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Margin recovery on cards...

KEC International Ltd. (KEC) is a global infrastructure Engineering, Procurement and Construction major. It has presence in the verticals of Power T&D (Transmission & Distribution), Cables, Railways and Water & Renewable.

• In Q2FY24, KEC reported a revenue growth of 11% YoY led by strong execution in civil business by 42% YoY and SAE tower segment by 51% YoY.

• EBITDA margin expanded by 172bps YoY to 6.1% in Q1FY24 owing to higher execution in non-T&D business and benign raw material prices.

• We expect margins to improve in H2FY24 on account of a healthy product mix and the management reiterated the expectation of ~7% margin in FY24.

• An increase in interest costs by 39% in Q1FY24 due to higher interest rates and an increase in working capital loans impacted earnings growth.

• The order book increased by 14% YoY in H1FY24; however, inflow declined by 14% YoY due to subdued growth in the railway, civil & SAE segments.

• The order book remains healthy; however, increasing debt levels remain a concern. We therefore reduce the P/E valuation to 18x (vs 20x earlier) on FY25 EPS and maintain Accumulate rating with a TP of Rs.640.

Margins improved...

KEC reported a revenue growth of 10.7% YoY to Rs4,499cr in Q2FY24, which is below our estimate. Subdued execution in T&D business and railway segment restricted the top-line growth. On the other hand, civil, SAE and solar business registered a decent revenue growth of 42%/51%/127% respectively. The management lower the revenue guidance to Rs20,000cr (vs Rs24,000cr earlier) for FY24 on account of a strong order book and a tender pipeline of Rs1,25,000cr in H2FY24. EBITDA margin improved by 172bps YoY to 6.1% during the quarter due to benign commodity prices and higher mix of non– T&D orders. The management stated that margin recovery is on the cards, expects margins to expand to 7% in FY24 as most of the legacy orders are completed and moderation in commodity prices. However, interest cost increased by 39% YoY in Q2FY24, while interest cost to revenue remained high at 4% compared to 3.1% during Q2FY23. The net debt is increased by Rs943cr in H1FY24 to Rs4,491cr and it remains a concern for earnings growth for FY24.

Strong order book...

In H1FY24, despite an increase in T&D orders by 22% YoY to Rs3,960cr, the company’s order inflow de-grew by 14% YoY to Rs. 9,000cr, owing to drop in railway order intake by -46% YoY and water & civil business by –29% YoY. The order book during H2FY24 increased by 14% YoY to Rs. 31,320cr. The total order book, along with current L1, stands at Rs.35,000cr (2x TTM revenue), providing better revenue visibility in the coming quarters. The management also stated that the T&D tender pipeline remains healthy at Rs 1,25,000cr (include international T&D Rs50,000cr & domestic T&D 30,000cr) and expects Rs. 8,500cr of order inflows from the civil segment in FY24.

Valuations

Govt’s thrust on capex spending and a revival in private capex provide ample impetus to the sector. The pick-up in T&D order book and improvement in margins are positive for KEC. However, rising debt level remains an overhang. We therefore reduce P/E valuation to 18x on FY25 EPS with a TP of Rs. 640.

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