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We recently interacted with KEC International. The company is on the cusp of a major turnaround driven by stellar growth in its TAM, sequential margin recovery, and reduction of working capital to normalized levels. KEC is the market leader in the domestic T&D EPC industry and is expected to be a major beneficiary of a stellar growth in TAM. With execution of legacy projects largely behind, turnaround in SAE Brazil profitability and a stable commodity environment, the company has significant leverage in terms of margin improvement in the next 2 years. Additionally, the working capital cycle is expected to improve led by improved collection efficiency and higher mix of Civil business.

Dream domestic T&D capex driven by renewable power evacuation projects

* There is a strong momentum in the T&D ordering pipeline which is driven by the massive investments taking place in renewable energy installations which will require setting up of transmission infrastructure in order to evacuate the generated power

* The TAM (excluding state projects) for FY24 stands at ~Rs200-250bn consisting of TBCB projects, orders from private developers and PGCIL. We foresee this TAM to grow at a ~25-30% CAGR for the coming 3 years

* The FY25 and FY26 capex outlay of PGCIL, which is a key customer for KEC is expected to be more than 2x of FY23 levels which provides robust visibility for the next 2-3 years

* In an industry which is oligopolistic in nature, KEC has a ~20-25% market share in PGCIL tenders and is expected to be a major beneficiary of the tenders in the short to medium term

Strong order inflow in Civil to drive non-T&D business

* In the recent years, Civil has been the fastest growing segment with FY23 witnessing 75% revenue growth while order inflows grew by 15% on a high base

* Within Civil, the Water business is the single-largest contributor with a ~40% share in the order book of ~Rs105.4bn primarily driven by the government’s thrust on expanding the network of piped water connections under the Nal se Jal scheme. Out of the overall outlay on this scheme, only ~40-50% has been exhausted so the balance portion translates into a very healthy runway for the next 2-3 years

* Another key growth avenue within Civil is residential real estate which has an order book of ~Rs20-25bn currently. The company has a strong inquiry inflow from marquee developers. A major advantage in the residential real estate projects is the absence of Right of Way issues which the company typically encounters in the T&D and Water businesses so execution can take place at a faster pace

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