Hold KEC International Ltd For Target Rs.535 - ICICI Direct
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Weak numbers but saved by non-T&D segment…
About the stock: KEC International (KEC) is one of the EPC majors in key infrastructure sectors like 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 42% in FY21)
T&D diversified across countries with entry into ~20 countries in last five years
Q3FY22 Results: KEC reported a weak set of Q3FY22 numbers
Revenue was up marginally by 1.5% YoY to | 3340 crore, aided by strong growth in non-T&D segments
EBITDA came in at | 239 crore, down 20% YoY with margins at 7.2%, impacted by business mix, SAE project headwinds, commodity prices
Consequently, adjusted PAT came in at | 93.6 crore, down 35.5% YoY
YTD order inflows came in highest ever at | 14121 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 change our rating on the stock from BUY to HOLD
Target Price and Valuation: We value KEC at | 535 i.e. 17x P/E on FY24E EPS.
Key triggers for future price performance:
We expect revenue to grow at ~14.7% CAGR in FY22-24E owing to strong order book worth ~| 24401 crore and L1 orders worth ~| 4000 crore
Strong order pipeline for H2FY22E to ensure decent order inflow growth
SAE business to turn around in next financial year with closure of two legacy projects and start contributing with decent margins from FY23E onwards
Controlled net working capital (NWC), double-digit return ratios
Alternate Stock Idea: We also like Larsen & Toubro in our coverage
Focus on monetisation of non-core assets, improving RoEs and reducing debt makes it an attractive bet to ride the infrastructure revival theme
BUY with a target price of 2270
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