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Margins impacted amid decent execution…

About the stock: KEC International (KEC) is one of the EPC majors in key infrastructure sectors such as power T&D, railways, civil, urban infrastructure, solar, smart infrastructure, oil & gas pipelines and cables.

* A strategic shift in portfolio from T&D to non-T&D (13% contribution in FY16 increased to 42% in FY21)

* T&D diversified across countries with entry into ~20 countries in last five years.

Q1FY22 Results: KEC reported muted Q1FY22 results.

* Revenue was up 15.1% YoY, aided by strong growth in non-T&D segments

* EBITDA came in at | 159.9 crore, down 18% YoY with margins at 6.3%, impacted by change in business mix, SAE project headwinds

* Consequently, came in at | 46.1 crore (down 34.8% YoY)

* Order inflows for Q1FY22 came in at | 4401 crore.

What should investors do?

KEC’s share price has grown by ~2.5x over the past five years (from ~| 125 in March 2016 to ~| 421 levels in March 2021).

* We remain long term positive and retain our BUY rating on the stock

Target Price and Valuation: We value KEC at | 485 i.e. 15x P/E on FY23E EPS

Key triggers for future price performance:

* We expect revenue to grow at ~11% CAGR in FY21-23E owing to strong order book worth ~| 20434 crore and L1 orders worth ~| 5500 crore

* Strong order pipeline for 9MFY22E to ensure decent order inflow growth

* SAE business to turn around by Q4FY22E with closure of two legacy projects and start contributing with decent margins from FY23E onwards

* Controlled net working capital (NWC), double-digit return ratios.

Alternate Stock Idea: We also like Grindwell Norton in our coverage.

* High margin value added products and solutions oriented approach to drive margin expansion (from ~16.7% in FY20 to 20.6% in FY23E)

* BUY with a target price of | 1510

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