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Robust execution, margin improves YoY/QoQ; downgrading to ADD

KEC International reported revenue/EBITDA/PAT growth of 28% / 45% / 36% YoY at INR 42bn / 2.4bn / 423mn. T&D and civil businesses continued to witness strong execution on robust order backlog and normalising of supply chain. The order pipeline remains healthy at >~INR 1trn across segments, which is likely to drive order inflow growth. Current order backlog + L1 at INR 350bn offers strong revenue visibility. We expect momentum to continue for FY24E/FY25E. Q1FY24 interest cost increased to INR 1.6bn (3.7% of sales vs 3.1% in FY23) due to increase in debt on account of higher execution. We expect limited debt reduction due to rising order backlog. Hence, we cut our earnings estimates for FY24E & FY25E by 8% and 3% respectively. Downgrade to ADD (from Buy) with a revised TP of INR 710 (Sep’25E).

Margins to improve gradually

Consolidated EBIDTA margin improved 70bps YoY to 5.8% both on YoY and QoQ basis (FY23 EBITDA margin was at 4.8%). Standalone EBITDA margin, at 4.2%, was impacted due to execution of low-margin legacy orders, which are likely to be finished by Q3FY24. Operations at SAE Towers, Brazil, have normalised at the PBT level. We expect gradual improvement in margins and have pencilled 7.4% / 8.2% EBITDA margin for FY24E/FY25E.

Net debt and working capital increased QoQ

Overall debt (including advances) increased by INR 7bn QoQ to INR 57bn during the quarter, though it remained lower than the INR 60.7bn in Q1FY23. Working capital days increased to 126 from 118 as of Mar’23. The rise in debt and working capital is due to higher order book and execution. We expect limited reduction in debt and interest cost in the near to medium term.

Downgrade to ADD on strong run-up with TP of INR 710

Order inflow in Q1FY24 stood at INR 45bn, up 30% YoY. With a strong order book + L1 position of INR 350bn and stability in commodity prices, execution momentum is expected to sustain in FY24E/FY25E followed by improvement in margins. We expect RoE/RoCE profile to improve from 3.9%/9.2% in FY23 to 19.9%/16.7% in FY25E. Having witnessed a strong run-up in the recent past (28% in last 3 months), we downgrade the stock to ADD (from BUY) with a TP of INR 710 (18x Sep’25E EPS).

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