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Healthy execution; margin recovery on cards

KEC International Limited (KEC) is a global infrastructure Engineering, Procurement and Construction major. It has presence in the verticals of Power T&D (Transmission & Distribution), Cables, Railways and Water & Renewable.

• KEC registered a healthy revenue growth of 31% YoY (above estimate), owing to strong execution in T&D segment by 39% YoY, and the Civil by 75% YoY while, railway, cable and solar business witnessed a de-growth.

• EBITDA margin declined by 259%bps YoY to 4.6% due to the execution of low margin legacy projects, elevated commodity prices, and losses in SAE Brazil performance.

• The management expects margins to recover from Q1FY24 onwards, led by completion of legacy projects and recovery in SAE tower business.

• The order book, including L1 orders, stands at a record level of over Rs.35,000cr, (2.2x TTM revenue) and KEC is targeting an inflow of Rs 23,000cr for FY24.

• Improvement in T&D execution and healthy order book, we remain positive on KEC for the long term basis. We reiterate, Accumulate rating and value the stock at a P/E of 14x with a TP of Rs.524.

Execution picked up...

KEC registered a revenue growth of 31% YoY, which is above our estimate of Rs 4,375cr, supported by T&D execution at 39% YoY, and the civil businesses by 75% YoY. While, railway, cable, and solar business witnessed a de-growth in revenue. On the margin front, EBITDA margin contracted by 259bps YoY to 4.6% during the quarter due to the execution of legacy projects with elevated commodity prices, higher freight costs and losses in SAE Brazil. The management stated that margin recovery is on the cards, expects margins to pick up from Q1FY24 onwards, led by completion of legacy projects and recovery in SAE tower business. Weak operating margin combined with higher interest expenses of 81% YoY, led the adj. PAT to de-grew by –81.2% YoY to Rs.18cr.

Order book expanded by 19% YoY ...

In 9MFY23, the company’s order inflow grew by 10% YoY to Rs. 15,554cr, supported by strong traction in T&D segment (11% YoY) and railway business (44% YoY). Consequently, the company increased the order inflow guidance to Rs.22,000cr to Rs.23,000cr (vs Rs.18,000 to Rs.20,000cr earlier) for FY23. The order book during the quarter increased by 19% YoY to Rs28,981cr, the total order book, along with current L1 stands at Rs.35,000cr (2.2x TTM revenue), its highest ever. The management also stated that, the tender pipeline remains healthy at Rs.1.1 trillion, comprising T&D, railway.

Valuations

We expect margin pressure to persist in Q4FY23 as well, therefore, we reduce FY23 EPS estimate by 18%. Govt’s thrust over capex spending and a revival in private capex provide ample impetus to the sector. A healthy diversified order book and strong execution capability will aid top-line growth. We remain positive on KEC and value the stock at a P/E of 14x on FY25E EPS with a TP of Rs.524.

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