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In-line results

KEC International (KEC)’s results were largely in line with expectations on revenue/EBITDA/PAT for the quarter and full year FY24. Revenue worth INR4- 5b was deferred due to supply chain disruptions involving transformers, conductors, and DI pipes, thereby adversely impacting revenues in the T&D and Civil segment. Net working capital cycle has come down for the company on better collections from projects stuck in Afghanistan. Net debt adjusted with acceptances as on Mar’24 stood stable YoY, after moving up higher during the year. Lower-than-expected order inflows due to selective bidding during FY24 led to miss in overall order inflow for the year. Overall, we continue to expect KEC to benefit from a strong T&D tendering pipeline. We cut our estimates by 13%/6% for FY25E/FY26E to bake in the impact of lower order inflow and slightly better margins. We maintain Neutral rating on the stock with a TP of INR710.

Results impacted by lower-than-expected order inflows

KEC’s 4QFY24 result came largely in line with our expectations. Continued momentum in the T&D segment (+24% YoY) and Civil segment (+27% YoY) was offset to some extent by muted performance of the Railways segment, which saw a 27% YoY decline. Revenue grew 12% YoY to INR61.6b, largely in line with our estimate. EBITDA margin at 6.3% showed a ~20bp QoQ improvement. PAT growth of 110% YoY came on a low base. For FY24, revenue/EBITDA/PAT grew 15%/46%/97%. However, owing to poor OCF generation and higher capex, FCF saw a decline vs. FY23 levels. FY24 order inflow declined 19% YoY to INR181b, missing initial guidance, owing to a conscious decision to bid selectively, while the order book stood at INR296b. For FY25, management guided for order inflows of ~INR250b, revenue growth of ~15%, a margin of ~7.5%, and a capex of ~INR3.5b.

Prospect pipeline remains strong in transmission

Overall prospect pipeline for KEC stands strong at INR1.35t. Within this, the order pipeline continues to be buoyant for T&D (~INR600-700b) and Civil segments, while it remains weak for the Railways segment. Near-term pipeline of domestic T&D projects also remains strong along with HVDC projects. Despite KEC’s order inflows totaling INR181b in FY24 missed the initial guidance due to its selective approach to railways projects and some T&D and civil orders below its margin threshold, we expect the finalization of domestic transmission tenders to benefit KEC in the near to medium term.

T&D and Civil segment revenue performance remains strong

T&D segment revenues were up 20% YoY and the company has an order book of INR145b, including L1 projects as of FY24. SAE has also remained PBT positive throughout the year. During FY24, the company also managed to improve collections from projects stuck in Afghanistan. Civil segment inflows declined 42% YoY for FY24 due to selective bidding from the company for metro projects and the lack of large water related projects. We expect Civil segment inflows to start ramping up from diverse sectors such as B&F from residential and industrial followed by private capex.

Railways segment to see another year of decline

Railways segment revenues declined 27% YoY due to lack of order inflows as well as slower execution due to working capital issues. The company installed Kavach systems on 70 route kilometers and plans to add it on another 100 route kilometer in the coming quarters. However, due to increased competition in the Railways segment as well as working capital challenges, the company is witnessing margin and revenue growth pressure and will be selective in pursuing order inflows from railways. Meanwhile, the company is also foraying into international geographies for railway-related orders. The company expects that post-election, higher allocation should be made toward signaling, track-laying, electrification, anti-collision, and station redevelopment that are the core competencies of KEC.

Financial outlook

We expect a revenue/EBITDA CAGR of 12%/33% over FY24-26 for KEC. This will be driven by: 1) order inflow growth of 29% over the same period, led by a strong prospect pipeline, 2) a gradual recovery in EBITDA margin to 7.3%/8.5% by FY25/26, and 3) control over working capital due to improved customer advances, improved debtor collections from railways and Afghanistan projects. With improvement in margins and stable working capital, we expect the RoE and RoCE to improve to 20.6% and 17.1% by FY26, respectively

Key risks and concerns

Risks such as a slowdown in order inflows, higher commodity prices, an increase in receivables and working capital, and heightened competition pose potential challenges that could affect our estimates.

Valuation and recommendation

KEC is currently trading at 30.5x/19x on FY25E/26E earnings. We value the company at a slightly higher valuation multiple of 18x on two-year forward estimated earnings to take into account improved prospect pipeline from domestic transmission projects. Our estimates bake in a revenue CAGR of ~12% and EBITDA margins of 7.3%/8.5% for FY25-26. We maintain our Neutral rating with a target price of INR710.

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