Buy KEC International Ltd for the Target Rs 550 by Emkay Global Financial Services Ltd
We assume coverage on KEC International (KEC) with BUY and TP of Rs550, valuing the stock at 13x its June-28E EPS. KEC reported a weak 1QFY27 financial performance, with revenue flat yoy at Rs50.2bn (estimate: Rs52.7bn). EBITDA margins fell 118bps yoy to 5.8% (estimate: 7%), resulting in 17% yoy decline in EBITDA to Rs2.9bn (estimate: Rs3.7bn), while PAT came in at Rs726mn (-42% yoy), below our estimate of Rs1.3bn. YTD order inflow stood at Rs63bn across T&D, Civil, Renewables, Cables and Conductors, and Transportation businesses, taking the order book to RS400bn. Despite a healthy order book, margin visibility remains uncertain, as KEC is cautious on converting orders to revenue, citing supply chain challenges from the ME crisis.
Revenue-led miss on the operational front
KEC’s 1QFY27 revenue of Rs50.2bn (flat yoy) was below our estimate of Rs52.7bn. EBITDA at Rs2.9bn (-17% yoy) stood 22% below our estimate, while operating margin came in at 5.8% (-118bps yoy; estimate: 7%). The T&D segment reported flat yoy revenue at Rs27.7bn, while revenue was healthy in the SAE Towers (+25% yoy) and Cables (+57% yoy). On the other hand, the Civil/Transportation segments witnessed revenue declines of 3%/45%, respectively, due to labor shortage, delayed payment collection, cautious execution, and delays in project closure.
Miss on operating margins; management cautious on margin guidance amid Middle East uncertainty
KEC reported EBITDA of Rs2.9bn (-17% yoy; estimate: Rs3.7bn). The margin impact was due to cost escalation, led by soaring freight costs (including war-related surcharges) and port congestion resulting in higher lead times (re-routing), arising from the ME crisis. The management refrained from providing margin guidance for FY27 due to uncertainty over supply chain bottlenecks but believes a high-single-digit EBITDA margin in FY28 is achievable. Reported PAT was Rs726mn (-42% yoy), below our estimate of Rs1.3bn.
Healthy order inflow; tender pipeline looks healthy
KEC reported strong order inflow of Rs63bn (+14%) in 1QFY27, while order backlog grew 10% yoy to Rs377bn. The T&D tender pipeline remains healthy, with an equal split between domestic and international markets, supported by increasing opportunities in renewable power evacuation, green energy transition, and inter-regional transmission connectivity. The overall order pipeline remains healthy at Rs2trn, led by transmission and distribution (Rs700bn), followed by SAE, civil, and railways. This provides confidence of the company achieving its order inflow guidance of Rs300bn for FY27.
Investment summary
We assume coverage on KEC International (KEC) with BUY and TP of Rs550, valuing the stock at 13x its June-28E EPS.
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