Buy KEC International Ltd For Target Rs. 520 - Yes Securities
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Another quarter of disappointing margins
Our view
KEC International (KECI) reported a mixed set of numbers, with healthy topline growth across both T&D (7% YoY) and nonT&D segments such as Cables (10% YoY), and Civil (65% YoY). Despite robust gross margins, EBITDA margins remained under pressure owing to elevated freight costs, execution of legacy projects at adverse prices and SAE Brazil performance. Primarily due to a low base, order inflows grew 134% YoY. As on 2QFY23 order book stands at ~Rs275.7bn (1.8x TTM revenue), providing revenue visibility for next few quarters. Going forward management expects adverse impact of SAE legacy projects and margin pressures to ease by 3QFY23. Management maintained order inflow guidance of Rs180200bn in FY23 and high singledigit margins by FY24.
We believe KECI is well poised to gain from upcoming opportunities in infrastructure segment given 1) diversified business model, 2) healthy market share in T&D segment, 3) excellent execution track record with strong parentage and 4) comfortable balance sheet. The stock is currently trading at 19.3x/11.7x/9.6x FY23E/FY24E/FY25E earnings. We upgrade the stock to BUY (previously ADD) with an unchanged TP of Rs520 valuing it at 14x (its 5year average PE) on FY24E earnings.
Result Highlights
* Consol sales came in at ~Rs40.6bn (up 13% YoY) vs (YSL estimate ~Rs31.3bn) on account of better execution across nonT&D segments such as Cables (up 9% YoY) and Civil (up 65% YoY) while T&D segment grew by 7% YoY
* EBITDA degrew by 30% YoY to Rs1.8bn (YSL estimate ~Rs1.9bn) with EBITDA margins contracting by ~280bps YoY to 4.4% mainly due to higher subcontracting & other expenses.
* PBT degrew by 82% YoY to Rs266mn on the back of higher interest cost (up 74% YoY).
* Despite a lower effective tax rate (107.9% vs 20.3% in 2QFY22) PAT came in at Rsmn (down 31% YoY) led by weak operational performance.
* Order inflows grew by 134% YoY at Rs69.9bn
* Order book continues to remain comfortable at Rs275.7bn (excluding L1 orders worth Rs65bn+)
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