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Challenging quarter

Our view

KEC International (KECI) reported a weak set of numbers, primarily led by muted executional performance in the T&D segment. Non‐T&D business such as Civil/Cables/Railways reported a growth of 33%/ 28%/ 11% YoY, while T&D declined 16.5% YoY owing to Covid‐19 related disruption primarily in Brazil. EBITDA Margins remained under pressure owing to elevated commodity prices, Afghanistan crisis and covid situation. On the account of delay in orderfinalization and deferment in ordering particularly in T&D space, order inflows declined 39% YoY. As on 4QFY22 order book stands at ~Rs237bn (1.7x TTM revenue), providing revenue visibility for next few quarters. Going forward management expects adverse impact of SAE legacy projects to ease by 3QFY23 while margin pressures are expected to persist until 1HFY23. Management expects Non‐T&D business to reach ~60% of topline by FY23E/24E largely driven by Civil & Cable segment.

We believe KECI is well poised to gain from upcoming opportunities in infrastructure segment given 1) diversified business model, 2) healthy market share in T&D segment, 3) excellent execution track record with strong parentage and 4) comfortable balance sheet.  On account of disappointing FY22 performance and margin pressure we have revised our EPS estimate downwards by 28%/4% for FY23E/24E. The stock is currently trading at 16.7x / 10.1x FY23E/24E earnings. However, on account of steep correction in the stock price (down 28% in 3 months), we upgrade our rating to BUY with a revised TP of Rs520 (earlier TP of Rs541) valuing it at 14x (its 5‐year average PE) on FY24E earning

Result Highlights

Sales came in at ~Rs42.7bn (down 2% YoY) vs (YSL estimate ~Rs51.9bn) on account of lower than anticipated execution across segments primarily in T&D segment.

EBITDA declined by 29% YoY to Rs2.5bn (YSL estimate ~Rs4.5bn) with EBITDA margins contracting by 224bps YoY to 5.9% vs 8.1% in 4QFY21 mainly due to higher employee cost & sub‐contracting expenses.

PBT de‐grew by 56% YoY to Rs1.2bn on the back of higher interest cost (up 51% YoY). Interest expense as a % of sales increased from 1.4% to 2.2% YoY. OI declined by 73% to Rs34mn.

PAT came in at Rs1.1bn (down 42% YoY) led by lower than anticipated execution particularly in the T&D segment.

Order inflows remain muted at Rs30.8bn (down 39% YoY).

However, order book continues to remain comfortable at Rs237bn (excluding L1 orders worth Rs40bn+)

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