South-East Asia. Working capital is expected to be high given better than expected collections in FY19 and large advances from projects in Bangladesh, etc. during Mar’19. We raise our earnings by 8% for FY21E. Maintain ADD with a revised target price of Rs341 implying 12x FY21E earnings (earlier target price: Rs314).
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