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Healthy performance in Non–T&D business...

KEC International Limited (KEC) is a global infrastructure Engineering Procurement and Construction major. It has presence in the verticals of Power T&D (Transmission & Distribution), Cables, Railways and Water & Renewable.

* Q4FY21 revenue grew by 18.8% supported by strong execution in non– T&D segment (Civil, Railway, Cable & Solar) while T&D revenue registered a de-growth of 5.7% YoY.

* EBITDA margin declined by 197bps YoY to 8.1% due to headwinds in SAE business (Brazil) and higher commodity prices.

* Order book (incl. L1) stands at Rs.25,000cr supported by strong pick up in T&D orders (79% YoY in FY21).

* Rebound in cable business and pick up in railway & civil business to drive revenue growth in the coming quarters.

* We reduce FY22E/FY23E earnings estimate by 15%/6% respectively due to challenges in T&D–SAE execution and commodity prices.

* We maintain our Buy rating owing to healthy order book & recovery in non-T&D business and value KEC at a P/E of 14x on FY23E EPS.

Non-T&D business supported execution...

Q4FY21 revenue grew by 18.8% YoY to Rs4,361cr supported by strong execution in non-T&D business while T&D revenue got impacted due to headwinds in execution in overseas business especially in Brazil. Delving to the fine print of revenue, civil business grew by 190% YoY , railway grew by 39% YoY and cable segment grew by 61% YoY. FY21 revenue grew by 9.6% YoY to Rs13,114cr. We expect non-T&D business continue to outperform due to improved traction in order inflow and approvals for EPC projects. In FY21, the overall T&D revenue including SAE tower declined by 6.6% to Rs7,637cr and we expect T&D execution is likely to be slower in the near term.

Healthy order book...

FY21 order book (including L1) stands at Rs 25,000cr (1.9x TTM revenue) provide strong visibility for coming years. Management indicated that order pipeline continuous to remain healthy, however there has been a delay in conversion of orders due to pandemic situation. In international market, good traction witnessed in Middle East, Africa, SAARC and MENA region. On the domestic front, segments like Railway, Civil, Urban infra and solar would be key focus area of the company.

Higher commodity prices impacted margin…

EBITDA margin declined by 197bps YoY to 8.1%, due to rise in commodity prices and higher sub-contracting expenses (56.9% YoY). Lower execution in international market due to Covid led disruptions that impacted raw material availability and led to cost & time overruns. Due to challenges in SAE business in Brazil and higher commodity prices we reduce FY22E/ FY23E EPS estimate by 15%/6% respectively. During Q4FY21, PAT came in at Rs.194cr, flat on a YoY basis.

Valuations

We expect railway, cable & civil business to be the growth drivers. While rise in commodity prices and disruptions in international SAE business may have near term impact on margins. We therefore revised down our TP to Rs 464, value KEC at a P/E of 14x on FY23E EPS and maintain BUY rating.

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