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Good quarter amid lower expectation and base

We maintain our ADD rating on KEC International and TP of Rs950/share (unchanged). Despite a challenging environment, order inflow growth has been robust (+70% YoY), led by T&D, civil, and renewables. The management has maintained FY25 guidance of Rs250bn, supported by its robust L1 position and tender pipeline (Rs1.5trn) across businesses. In Q1, KEC faced challenges related to heat waves, the general elections, and supply chain which we believe should recede Q3FY25 onward. We expect EBITDA margin to gradually normalize from Q3FY25. Debt remains at elevated levels, albeit seeing marginal reduction during the quarter. The company has announced demerging its Cable business (8% FY24 consolidated revenue) into a separate subsidiary, given improved business visibility and value unlocking. The management also announced raising Rs60bn in due course, to be used for any organic/inorganic growth opportunities across businesses.

Muted execution due to general elections; BoD approves fund-raising

Q1 revenue for KEC was muted at Rs45bn (+6% YoY) due to the general elections during the quarter. Within segments, the T&D (including SAE)/Civil segments grew 14%/11% YoY. However, slowdown in railways segment execution persists, with KEC registering a 38% YoY decline. Meanwhile, EBITDAM expanded marginally to 6% (+23bps YoY). PAT doubled to Rs876mn YoY, on the back of soaring ‘other income’ at Rs431mn (+1,424% YoY), comprising Rs240mn received in a decade-old arbitration case. KEC’s BoD have approved i) subsidization of the Cables segment, to tap into growing opportunities in the RE segment, ii) fund-raising up to ~Rs60bn (issuance of Equity/NCDs: Rs45bn/Rs15bn), to invest in superior capabilities, and organic/inorganic growth avenues. The management maintains FY25 revenue guidance of +15% YoY growth/7.5% EBITDAM.

Strong inflows, despite a slow quarter

Strong order inflow of Rs76bn (+70% YoY) provides assurance on KEC achieving its FY25 inflow target of Rs250bn during FY25 (~30% target achieved; no change in inflow guidance). Resurgence in the domestic T&D pipeline is visible in KEC’s inflow rising to ~Rs44bn (64% YoY). Order backlog+L1 stood at Rs420bn (BB ratio: 1.6x), with T&D (including SAE)/Civil contributing the lion’s share of ~51%/31% in the backlog.

Delay in Receivables hinder NWC days; net debt position remains range-bound

NWC days soared to 122 (vs Q4FY24: 112 days) owing to funding blockages in certain GoI projects, coupled with delay in receivables prior to the interim budget being passed. Net Debt (including acceptances) stands at Rs56bn (vs Q1FY24: Rs57bn); it remains range bound (FY25 targeted range: Rs5-6bn). This reflects the improvement in finance cost as a % of sales decline to 3.4% (vs Q1FY24: 3.7%). With fund raising on the cards (albeit not in the near future), issuance of NCDs could be primarily utilized towards improving KEC’s NWC and balance-sheet positions.

Valuations

We maintain KEC’s revenue/EBITDA/PAT CAGR at 12%/29%/61%, respectively, during FY24-27E, culminating into ROE/ROCE of 23%/24% during FY27E (vs FY24: 9%/15%). The recent run-up in the stock price (3M: ~20%) leaves limited upside from current levels. We maintain an ADD rating and TP of Rs950/share, based on 20x Jun-26E earnings, which is a 9% upside.

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