Buy KEC International Ltd For Target Rs. 740 - Yes Securities
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Interest Cost and Railways play spoil sport
Our view
KEC International (KECI) reported weak print with a higher than anticipated interest cost and weakness in Railways business spoiling the show even as the company could deliver margin in line with guidance. A supply chain led slowdown in execution in T&D business is expected to be transient while pain in Railways business is expected to continue given increased competition from Tier-2/3 players impacting bidding margin. Civil continues to be shining light with supernormal revenue growth and strong pipeline in residential, data centres and Metro segments.
Looking forward
Management maintained its guidance on FY24 revenue growth (~17%), order inflow (~Rs220-250bn) and margin (~7%) for FY24. T&D and Civil are expected to continue driving revenue performance with execution of a strong order book and also a pipeline visibility. Railways is expected to remain muted in the near-term as the company remains cautious in bidding. We are building in strong margin expansion in FY25 primarily driven by (1) exhaustion of legacy orders, (2) Strong demand in higher kV T&D projects, (3) stable commodity prices. We have cut our EPS estimates for FY24E/25E by 16%/10% respectively factoring in higher interest cost and lower railway revenue. We maintain BUY with a revised target price of Rs 740 based on 18x FY25E earnings
Result Highlights
* Consol sales came in at ~Rs45bn (up 11% YoY) (vs YSLe Rs47.1bn). T&D business saw significant moderation in revenue growth on account of supply chain issues in the domestic business.
* EBITDA Margin came in line with estimates at 6.1% (up 170bps YoY) in line with management guidance.
* PAT growth at 1% YoY also reflects a one-time reversal of a tax provision in Q2FY23. PBT growth stood at 148% YoY.
* Order Inflow saw a substantial decline of 35.3% YoY coming in at Rs45bn as the Railways business saw practical no orders in the quarter (Rs21bn in Q2FY23).
* Orderbook improved 14% YoY to Rs313bn with T&D share increasing to 48% from 44% in Q2FY23.
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