Strong execution but working capital stress persists
KEC International’s Q1FY20 revenue grew 15% YoY to Rs24bn led by 25% growth to Rs12.7bn under T&D segment driven largely by overseas projects and 67% YoY growth in railways to Rs5.2bn. However, the net working capital increased to 120 days impacted by higher receivables. Higher working capital together with Rs50mn of impact under interest cost due to prepayment premium of high cost loan limited the overall PAT growth. Given the growth visibility due to strong orderbook of Rs190bn (1.7x TTM sales) and L1 position of Rs35bn, we maintain our ADD rating on the stock with a revised target price of Rs312 (previously: Rs341).
* Healthy growth under SAE expected: Going forward, the T&D execution is expected to witness healthy growth led by overseas subsidiary SAE, traction from SAARC, South East Asia and Middle East in the near- to medium-term. The company currently has Rs7bn of receivable exposure from Saudi Arabia of which Rs3bn is retention; liquidation of this will improve cashflows.
* Strong railways and T&D segment execution: Led by overseas market, the overall T&D segment grew 25% YoY to Rs12.7bn, under this, the overseas subsidiary SAE grew 13% to Rs3bn. Railways grew 67% YoY to Rs5.2bn and the growth traction is expected to continue from this segment. The company is confident to achieve its FY20E revenue guidance of 15-20% growth.
* Muted order intake, expect to improve in H2FY20: Impacted by elections, the order intake was muted at Rs11bn, however, the company is L1 in Rs35bn of orders and is confident of achieving Rs150-160bn of order intake in FY20E. Main contractor ordering of Green Energy Corridor is completed and finalisation of EPC contractors for the same is expected in a month. Order traction from railways is poised to improve going forward.
* Higher receivables impact cashflows: Increase in receivables led to higher working capital, this, in addition with certain prepayment of loan resulting in Rs50mn increase in interest cost in Q1FY20 limited the earnings growth. The company is confident of restricting the overall interest cost to 2.8% of sales during FY20E.
* Maintain ADD on strong orderbook and growth outlook: Though the overall order intake was muted in Q1FY20, strong orderbook, railways and overseas lend growth visibility. We cut our earnings by 8% for both FY20 and 21E and maintain ADD with a revised target price of Rs312 (12x FY21E earnings), previously: Rs341.
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