KEC International - 1QFY18 Result Update - Strong Quarterly Performance Continues; Maintain BUY

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).