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Margin pressure continues; H2 to see an uptick

Our view

KEC International (KECI)reported a mixed set of numbers, with healthy topline growth across both T&D (17% YoY) and non?T&D segments such as Cables (25% YoY), Railways (19% YoY) and Civil (99% YoY). Despite robust gross margins, EBITDA margins remained under pressure owing to elevated freight costs. On account of delay in order finalization and deferment in ordering particularly in T&D space, order inflows declined 21% YoY. As on 1QFY23 order book stands at ~Rs237bn (1.6x TTM revenue), providing revenue visibility for next few quarters. Going forward management expects adverse impact of SAE legacy projects and margin pressures to ease by 3QFY23. Management expects 15?20% growth in order inflows in FY23 and double? digit margins by FY24.

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.  The stock is currently trading at 19.7x/11.9x FY23E/FY24E earnings. With the recent run?up in the stock price, we now have an ADD rating (previously BUY) on the stock with an unchanged TP of Rs520 valuing it at 14x (its 5?year average PE) on FY24E earnings.

Result Highlights

* Consol sales came in at ~Rs33.2bn (up 31% YoY) vs (YSL estimate ~Rs28.2bn) on account of better execution across non?T&D segments such as Railways, Cables and Civil while T&D segment grew by 17%.

* EBITDA grew by 5% YoY to Rs1.7bn (YSL estimate ~Rs1.9bn) with EBITDA margins contracting by 122bps YoY to 5.1% mainly due to higher employee cost & other expenses.

* PBT de?grew by 37% YoY to Rs371mn on the back of higher interest cost (up 54% YoY).  

* Despite a lower effective tax rate (16.4% vs 21.2% in 1QFY22) PAT came in at Rs310mn (down 33% YoY) led by weak operational performance. 

  * Order inflows remain muted at Rs34.7bn (down 21% YoY). * However, order book continues to remain comfortable at Rs237.2bn (excluding L1 orders worth Rs80bn+

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