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Pipeline remains strong

KECI in its annual analyst meet highlighted a strong addressable market for T&D and improving opportunities for the civil segment. The company is continuously focusing on profitable growth and targeting reduction in NWC cycle on improved collections. We expect KECI to continue to benefit from the prospect pipeline in T&D and thus, maintain our estimates. We retain our Neutral rating on the stock with a TP of INR710, based on 18x two-year forward earnings.

Domestic T&D – tendering pipeline provides strong visibility

KECI’s domestic T&D business witnessed exponential growth in the order book, from INR30b in FY22 to INR100b in FY24, aided by the government’s thrust on renewable energy, green hydrogen and an overall increase in power demand. There is a robust pipeline of INR250b for domestic T&D projects and it is poised to grow at a healthy pace over the next 3-4 years. A strong order book and a healthy pipeline should help KECI sustain 50% growth in domestic T&D revenue in FY25. Owing to strong demand for power, KECI is bidding for four lines that transmit power to Mumbai. Notably, PGCIL has won an HVDC order worth ~INR130-140b. The company expects to bag the same in 2QFY25.

International T&D – legacy projects over; focus on profitable growth

There is continued traction in the GCC region, particularly in UAE and Abu Dhabi, coupled with healthy prospects in Mexico, Australia, US, etc. However, the situation in Russia, Central Asia, Africa and SAARC region is muted owing to a combination of factors such as geopolitical tensions, currency fluctuation and funding issues. After reporting losses in the post-Covid period, SAE has seen a turnaround in FY24 with order book + L1 of INR30b. New orders have been booked at better margin, so going forward the company expects further improvement. Large tenders are expected from Australia for many renewable projects. KECI also expanded its Dubai tower manufacturing facility to cater to increased demand from the Middle East. Pending dues from Afghanistan stood at ~INR3b, which the company expects to recover in due course.

Civil – poised to see multi-year growth

The civil segment has been growing at a robust pace over the past few years, led by commercial and residential real estate, private capex, data centers, water projects, metros, etc. The company expects this momentum to continue, with healthy activity taking place in data centers, real estate, hospitals, government buildings, etc. Though order inflows declined during FY24 due to delays in finalization of water-related projects and focus on the completion of existing metro projects, we expect improved traction to be visible from FY25 onwards for the civil segment on improved private capex, B&F capex, etc. Delays in existing metro projects also led to some cost overruns, thereby impacting margins in the civil segment.

Railways – to see another muted year

There has been a continued sluggishness in the railways segment as the bulk of government spending has largely gone toward locomotives, wagons and station redevelopment, where KECI lacks presence. This factor, coupled with heightened competitive intensity and execution delays, led to a 17% revenue decline in FY24 and margin pressure. Accordingly, the company has consciously adopted a selective approach while bidding and will focus on executing the backlog, which will help to reduce working capital. KECI expects a higher emphasis on infrastructure upgrades, as Vande Bharat trains are currently running at below-capacity speeds. As a result, FY25 revenue could continue to decline.

Margin improvement playing out sequentially

KECI has been witnessing sequential margin expansion for the last six quarters, aided by the completion of legacy projects, new order wins at favorable margins, stable commodity prices, limited competition in large-ticket T&D projects (5-6 players) and SAE turnaround. For FY25, the management has guided for 7.5% margin and expects it to improve further in FY26. As the average ticket size of domestic T&D projects has gone up (INR500b), competition is confined to 5-6 players, which has led to pricing discipline. This has resulted in improved profitability in T&D, where the company is able to enjoy ~10% margin. Civil segment margins will improve once the execution ramps up on metro projects.

Focus on working capital reduction

KECI is focusing on working capital reduction through improved customer advances, improved collection from Afghanistan and railways segment, and better payment terms for transmission projects.

Adding capabilities to capture opportunities

In order to improve its backward integration, the company has forayed into the manufacturing of conductors (AAAC, AL-59, ACSR). The facility is expected to be commissioned in 3QFY25 and has already secured orders for supplying AL-59 and ACSR conductors from a government utility and private TBCB players. This move will support margins and revenues of the cables segment. However, the company does not intend to compete with other conductor players, which are also its suppliers. It is meant for internal consumption. Similarly, KECI has added a few more products to cater to civil, railways, T&D and urban infra businesses.

Financial outlook

We maintain our estimates and expect a CAGR of 12%/33% in revenue/EBITDA over FY24-26 for KECI. This will be driven by: 1) order inflow growth of 29%, 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 margin improvement and stable working capital, we expect RoE and RoCE to improve to 20.6% and 17.1% by FY26, respectively.

Key risks and concerns

A slowdown in order inflows, higher commodity prices, increase in receivables and working capital, and heightened competition are some of the risks that could potentially impact our estimates.

Valuation and view

KECI is currently trading at 31x/20x on FY25E/FY26E EPS. We maintain our Neutral rating with a target price of INR710.

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