* KECI reported in‐line results as Sales/EBITDA de‐grew 4%/7% yoy while adjusted PAT remained flat yoy. Sales were robust in SAE Tower (+39% yoy) & Railway (+36% yoy) divisions while domestic T&D execution dropped by 17% yoy as KECI lost revenues of Rs5‐6bn due to COVID‐19 disruptions.
* Order book (incl. L1 of ~Rs40bn) stood at Rs240bn (+1% yoy). Order inflow was Rs27.6bn in Q4FY20 (+8% yoy).
* Consolidated net debt/EBITDA (incl. interest bearing acceptances) was at 2.54x vs 2.15x in FY19. Non‐cash working capital as % of sales increased to 25% in FY20 (vs 22% in FY19).
* While the interest cost/sales ratio stands at ~2.6% in FY20, management is hopeful of reducing it to ~2.3% in FY21.
* Our View
* We think ordering to pick up pace in Q2FY21 as KECI derives majority of orders from agencies like PGCIL, Indian railways (RVNL/RITES), metro corp, and multilateral banks, which in our view would be relatively less impacted by the pandemic. KECI to benefit from upgradation of rail infra, rising electrification, DFCC projects, metro projects & smart infra. Order pipeline is looking strong at ~Rs400bn (Domestic T&D: Rs200bn, MENA region: Rs80bn, Railways: Rs100bn)
* Though management refrained from giving any guidance, we are estimating ~8% sales decline with ~100bps margin reduction in FY21 owing to short term headwinds like i) Domestic lockdown, ii) Unavailability of workforce, iii) Supply disruptions & iv) Increased costs & negative operating leverage.
* We expect strong recovery in FY22 earnings (+35% growth yoy) led by diversified & healthy order backlog, ability to bag orders in tough times & proven execution track record.
Valuations are attractive as KECI is trading at ~9x FY22 EPS, nearing bottom cycle multiple vs long term avg. 1‐yr forward P/E of 14x. Retain ‘BUY’ with TP of Rs267 at 12x FY22 EPS.
Risk to our call
Delay in order inflow/execution due to COVID‐19 disruptions Deterioration in NWC to increase leverage
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