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The West Asia crisis continues to hurt performance

KEC International (KEC)’s 1Q result was in line on revenue and PAT fronts, while margins were below our estimates due to continued higher costs, led by the West Asia crisis and revenue loss during the quarter. Order inflow grew 14% YoY, taking the order book to INR377b, up 10% YoY. We expect the company’s performance over the next few quarters to remain affected by lower recognition as supply chain challenges continue to hit cost and completion timelines. This is also likely to hurt the margin profile of KEC. Domestically too, the RoW issues and delayed projects in the civil segment have resulted in weak margins in non-T&D segments. We expect execution ramp-up and debt reduction in 2HFY27 to be the key performance drivers. We cut our estimates by 16%/5% for FY27/FY28 to reflect the weakness in margins. We also reduce our valuation multiple to 16x from 18x to bake in the continued uncertainties on margin improvement in the near-to-medium term. Consequently, we arrive at our revised TP of INR580 based on 16x two-year forward earnings. Reiterate BUY.

In-line revenue and PAT

KEC’s revenue remained flat YoY at INR50.2b, in line with our estimate. Execution remained healthy across T&D, cables, and renewables, while railways’ execution remained weak as the company is focusing on the completion of its ongoing projects. Gross margin expanded 120bp YoY to 24.0%, vs. our estimate of 22.8%. Absolute EBITDA declined 17% YoY to INR2.9b, while the EBITDA margin of 5.8% was below our estimate of 6.5%. While its margin was lower than our expectations, higher-than-expected other income and a lower tax rate led to an in-line PAT. KEC’s PAT declined 42% YoY to INR726m. Order inflow increased 14% YoY to INR63b, taking the closing order book to INR377b. Net debt including acceptances has been reduced by more than INR1.5b YTD to INR65.7b. NWC days stood at 134 as of 30th Jun’26 vs. 137 as of 31st Mar’26.

The Middle East disturbance hits 1Q performance

The Middle East disruptions remained a key drag on execution during 1QFY27, with ~INR3b of revenue deferred in 1QFY27, and some spillovers are expected into 2Q. This region accounts for ~25% of KEC’s order book, or ~INR100b, broadly split between Saudi Arabia and the UAE. While projects continue to execute on the ground, elevated freight, insurance, and fuel costs have increased the cost of execution, with discussions ongoing with customers for recovery of these incremental costs. Correspondingly, execution growth has been tapered down. Supply-side disruptions remain more pronounced, with ~25-30% of project revenues linked to supplies sourced from outside the region, while higher shipping costs and disruptions to shipping routes have resulted in deferral of revenues. The Dubai facility has also faced delays in order finalization.

Financial outlook and valuation

We cut our estimates by 16%/5% for FY27/28 to bake in an uncertain margin outlook owing to the West Asia crisis. We expect a CAGR of 15%/14%/18% in revenue/ EBITDA/ PAT over FY26-29. This will be driven by

1) order inflow growth of 21% on a strong prospect pipeline

2) EBITDA margin of 6.4%/6.8%/6.9% over FY27/28/29E

3) stable NWC. KEC is currently trading at 18.8x/13.7x/11.3x on FY27E/28/29E EPS. We also reduce our valuation multiple to 16x versus 18x to bake in continued uncertainties on margin improvement in the near-to-medium term. Consequently, we arrive at our revised TP of INR580 based on 16x two-year forward earnings. Reiterate BUY.

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