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Execution and margin in-line; High interest cost dents PAT

KECI’s consolidated sales grew 11% YoY to Rs45bn, 3% below our estimate. Growth was led by SAE towers (+51% YoY to Rs3.3bn) and Civil segment (+42% YoY to Rs10.5bn). EBITDA grew 54% YoY to Rs2.7bn on a low base, leading to EBITDA margin of 6.1%, up 170bps YoY/30bps QoQ and in-line with our estimate. Higher interest cost (up 39% YoY to Rs1.8bn, forming 4% of sales vs. 3.1% YoY due to steep rise in cost of borrowing and higher debt levels) led to flattish PAT YoY at Rs558mn. PAT was below our/consensus estimate of Rs709mn/Rs865mn. YTD-FY24 order inflow was Rs90bn while order book was up 13% YoY/4% QoQ at Rs331bn with domestic-international split of 69-31%. With large tender pipeline (Rs1250bn), KECI has retained its order inflow/revenue guidance of Rs250bn/Rs200bn for FY24. With SAE turning PBT positive, 6% EBITDA margin in H1FY24 is achieved while guidance of 7% margin for FY24E has been retained. We cut our order inflow estimate to Rs235bn (from Rs250bn earlier) for FY24 and incorporate a steep rise in interest cost. Thus, our earnings estimates are cut by 18%/15% for FY24/25. We roll over the valuation to Sept’25 and retain ADD rating with a revised target of Rs625 (Rs660 earlier) based on P/E of 16x H1FY26E EPS.

Execution remains healthy; T&D and Civil offers healthy scale-up prospects

Segment-wise, SAE towers grew 51% YoY to Rs3.3bn while Civil segment grew 42% YoY to Rs10.5bn. Cables grew 6% YoY to Rs4.1bn while T&D sales grew only 2% YoY to Rs18.8bn. Railways sales fell 12% YoY to Rs7.8bn. Revenue worth Rs5bn was deferred from Q2 owing to supply constraints in components such as conductor, transformer and pipes for Jal Jeevan mission. 20% of sales is derived from product supply orders of towers and cables. The business outlook is positive for T&D segment from India (led by green energy corridors) and overseas markets (Middle East, SAARC and Far East). Civil is scaling up at rapid pace, and is likely to register revenue of Rs50bn/Rs70bn in FY24E/25E

Operating margin in-line; H2 to see much improved margin profile

EBITDA margin in 2Q/H1FY24 was at 6.1%/5.9%, in-line with management guidance. KECI has maintained its FY24 EBITDA margin guidance of 7%. Margin are likely to expand in T&D segment. Existing margin in Saudi Arabia are at 8-9% while KECI is aiming for double digit margin in new orders. Civil segment is operating at EBITDA margin of 8% and PBT margin of 5%. KECI is not taking low margin orders from divisional railways.

Tender pipeline is large but FY24 inflow guidance of Rs250bn could be at risk

Tender pipeline is large at Rs1250bn comprising T&D (Rs750bn), Railways (Rs200bn) and Civil (Rs200bn). It includes international T&D pipeline of Rs500bn consisting of Rs300bn from GCC countries. In domestic market, large opportunity includes Rs280bn green energy corridor in Ladakh. However, considering YTD-FY24 order inflow of Rs90bn, and possible spill-over of some domestic orders to next year due to elections, we feel Rs250bn inflow target in FY24 could be at risk. We factor in Rs235bn inflows (+5% YoY).

Maintain ADD with a revised target price of Rs625

We expect KECI to report revenue CAGR of 13% over FY23-26E. Higher interest costs and high NWC cycle (140 days as on 1HFY24) are near term headwinds.

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