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Poised for comeback

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

Key Highlights of Analyst Meet

* KEC International expects revenues to grow 15% in FY23E and at 15-20% in FY24E. A recovery is expected from Q3YF23E onwards as losses in SAE Towers will be over by then. Low margin T&D orders will be completed and high margin news orders execution will come into play. For FY24E, the management expects double digit margins at the company level

* The company is experiencing strong business visibility across segments and uptick in tendering activities of domestic T&D and railways with | 110000 crore of tender pipeline. Out of this, | 60,000 crore is from T&D and rest is from Civil and Railways. This results in improved quality of order intake for KEC. Overall award to tender ratio remains at 15-16%. The company expects inflows to the tune of |19000-20000 crore in FY23E

* Working capital: KEC’s working capital is quite controlled and down 15- 20%. Going forward, it is expecting further improvement. The management is targeting 130 days of NWC by FY23E and 100 days for FY24E. Interest cost to revenue ratio is expected to come down to 2% in FY24E. Usually, the cables business is a negative working capital one. Gross debt is expected to remain around | 5000 crore in FY24E similar to FY23 levels despite strong growth in FY24 revenues. A good quantum of release in working capital is expected in H2FY23E, which will cushion strong growth in FY24E

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 change our rating from HOLD to BUY

Target Price and Valuation: We value KEC at | 540 i.e. 17x P/E on FY24E EPS.

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