KEC International - Strong growth lifts earnings - ICICI Securities

Led by strong execution in railway segment (up 40% YoY) and civil (up 200% YoY), KEC International (KEC) reported better than expected earnings. Margins were subdued due to cost escalation in SAE and higher mix of low-margin non-T&D contribution. However, we expect margins to normalise going forward. L1 position in contracts worth Rs35bn and strong orderbook at Rs195bn (1.6x TTM sales) lend growth visibility. Reduction in interest rates and prudent control on working capital led to lower financial cost. Factoring-in the strong execution in Q2FY21, we raise earnings by 3.3% and 10% for FY21E and FY22E respectively. Maintain BUY with a revised target price of Rs435 (previously Rs342).

- Railway and civil segments remain strong growth engines: Given strong orderbook, the civil segment is expected to witness robust growth in FY21 with healthy order prospects. Management estimates Rs14bn-15bn revenues for the year led by activity in metro civil, water pipeline, warehouse, data centre and industrial segments. Electrification-related orders continue to be strong under the railway segment supporting overall growth in this segment.

- Margins to normalise: EBITDA margin declined 150bps YoY to 9%, impacted by higher mix of low-margin non-T&D execution. Fluctuation in the Brazilian currency, real, and higher costs impacted SAE profitability. This is expected to normalise going forward with gradual easing out of Covid restrictions, increase in T&D contribution and stabilisation of the Brazilian currency.

- Healthy order pipeline; domestic T&D ordering to improve in H2FY21: Overseas order prospects are healthy and overall the company has bid for projects worth ~Rs300bn as of now with ~Rs200bn bids in the pipeline. Green energy corridor orders are to be rebid given the new clause to discourage Chinese companies from participating. These tenders are expected to be finalised by Dec'20 while overseas orders from MENA, Far East and Bangladesh continue to be buoyant.

- Maintain BUY on strong execution and healthy order prospects: Railway and civil segments are expected to remain in high-growth phase in the near to medium term. Normalisation of margins, control on working capital and lower interest rates will support earnings growth. Factoring-in the strong execution in Q2FY21, we raise earnings by 3.3% and 10.1% for FY21E and FY22E respectively. Maintain BUY with a revised target price of Rs435 (previously Rs342).

Shares of KEC INTERNATIONAL LTD. was last trading in BSE at Rs.337.25 as compared to the previous close of Rs. 328.9. The total number of shares traded during the day was 18766 in over 1086 trades.

The stock hit an intraday high of Rs. 342.5 and intraday low of 332. The net turnover during the day was Rs. 6347073.

Source : Equity Bulls

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