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In a strong footing, despite challenging macros
We believe the recent stock price correction of KEC International offers a very good investment opportunity as the company is relatively well placed to tackle the current challenging environment. We are penciling in a lower growth than the management’s guidance for FY21E. We have cut our target multiple from 13x to 12x FY21E, despite that our revised target price of Rs293 (earlier: Rs327) offers 31% upside from the current levels. Hence, we upgrade our rating to BUY from ADD as we believe (i) ex-Saudi, MENA market ordering will not be much impacted due to reduction in crude prices, (ii) no major impact in execution of current projects due to COVID-19 crisis, (iii) relatively a beneficiary of rupee depreciation and low commodity price and (iv) beneficiary of reduction in competitive intensity.
* Stable execution despite COVID-19 disruption: There isn’t any stoppage of work in any project of the company and execution is going as per plan. There are certain minor disruptions in terms of delay in inspection of certain products to be imported from China and Europe due to COVID-19 outbreak. However, this is expected to be in the range of Rs2-3bn and will get booked in FY21E.
* Doesn’t expect any major fall in order intake due to crude prices: During the previous instance of a strong fall in crude prices, the reduction in ordering was majorly impacted in Saudi. Currently, there are tenders worth US$1bn in the MENA region and ordering activity ex-Saudi is unlikely to be impacted by the fall in crude prices.
* Working capital is under control with reduction in Saudi receivables: KEC’s net debt as of Q3FY20-end stood at Rs24bn (Rs6.5bn lower YoY and flat sequentially). The management is confident of further reduction of the same on the back of improved collections from Saudi and lower support towards vendors.
* Tailwinds in terms of rupee depreciation, lower commodity price and lessor competitive intensity: KEC will be a net beneficiary of rupee depreciation and reduction in commodity prices. Given the challenging environment, the company is witnessing lower competition in overseas markets which can result in better pricing and order volumes.
* Upgrade to BUY on compelling valuations, growth levers: Though the overall macro headwinds persists, we believe, the company has enough growth levers to tackle the same. We pencil in a 10% growth in FY21E, lower than the management guidance of 15%. Factoring in potential challenges of COVID-19 crisis, we have reduced target multiple to 12x from 13x FY21E. Despite that, the current valuations of 9x FY21E are attractive, hence, upgrade to BUY with a revised target price of Rs293.
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