KEC
International (KEC) has delivered a strong performance in 1QFY18 with
its net profit rising by 103% YoY to Rs630mn led by higher margin
(+90bps YoY) and lower interest cost (-12% YoY). Its revenue grew by
6.2% YoY to Rs18.9bn vs. our estimate of Rs19.0bn. Notably, GST roll-out
impacted KEC’S revenue growth to the extent of Rs1bn. Further, overseas
sales
from SAE Tower de-grew by 41% YoY owing to holding back of tower supply
following some environmental issues in Brazil.
We
expect KEC’s earnings to witness 25.2% CAGR over FY17-19E on strong
order book, improving margin
profile and healthy outlook in T&D and other emerging business
segments. Notably, the stock price has more than doubled in last 12
months. However, we continue to remain positive on the fundamentals of
KEC. Upwardly revising our target multiple from 15x earlier to 18x FY19E
EPS at 25% discount to its peak cycle multiple (23x) owing to high
traction in order inflow and improving margins profile towards its
historic high levels, we reiterate our BUY recommendation on the stock
with a revised Target Price of Rs335 (from Rs279 earlier).
Revenue Growth Continues to be Strong
T&D
sales (including SAE sales) rose by just 3.1% YoY to Rs14.8bn despite
an impressive 12.6% growth excluding SAE sales, which de-grew by 41% YoY
owing to holding back of supply of towers following some environmental
issues in Brazil. Revenue from Railway business zoomed by 129% YoY to
Rs1.6bn, while Solar Business recorded 50.0% YoY growth to Rs0.2bn.
However, revenues from Cables and Water segments declined by 10.2% YoY
and 16.7% YoY to Rs1.5bn and Rs0.15bn, respectively.
Operating Margin at
Highest Level; PAT Zooms
KEC’s
overall EBITDA margin
expanded by 92bps YoY to 9.3% in 1QFY18 owing to absence of low-margin
legacy orders in Water, Railways and Power Systems segments. Its
reported PAT zoomed by 103.7% YoY to Rs630bn (vs. our expectation of
Rs528mn) led by higher margin, lower interest cost and lower effective
tax.
Outlook & Valuation
We
expect KEC to witness steady improvement in margins owing to reducing
backlog of low-margin orders, improved margin profile in new orders,
lower commodity prices and breakeven in Tower & Cable business. Expecting
25.2% CAGR in KEC’s earnings over FY17-19E on strong order backlog and
improving margins profile, we reiterate our BUY recommendation on the
stock with a revised Target Price of Rs335 (from Rs279 earlier).
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