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Execution in line; commodity inflation weighs in on margin

* KECI’s 4QFY21 revenue was in line with our estimate, with the miss on operating margin largely attributable to commodity-led cost escalation and weaker execution in the SAE business. It continued its impressive performance in the Ex-T&D segment, with revenue growing 68% YoY, led by strong growth in the Railways and Civil segments.

* Interest cost reduction continued in 4Q (-3% YoY), while the decline for FY21 stood at 15% YoY. This was largely on account of a favorable mix between domestic and overseas debt levels and is primarily a function of a decline in interest rates.

* KECI is steadily diversifying the business to avoid concentration risk from the Power T&D business, with the Railways and Civil segments emerging as strong growth avenues and growing by 34% YoY and 3x, respectively, in FY21. Excluding the T&D business, revenue share stood at 48% in 4QFY21 (v/s 34% YoY). The same for FY21 stood at 44% (v/s 34% in FY20). It is on course to reach 50% of total sales by FY22-end. The company’s performance over the past few years has been commendable, given that not many have been able to sustain growth with a topline of over INR100b in the EPC space in India.

* The company has all the ingredients in place for growth over the next 3–5 years. A strong promoter parentage and focus on the Balance Sheet should help KECI emerge stronger post the COVID-19 crisis v/s peers. Maintain Buy, with an unchanged TP of INR450/share (15x FY23E EPS). Key risks include continuously rising commodity prices and delay in new awarding.

Improvement in Balance Sheet commendable

* 4QFY21 snapshot: Revenue grew 19% YoY to INR43.6b and was in line with our estimate. EBITDA declined 4.4% YoY to INR3.5b and was 8% below our estimate. EBITDA margin came in at 8.1% v/s our expectation of 9%, suggesting impact of commodity prices in the international business. Adjusted PAT was flat at INR1.9b and was 6% below our expectation.

* FY21 snapshot: Revenue grew 9% YoY to INR131b – a commendable performance in a pandemic impacted year. EBITDA fell 7.5% YoY to INR11.4b as EBITDA margin contracted 130bp to 9%. Interest expense declined to INR2.6b from INR3b – a function of lower interest rates and favorable debt mix between the international and domestic market. Adjusted PAT was largely flat at INR5.5b.

* Order book/inflow update: Order inflow grew 5% to INR119b. Order book declined 7% to INR191b (order book/revenue ratio: 1.5x). The company is L1 in orders worth ~INR60b.

* Net debt reduced to INR16.8b from INR22.2b in FY20. Net debt/equity ratio improved to 0.5x from 0.8x in FY20.

Key highlights from the management commentary

* Around 10% of the total order book is exposed to base metals (unhedged for steel). The management expects cost pressures in the SAE business in 1QFY22, post which the situation should normalize.

* The impact on margin is due to cost inflation and weaker execution in Brazil, with currency depreciation weighing on topline. On a standalone basis, margin is in double-digits for KECI (10.7% in FY21).

* About 50% of order book in the Railways segment is geared towards nonconventional supplies (technological related areas like Metro, DFCC, and high speed rails).

Valuation and view

* We maintain our Buy rating, with a TP of INR450/share (15x FY23E EPS), given: a) the company’s strong execution track record, b) declining business concentration risk due to its foray into Railways, Civil, etc., and c) reasonable valuations.

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