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Focusing on improving return metrics

KECI in our recent meeting highlighted a continued strong addressable market for T&D and improving opportunities in the civil segment for residential buildings, petrochemicals, hospitals, etc. while, industrials has been witnessing slow momentum. The company is continuously focusing on improving return metrics and targeting a 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 INR940, based on 21x two-year forward earnings.

T&D segment pipeline remains strong

KECI’s T&D business witnessed growth in the order book, from INR120b in FY22 to INR245b (including L1) in FY25, aided by the government’s thrust on renewable energy, green hydrogen and an overall increase in power demand. Major regions contributing to the current T&D order book include India (43%), the Middle East (31%), the Americas (9%), Africa (5%) and CIS (5%). There is a total tender pipeline of INR600b for T&D projects. Domestic T&D segment growth is primarily being driven by increased power demand in the country (target of achieving 600GW of non-fossil fuel capacity by 2032) and KECI’s entry into the HVDC area, where the company is already executing projects and is eyeing two more tenders from Gujarat and Leh Ladakh. International T&D order enquiries are building up in the Middle East, the Americas and Australia, while Africa still remains slow.

Working capital expected to improve

KECI has an order backlog of approximately INR20b in its water project segment, where the broader industry has faced delays in payment releases from government authorities. However, by the end of FY25, execution momentum in this segment had started to improve, with payment inflows beginning to resume - around INR1.4b received during the year. Management also indicated that the railways business may have bottomed out and could see gradual improvement going forward. These factors, along with an increasing contribution from the T&D segment (which inherently has more favorable working capital), are expected to support the company’s target of reducing NWC level to 100 days. Nonetheless, we believe execution and working capital recovery trends warrant continued monitoring. We expect pending payments from Afghanistan, water projects and railway projects to help reduce the burden on receivables. Along with this, with the completion of metro projects and a few international projects, the release of retention money will help the company to reduce NWC cycle.

Focusing on improving margin and ROCE

KEC aims to improve its RoCE profile by focusing on NWC reduction and margin improvement. While T&D segment has already reached double-digit margins and has a comfortable working capital cycle, the other non-T&D segments, particularly civil and railways, are facing pressure on both margin and NWC. The company intends to improve return metrics for non-T&D segments by focusing on improved collections, targeting better margin in projects and timely completion of projects. Civil segment margins are currently hovering in mid-single digits, while railway segment margins are close to break-even levels. With payments gradually resuming for water projects in the civil and railways segments, management anticipates an improvement in working capital for both segments in FY26, which should enhance ROCE. However, we expect margin improvement to still take some time to reflect for non-T&D segments, while NWC improvement can happen faster.

Financial outlook

We expect a revenue/EBITDA/PAT CAGR of 17%/27%/44% over FY25-27. This will be driven by 1) order inflow growth of 24% over the same period, led by a strong prospect pipeline; 2) a recovery in EBITDA margin to 8.1% by FY26/FY27; and 3) a gradual reduction in NWC. With the expected improvement in execution and margins, we expect its RoE and RoCE to reach 21% and 17.8%, respectively, by FY27.

Valuation and view

KECI is currently trading at 24.8x/19.6x on FY26E/27E earnings. We reiterate our Neutral rating with a TP of INR940, based on 21x Mar’27E EPS

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 key risks that could potentially affect our estimates.

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