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Weak margins drag show…

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

Q1FY23 Results: KEC reported a weak set of Q1FY23 numbers.

* Revenue grew 30.6% YoY to | 3318.1 crore owing to healthy growth in both T&D & non T&D

* EBITDA was at | 168.5 crore, up 5.4% YoY with margins at 5.1%, impacted primarily by elevated commodity prices & logistics costs and SAE Brazil performance

* Consequently, adjusted PAT came in at | 31.1 crore, de-grew 32.6% YoY

* Q1FY23 order inflows came strong at | 3472 crore

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 retain our HOLD rating on the stock

Target Price and Valuation: We value KEC at | 475 i.e. 15x P/E on FY24E EPS

Key triggers for future price performance:

* We expect revenue to grow at ~16% CAGR in FY22-24E owing to strong order book worth ~| 23720 crore and L1 orders worth ~| 8000 crore

* Strong order pipeline for FY23E to ensure decent order inflow growth

* SAE business’ legacy EPC projects will get executed by Q2FY23, which will arrest losses and help to improve margin. Also, execution of new orders with good margins will also come into play in H1FY23

Alternate Stock Idea: We also like Thermax in our coverage.

* Strong balance sheet, prudent working capital management, recent technological tie-ups, are expected to support growth

* BUY with a target price of | 2405

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