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Enabling well-diversified growth; margins to recover

KEC International’s FY22 revenue grew 5% to Rs137bn, led by growth in civil, railways and cables businesses. Execution was impacted by covid-related challenges, political unrest in Afghanistan, temporary suspension of construction activity in Delhi due to environmental restrictions and elevated commodity prices. As a part of its diversification strategy, non-T&D business now contributes 50% of revenue compared to 13% in FY16 led by growth in railway and civil. Civil segment is expected to continue to drive growth for the company. It secured its highest-ever order intake of Rs172bn in FY22, which grew 45%, led by civil and international T&D businesses. Orderbook stands at a robust Rs237bn (1.7x TTM sales), up 24%. Higher working capital led to cashflow from operations declining to Rs26mn during FY22 as against Rs1bn in FY21. Maintain BUY with a target price of Rs502 as we believe margin expansion on the back of robust order intake will be visible from H2FY23 given the correction in commodity prices from its recent peak.

* Elevated commodity costs led to margin contraction:

EBITDA margin during FY22 contracted 210bps to 6.6% due to cost and time escalations mainly in SAE Towers. During the year, company focused on supplying hardware, where it is able to command better margins in an inflationary scenario. It made an exceptional provision of Rs992mn towards impairment in subsidiaries, of which Rs973mn was towards SAE Towers.

* Debt and working capital remain at elevated levels YoY:

During FY22, working capital was elevated due to i) higher losses from subsidiaries; ii) company maintained higher-than-normal inventory due to commodity inflation; and iii) delayed collection in railway segment. This led to net debt increasing to Rs26bn in FY22 as against Rs16.8bn in FY21 and working capital days to ~137 days.

* Higher interest cost to prevail in short term:

Interest cost as a %age of revenue grew to 2.3% as against 2% in FY21 due to higher debt and rising interest rates. However, we believe higher execution in civil segment is expected to elevate working capital pressure. A better mix of rupee and foreign currency borrowing might help elevate borrowing costs.

* Maintain BUY:

The company has guided for 15% YoY growth in order inflow and revenue in FY23 on the back of strong order book. In our view Any normalisation on current headwinds related to higher commodity prices, supply-chain disruption may boost execution and profitability. With global capex revival in the oil & gas space, we expect ordering to pick up in that segment as well. Key risks: Any further increase in commodity prices and any incremental execution challenges at SAE Towers.

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