BUY on KEC International - Robust performance continues - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities

2QFY21 financial performance was again a positive surprise on execution and profitability, aided by lower interest cost, increasing labour strength (back to pre-COVID level) and deployment of mechanisation, automation & digitalisation initiatives to improve productivity and quality of execution. KEC is seeing good traction in Railways and Civil segment ordering. New avenues of growth within the Civil segment are emerging like warehouses and data centres, oil & gas pipelines, water pipelines, chemical industry, hydrocarbons, select residential, defence and industrial real estate opportunities, etc, even as Railways/MRTS continues to ramp up progressively. Net debt-equity is stable at 1.1x. With robust prequalification in domestic/international markets and across sectors, KEC is well-placed for a re-rating. The bid pipeline is strong at Rs 500-600bn, including Rs 250-300bn of bids which are yet to be opened.

Better-than-expected financial performance: Revenue: Rs 32.6bn (+16/+48% YoY/QoQ, 13% beat); While execution in T&D segment (Rs 19.7bn) remained flattish, revenue growth was driven by non-T&D segment, mainly from railways (Rs 8.2bn, +45% YoY) and civil (Rs 2bn, ~4x 2QFY20, 4 MRTS/RRTS orders) segments. Cables revenue was flattish at Rs 2.5bn as customers deferred orders in anticipation of lower commodity prices in future. EBITDA margins: 9.1% (-146/+17bps YoY/QoQ, vs est. of 9.2%). YoY dip driven by higher share of non-T&D mix in the business and COVID impact. Interest cost stood at Rs 674mn (-18/+2% YoY/QoQ), 2.1% of revenue vs 2.9% YoY. Consequently, RPAT came in at Rs 1.4bn (+2.5% YoY, ~2x 1QFY21, 19% beat). This relative outperformance is expected to carry forward in 2HFY21 as well, contingent on COVID being contained.

Order inflow stable, tender pipeline strong, postponement leading to slower conversion: KECI has received Rs 43.7bn of orders in FY21 till now, primarily driven by International-T&D. Order book stood at Rs 195bn at the end of Sep-20 ex L1 order of Rs 35bn. KEC is seeing a robust bid pipeline with Rs ~300bn of bids submitted yet to be opened and Rs ~250bn of bid submission due over the next two months, spread out across segments. Pace of awarding, however, has been slow since COVID struck. Railways tendering activity has picked up slightly, but is still progressing at a very slow pace. SAE-Brazil is also stabilizing now post months of volatility.

Balance sheet stable, marginal improvement in NWC: Consolidated net debt, including the interesting bearing acceptances, stood at Rs 34.8bn (1.1x net D/E), marginal increase from Rs 33.2bn at the end of Jun-20. NWC improved to 132 days vs 139 days QoQ. The medium term is to bring this down to ~100 days, and bring down interest cost (as % sales) further. Foreign borrowings at ~60% as on Jun-20 of the total mix is now coming down as interest costs in India have come down.

Shares of KEC INTERNATIONAL LTD. was last trading in BSE at Rs.336.65 as compared to the previous close of Rs. 337.9. The total number of shares traded during the day was 12492 in over 897 trades.

The stock hit an intraday high of Rs. 342.95 and intraday low of 335.55. The net turnover during the day was Rs. 4239130.

Source : Equity Bulls

Keywords