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Strong order book points toward better future

* KEC has recorded order inflows of ~Rs130bn YTD, with L1 orders of over Rs60bn. This is the highest-ever inflow till mid-Jan in any fiscal – 9MFY19 saw inflows of Rs115bn with L1 orders of ~Rs40bn. Till H1FY22, Railways/T&D at 33%/28% were the major contributors to the overall inflows. We have increased our annual inflow forecast to ~Rs180bn.

* Further, more recently, the Union Cabinet has approved the second phase of the Green Energy Corridor of the Intra-State Transmission System at a cost of Rs120bn. Domestic T&D is expected to improve in terms of inflows in FY23.

* We cut our FY22E Sales/EBITDA/PAT by 2%/5%/7% to factor in some execution delays due to the construction ban in Delhi and floods in Chennai during Q3FY22. KEC has projects in both the cities. Our FY23E/FY24E EPS now stands at Rs28.8/Rs37.7, higher/lower by 5%/2%.

* We maintain Buy rating on the stock, with a TP of Rs530 (Dec’22E), based on 15x oneyear forward PE, which is the average 10-year multiple.

* Highest YTD order inflow ever: YTD order inflow for KEC stands at Rs130bn, with L1 orders of Rs60bn. This is the highest-ever inflow till 9M. Based on this, we have raised our order inflow estimate to Rs180bn for FY22.

* Civil and T&D driving inflows: Till H1FY22, Civil (Rs24.5bn inflow - 33% of overall), T&D (Rs20.7bn inflow - 28% of overall) and Railways (Rs12.6bn inflow - 17% of overall) were the major contributors. There has also been an improvement in inflows at SAE Towers.

* We expect a flat Q3 from a revenue perspective: KEC had reported 12% YoY growth in revenue in H1FY22 on the back of ~140%/70%/18% YoY growth in Civil/Cables/Railways. SAE revenue was down by 35% due to lower opening order book.

* Order inflow momentum to continue in FY23 as well: We believe that with the second phase of the Green Energy corridor getting Cabinet approval, orders from Railways and Civil will drive the inflows for FY23 and hence the momentum should continue.

* Diversification continues with Oil & Gas sector as another addition: The acquisition of Spur Infrastructure will give KEC entry into the Oil & Gas space. In the past few years, KEC has successfully diversified into Railways and Civil.

* Maintain Buy with Dec’22 TP of Rs530: We cut our FY22E EPS by 7% to factor in delays in execution in Q3 (due to construction ban in Delhi and floods in Chennai) and delay in margin recovery in SAE. Given SAE is expected to turn positive in FY23, we estimate FY23/FY24 margins at 8.7%/10%. Average margins during FY17 to FY20 stood at 10.1% and, hence, we believe this is achievable. Our FY23E/FY24E EPS stands at Rs28.8/37.7. Maintain Buy with a TP of Rs530.

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