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On cusp of recovery…

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 50% in FY22)

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

Q2FY23 Results: KEC reported weak Q2FY23 results given the margin miss.

* Revenue grew 13.3% YoY to | 4064 crore owing to decent growth in non T&D segment

* EBITDA was at | 178 crore, down 29.7% YoY with margins at 4.4%, impacted by elevated logistics costs, execution of legacy projects with adverse commodity prices and SAE Brazil performance

* Consequently, adjusted PAT came in at | 55.2 crore, down 52% YoY

* YTDFY23 order inflows came in strong at | 10465 crore

What should investors do? KEC’s share price has grown by ~4x over the past five years (from ~| 125 in March 2016 to ~| 500 levels in January 2022).

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

Target Price and Valuation: We value KEC at | 515 i.e. 17x P/E on FY24E EPS.

Key triggers for future price performance:

* We expect revenue to grow at ~18.4% CAGR in FY22-24E owing to strong order book worth ~| 27569 crore and L1 orders worth ~| 6500 crore

* Strong order pipeline for FY23E to ensure decent order inflow growth

* SAE business’ legacy EPC projects will get executed by Q3FY23, which will arrest losses and help to improve margin. Also, execution of new orders with good margins will come into play in H2FY23

Alternate Stock Idea: We also like Larsen & Toubro (L&T) in our coverage.

* L&T has targeted revenues and order inflow CAGR of 15% and 14%, respectively, over FY21-26 with a consolidated RoE of 18%

* BUY with a target price of | 2355

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