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Transmission orders picking up

On YTD basis, KEC International (KECI) has achieved an order intake of Rs210bn (+49% YoY) against our FY23 estimates of Rs200bn, led by growth across businesses. Interestingly, as indicated in our earlier note Capital Goods: Revival in transmission capex on the cards, we have started seeing a pickup in domestic T&D awarding with PGCIL being awarded 8 projects (4 projects in 9MFY23) on TBCB basis. We reiterate our positive stance on strong T&D ordering, sustaining for the next 4-5 years, led by government’s consistent measures to increase the transmission capacity. The government has come out with a capex transmission plan of Rs2.44trn to evacuate 537GWs of renewable power capacity by 2030, a positive for KECI. We also expect non-T&D business (mainly civil) to continue witnessing strong growth led by water pipeline, public spaces, industrial, residential and data centre. We expect a gradual improvement in balance sheet with pick up in execution pace and lower commodity prices. We marginally tweak our estimates and maintain BUY with a revised TP of Rs540 (Rs528 earlier) at 15x FY25E.

* Robust T&D order pipeline: The Indian government has come up with Rs2.44trn
transmission plan that includes 50,890 circuit km transmission lines and 4,33,575MVA
substation capacity. Domestic T&D order inflows are expected to be robust, mainly driven
by Green Energy Corridor (GEC) phase-II (10,753 km of transmission lines and
2,546MVA substation capacity) and Leh Ladakh HVDC lines (900km of HVDC and battery
energy storage system at a cost of Rs270bn). Additionally, PGCIL has recently been
declared a successful bidder under TBCB for nine projects including the Khavda project.
The Khavda and Leh Ladakh projects together are worth Rs400bn of which KEC has an
addressable opportunity of Rs300bn.

* Balance sheet to improve: Overall debt (including advances) at the end of 9MFY23
stood at Rs56bn with working capital days at 139 days as on Dec’22 vs ~148 days on
Sep’22. We expect gradual reduction in debt (by Rs3bn) and working capital days on
account of release of milestone-based payments from railway projects, pending GST
proceeds, claims from Afghanistan and reduction in loss of funding for SAE projects would
aid working capital cycle reduction.

* SAE Towers: The current orderbook stands at Rs20bn led by Rs10bn worth of new
orders received in Brazil, Mexico and US. The US is seeing a capex revival which may
benefit SAE. Currently, there are no legacy orders remaining and the company has only
supply (towers, hardware and poles) orders now. Right now debt is approximately
US$45mn, which the company is in the process of refinancing and that should lower
interest cost.

* Maintain BUY: With lower commodity prices and gradually improving supply chain, execution
is expected to pick up over FY24 followed by improvement in margins. We revise our
FY24E/FY25E by 2.7%/2.4% on higher execution and improvement in margin resulting in a
2.3% increase in our target price. The stock is currently trading at 20/13x FY24/25E. Maintain
BUY with a revised TP of Rs540 (15x FY25E).

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