KEC International - 3QFY18 Result Update - Improved Project Execution Lifts Earnings

KEC International (KEC) has delivered a healthy performance in 3QFY18 with its revenue rising by 22.5% YoY to Rs24.0bn led by diminishing impact of GST. Consolidated net profit surged by 78.5% YoY to Rs1.1bn in 3QFY18 on the back of improved execution of T&D projects and higher operating margins. Looking ahead, we expect KEC’s earnings to clock 26.9% CAGR over FY17-20E on the back of strong order book, improving margin profile and healthy outlook in T&D and other emerging segments. Thus, maintaining our positive stance on KEC and rolling over our estimates to FY20E, we maintain our BUY recommendation on the stock with a revised Target Price of Rs445 (from Rs372 earlier).

Higher Revenue on Improved Execution

KEC’s revenue grew by 22.5% YoY to Rs24.0bn. SAE Towers’ sales grew by 40.8% YoY to Rs3.2bn owing to higher supply of towers in Brazil. Revenue from Power T&D business surged by 23.4% YoY to Rs18.5bn on improved execution. While revenue from Railways business grew by 98.5% YoY to Rs2.0bn, Civil (including Water business) recorded 321% YoY growth in sales to Rs0.8bn. However, revenues from Cables and Solar segment decreased by 2.0% YoY and 41.8% YoY to Rs2.7bn and Rs0.34bn, respectively. 

Operating Margin at Record Level; PAT Zooms

Despite higher commodity prices, KEC’s overall EBITDA margin expanded by 90bps YoY to 10.1% owing to better execution, absence of low-margin legacy orders in Water, Railways and Power Systems segments and execution of recently-bagged better-margin orders by SAE Towers. Its reported PAT zoomed by 78.5% YoY to Rs1.11bn.

YTD Order Backlog up 35% YoY; Order Intake Traction to Remain Strong

Post YTD order inflows of Rs113bn (+31%), KEC’s current unexecuted order book stands at Rs171.5bn. Notably, order inflows doubled on YoY basis in 3QFY18, while YTD order backlog grew by 35% YoY. Reiterating its FY18 guidance, KEC expects its order book to grow by double-digit in FY19. KEC expects interest cost to reduce and margin to improve further. It expects Cables business to get benefitted on the back of shifting to own facility and recent prequalification from PGCIL for 220 KV cables. Further, fresh order worth Rs8bn baged by SAE Towers in Brazil offers a healthy growth visibility, in our view. We expect strong order intake traction to continue led by higher T&D spending by SEBs, improved railways ordering and recovery in overseas markets.

Outlook & Valuation

Looking ahead, we expect KEC to report steady improvement in margins driven by reducing backlog of low-margin legacy orders, improved margin profile in new orders and breakeven in Tower & Cable business. We expect KEC’s earnings to clock 26.9% CAGR through FY17-20E on the back of strong order backlog and improving margins. Maintaining our positive stance on KEC and rolling over our estimates to FY20E, we maintain our BUY recommendation on the stock with a revised Target Price of Rs445 .

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