Sell KEC International Ltd For Target Rs.368 By Geojit Financial Services Ltd
Weak Execution and Margin pressure to Impact Profitability
KEC International Ltd. (KEC) is a leading global infrastructure engineering, procurement, and construction (EPC) company with a diversified presence across key sectors, including Power Transmission & Distribution (T&D), Cables, Railways, and Water & Renewable Energy.
* KEC’s Q1FY27 result were below estimates, revenue were flat at Rs 5,023cr, impacted by supply chain disruption due to Middle East crisis, and labour shortages.
* Execution in the civil and cable divisions remained steady, supported by improved demand, while execution in the T&D, railway, and solar segments remained weak.
* EBITDA margin declined by 118 bps YoY to 5.8%, due to higher input costs and slower execution in railway and civil projects. We expect margin pressure to persist in the near term and weigh on profitability.
* KEC’s order book grew 10% YoY to Rs37,697cr in Q1FY27, driven by a 14% increase in order inflows. The company is targeting order inflows of Rs30,000 cr in FY27, with 60-70% expected to come from the T&D business.
* Given the impact of prolonged execution delays and elevated project costs, we have cut our FY27 and FY28 earnings forecasts by 36% and 25%, respectively
Outlook & Valuation
We remain cautious on KEC as persistent cost inflation, execution disruptions in the Middle East, and weak margins in legacy projects continue to impact profitability. Although the order book remains strong, earnings visibility and return ratios are likely to remain subdued in the near term. Accordingly, we revise our rating to SELL with a TP to Rs 368 based on a P/E of 11x on FY28 EPS
Key Concall Highlights
* Management maintains its FY27 revenue growth guidance of 12% to 15%, acknowledging potential slight variations due to geopolitical factors, and expects stronger execution in Q3 and Q4 given the robust order book.
* The company targets Rs.30,000 cr in order inflows for FY27, with 60% to 70% expected from the T&D business and Rs.9,000cr to Rs.10,000cr from international markets, a significant portion of which will come from West Asia.
* The Civil business's profitability was negatively affected by old Metro projects that are completed but awaiting client takeover, incurring ongoing expenses of approximately Rs.10cr per month per project.
* T&D business is expected to continue achieving double-digit margins, with sufficient hedges in place to mitigate commodity price fluctuations. The SAE Towers business also operates at almost double-digit margins.
* Overall margins are anticipated to improve from Q3 onwards, with Q2 expected to remain similar to Q1, and high single-digit margins are considered possible by FY28.
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