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Healthy growth in T&D business...

KEC International Ltd. (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

• In Q1FY24, KEC reported a healthy revenue growth of 28% YoY led by strong execution in T&D segment by 71% YoY, and the civil segment by 60% YoY

• EBITDA margin expanded by 68bps YoY to 5.8% in Q1FY24 owing to benign raw material prices and moderation in employee costs.

• The company expects margins to improve to 6% in H1FY24 and 8% in H2FY24 supported by strong execution and moderation in commodity prices.

• The order book, including L1 orders, stands at a record level of over Rs.35,000cr, (2x TTM revenue), and KEC is targeting an inflow of around Rs 25,000cr for FY24.

• With the improvement in T&D execution and a healthy order book, we remain positive on KEC on a long term basis. We reiterate, Accumulate rating and value the stock at a P/E of 20x with a TP of Rs.703.

Healthy revenue growth...

KEC registered a revenue growth of 28% YoY to Rs4,244cr in Q1 FY24, driven by T&D execution at 71% YoY and the civil businesses at 60% YoY, while the SAE and the cable businesses witnessed a de-growth in revenue of –16%/-7%, respectively. The management guided for a revenue of over Rs2,4000cr in FY24 on account of a strong order book and a tender pipeline of Rs20,000cr in the next two quarters. EBITDA margin improved by 68bps YoY to 5.8% during the quarter due to benign commodity prices and a moderation in employee costs as a percentage of revenue. The management stated that margin recovery is on the cards, expects margins to expand to 7% in FY24 (6% in H1FY24 and 8% in H2FY24), supported by execution and moderation in commodity prices. Interest cost increased by 59% YoY in Q1FY24, whereas interest cost to revenue remained high at 3.7% compared to 3% during Q1FY23. Better operating margin and a fall in tax expenses of - 28% YoY led PAT to grow by 36% YoY to Rs.42cr.

Strong order book ..

In Q1FY24, the company’s order inflow grew by 30% YoY to Rs. 4,500cr, supported by strong traction in the T&D segment (47% YoY), railway business (74% YoY), SAE (48% YoY), and cable business (20% YoY). The order book during the quarter increased by 27% YoY to Rs. 30,125cr, cr. The total order book, along with current L1, stands at Rs.35,000cr (2x TTM revenue), providing better revenue visibility in the coming quarters. The management also stated that the T&D tender pipeline remains healthy in the SAARC region (especially Nepal & Bangladesh) and expects Rs. 8,000cr of order inflows from the civil segment in FY24.

Valuations

A pick-up in execution along with an improvement in margins will support earnings growth. Govt’s thrust on capex spending and a revival in private capex provide ample impetus to the sector. With the improvement in T&D execution and a healthy order book, we remain positive on KEC on a long term basis. We reiterate, Accumulate rating and value the stock at a P/E of 20x with a TP of Rs. 703.

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