Published on 18/09/2019 9:32:02 AM | Source: Equirus Securities Ltd

Update On KEC International Ltd by Equirus Securities

Higher domestic ordering in 2Q, 3Q to compensate for 1Q miss ― reiterate LONG

KECI’s 1QFY20 revenues grew ~15% yoy to ~Rs 24.1bn (in line with EE) on strong execution in both domestic and international T&D (+25% yoy) and railways (+67% yoy). Execution in the civil segment declined ~45% yoy due to a slowdown in industrial capex, the company’s cautious stance on real estate projects and shortage of manpower. 1QFY20 order intake at ~Rs 11bn came in weak (-59% yoy/-56% qoq) as tendering of domestic T&D and railways projects got postponed due to elections; management expects these orders to get awarded by 2Q-end/3Q-beginning. We marginally pare order intake assumptions for FY20 to factor in a weak 1Q and tweak FY20/FY21 PAT estimates by -4%/-5%. Restate LONG with a Sep’20 TP of Rs 362 (rolled over from a Jun’20 TP of Rs 360) at 15x TTM P/E (unchanged).


Domestic T&D ordering to gather momentum ahead: Management expects delayed domestic T&D orders to get awarded in late-2Q/early-3QFY20. Eight domestic TBCB projects (including Green Energy Corridor) have been awarded to developers in the last one month alone. Developers would start tendering of EPC work for these projects soon, as the execution of six out of eight projects has to be completed by Dec’20. Management has guided for domestic T&D order intake of Rs 60bn-70bn (PGCIL + TBCB + SEBs) in FY20. On the international T&D front, the company continues to widen its footprint and consolidate its position in the SAARC market. Brazil would see robust order intake in 3Q and 4QFY20 as May’19 auction has been postponed (single auction expected in Dec’19).


Revenue share of non-T&D business to continue rising: Railways business continued on a high-growth trajectory with 1Q segment revenues up ~67% yoy. However, there were no railway order inflows during the quarter as most railway tenders got postponed due to elections; KECI has an L1 position of >Rs 10bn in these tenders. Despite a blip in civil execution in 1Q (-45% yoy), management is confident of growing this segment by >50% in FY20 as it has started focusing on commercial buildings, metros, elevated corridors, and airports. In solar, KECI has made some inroads in international markets with an L1 position in a 30MW project in Africa. This should help counter weak solar demand in India.


Margins, interest cost & impact of Ind As 116: Operating margins at ~10.4% (~10.1% adjusted for Ind AS 116) inched up ~14bps yoy. EBITDA was overstated to the tune of ~Rs 70mn whereas depreciation and interest cost increased by ~Rs 90mn on account of IndAS 116. Management has guided for interest cost (as a percentage of sales) to drop to ~2.7% for full FY20 (1Q: ~3.3%) helped by effective transmission of lower policy rates.


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