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KEC International’s (KECI) Q4FY23 performance was ahead of our estimates with revenues up 29%/26% YoY/QoQ to ~Rs55bn, led by a robust order backlog and healthy execution in T&D and civil businesses. EBITDA margin at 5.1%, lower than our estimates (although up 56bps QoQ), was impacted by execution of lowmargin legacy orders. However, given the lower commodity prices, logistics cost at pre-covid levels and improved profitability at SAE Towers, we expect consolidated margins to improve gradually over FY24E. Net debt reduction and working capital improvement was ahead of our and street estimates, and are likely to improve further in FY24 as execution ramps up and collections improve. FY23 order inflows stood at a record Rs224bn, up 30% YoY, taking the order backlog to >Rs340bn (including L1 position in Rs35bn worth of bids). In light of the large orderbook and improving debt position, we increase our FY24E/FY25E EPS by 5%/2% respectively. Our target price for the stock stands increased to Rs590 (earlier: Rs540). Maintain BUY.

* Record order intake and orderbook: KECI received its highest-ever orders in terms of value at Rs224bn in FY23, taking the orderbook to a record Rs340bn. Management indicated a strong pipeline of orders worth Rs1trn, evenly spread across the segments, which is likely to maintain the order inflow momentum. FY24 order inflow guidance is at Rs240bn-250bn.

* Robust revenue growth: KECI’s Q4FY23 revenues were up 29%/26% YoY/QoQ. Its revenues for FY23 stood at Rs173bn, up 26% YoY driven by growth across all business segments. Management has guided for a revenue growth of 15% for FY24, led by strong order backlog and focus on execution

* Margins remain under pressure, but likely to improve gradually: EBITDA margin for Q4FY23 contracted 80bps YoY to 5.1%. For FY23, the margin stood at 4.8%, down 180bps YoY. Margins for the year were impacted by higher raw material costs, freight costs, losses at SAE Towers and execution of low-margin legacy orders. We expect gradual improvement in margins led by improved execution, and improvement in SAE Towers’ profitability (the subsidiary turned EBITDA-positive during the quarter). We have pencilled 7.4%/8.3% EBITDA margin for FY24E/FY25E.

* Improvement in debt and working capital: Overall debt (including advances) decreased by Rs11bn QoQ to Rs50bn (FY22-end debt was at Rs48bn). Working capital days decreased to 118 as of Mar’23 vs ~137 days in Dec’22.

* Maintain BUY: With a strong orderbook and order pipeline, stability in commodity prices and improving supply chain, we expect execution to pick up over FY24E followed by improvement in margins. Accordingly, we have increased our earnings estimates for FY24E/FY25E and arrive at a revised target price of Rs590 (earlier: Rs540).

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