IGI Logo

SAE drags profitability; visibility improves

KEC International (KEC) missed Q2FY22 estimates by 10% as SAE losses persisted (INR0.8bn) and are likely to stay in Q3 as well. On balance sheet, there’s a further 10% sequential increase in working capital owing to collection delays in the Railways business and funding to support SAE losses—a key monitorable. The key positive is the conversion of L1 orders into firm orders and improving the order pipeline (INR600–650bn), which gives better visibility on new orders.

The Spur Infra acquisition further bolsters KEC’s successful diversification strategy while productivity focus should boost revenue growth/margins over the medium to long term. However, commodity headwinds are clear risks in the near term. Maintain ‘HOLD’.

Non T&D continues to gain traction; SAE losses to ebb from Q4

KEC’s 10% revenue growth is in line and driven by the Railways and Civil businesses, which reported 70%-plus growth. Traction in the railways and civil businesses has improved, and management is targeting 15%/100% growth in these businesses in FY22. The core T&D business has also started gaining traction, especially in international geographies such as MENA and Bangladesh. The SAE business continues to be a spot of bother as revenue slid 42% and, it reported an INR0.8bn loss (200bps impact on EBITDA margin). Management expects sustained losses in Q3 before they ebb. Management expects 15% top-line growth in FY22 (H2 ask 15%).

Robust ordering prospects; debt continues to increase

With INR70bn H1 order intake, INR70bn L1 pipeline and INR600bn ordering pipeline, management is confident of INR150bn of order intake in FY22, though it targets INR180bn internally (dependant on L1 conversion). There’s a strong pipeline in ME, Far East and Bangladesh, especially on the T&D side. On the working capital, net working capital days deteriorated by four days QoQ to 138 with overall borrowings up 8% sequentially. The increase is due to: i) collection delays from the Railways business; ii) additional funding for SAE losses; and iii) collection delays from Afghanistan as USA has imposed total sanctions—a key variable to watch out for.

Outlook and valuation: Fairly valued; maintain ‘HOLD’

KEC’s successful diversification strategy has been playing well and the next five years present it with an opportunity to double revenue and improve margins. We await commodity volatility and SAE losses to subside before revisiting our target PE of 16x. Retain ‘HOLD/SN’ with a TP of INR465 (earlier-INR445) as we roll forward to FY23E.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.edelweiss.in/disclaimer
SEBI Registration No. INH000000172

Above views are of the author and not of the website kindly read disclaimer