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Performance impacted by lower margin and higher interest cost

KEC International Ltd (KECI)’s results were a mixed bag with in-line revenue being offset by a PAT miss. Revenue growth could have been higher; however, it was impacted by labor shortage and heavy monsoons in certain states. YTD order inflows jumped 50% YoY to INR134.8b, taking the order book to INR340.9b, up 9% YoY. For 1HFY25, the company reported revenue/EBITDA/PAT growth of 10%/14%/76% while for 2HFY25, we expect the same to grow at 13%/41%/84%. Net debt including acceptances declined YoY and QoQ on better collections. Overall, we continue to expect KECI to benefit from a strong T&D tendering pipeline for the coming few years. We marginally cut our estimates for FY25E/FY26E to bake in 2QFY25 performance. We maintain a NEUTRAL rating on the stock with a revised TP of INR900 (vs. INR950 earlier).

Results a mixed bag; miss on PAT

KECI’s 2QFY25 results were a mixed bag, as an in-line revenue print was offset by a miss at the PAT level. Revenue came in at INR51.1b, up 14% YoY, aided by the healthy execution of the opening order book of INR327.1b. Gross margin at 22.8% contracted ~50bp YoY/110bp QoQ. Staff costs stood at 7.9% of sales vs. 8.4% in 2QFY24. Other expenses as a % of sales were flat YoY at 8.6%. EBITDA grew 17% YoY to INR3.2b, while margin expanded 20bp YoY/30bp QoQ to 6.3%, below our estimate of 6.6%. Interest expenses as a % of sales marginally eased to 3.3% vs. 3.4% in 1QFY25 and 4% in 2QFY24. PAT came in at INR854m, up 53% YoY, despite a 58% decline in other income and a higher effective tax rate (24.7% vs. 15.2% in 2QFY24). Order inflows jumped 29% YoY to INR58.1b, taking the closing Order Book (OB) to INR340.9b (+9% YoY). T&D/non-T&D mix stood at 55%/45%. OB + L1 position stood at INR425b. For 1HFY25, revenue/EBITDA/PAT grew 10%/14%/76%, while free cash outflow narrowed to INR5.7b vs. INR12b in 1HFY24.

Revenue growth driven by T&D

2QFY25 revenue growth was entirely driven by the T&D segment, which reported revenues of INR28.3b (+28% YoY), led by a strong execution of the opening order book of INR166.8b along with a 72% YoY surge in order inflows in 1HFY25 to INR93b. The revenue growth could have been much higher but heavy monsoons in Rajasthan and Gujarat, coupled with labor shortage, affected execution. Notably, key international geographies such as the Middle East, CIS, Africa, and Americas are also seeing robust traction.

Civil segment to be a major growth driver

The Civil segment has been growing at a robust pace over the past few years, aided by traction in data centers, commercial and residential real estate, water projects, metros, etc. For 1HFY25, order inflows have been muted owing to elections, and partly due to a conscious decision to stay away from certain metro and water projects, where collection periods have become a little stretched. 2QFY25 witnessed 9% revenue growth at INR11.5b. For FY25, the company aims to bag orders worth INR40-50b, focusing on orders with execution timelines below 24 months. The current order book stands at ~INR100b.

Prospect pipeline remains robust for T&D and Civil

Overall, the prospect pipeline for KECI stands strong at ~INR1.5t, which is spread across transmission (INR600b), railways (INR150-160b), civil (INR500b), and INR150b for oil & gas and renewables combined. The recently unveiled NEP provides a fillip to domestic T&D visibility, envisaging an outlay of INR9.15t across the entire value chain by FY2032. The company is also witnessing a healthy uptick in international markets such as the Middle East, Africa, CIS, and Americas on the T&D side. The Civil segment will continue to see sustained growth as the prospects for real estate, data centers, private capex, etc. remain sanguine. Water projects too are expected to see an uptick once the state elections are over and outstanding dues get released. We factor in order inflows to post a CAGR of 29% over FY24-27.

Financial outlook

We slightly tone down our margin estimates for FY25/26, factoring in 1HFY25 performance while retaining our revenue estimates. Accordingly, we expect a revenue/EBITDA CAGR of 14%/27% over FY24-27 for KECI. 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 7.1%/8.3%/8.5% by FY25/26/27, and 3) control over working capital due to improved customer advances, improved debtor collections from railways, and selective participation in projects based on the execution timeline. With improvement in margins and stable working capital, we expect the RoE and RoCE to improve to 19.7% and 17.6% by FY27, respectively.

Valuation and recommendation

KECI is currently trading at 24x/19x on FY26E/27E earnings. Our estimates bake in a in a revenue CAGR of ~14% and EBITDA margins of 8.3%/8.5% for FY26E/27E. We maintain our Neutral rating with a revised TP of INR900 (vs. INR950 earlier) based on 21x two-year forward earnings.

Key risks and concerns

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

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