KEC International: Company Update - Building on diversification - HDFC Securities

Mr. Parikshit D Kandpal, CFA, HDFC Securities and Mr. Chintan Parikh, Institutional Research Analyst, HDFC Securities

We attended the KEC International (KECI) Annual Investor Conference 2021 on 16 June 2021. We note the following key takeaways from the call: (1) YTD order inflow is at INR 30bn. T&D and non-T&D businesses could see INR 80- 90bn ordering each in FY22; (2) While domestic T&D ordering is expected to remain muted, the MENA region is seeing increased traction; (3) KEC wants to transform itself into an engineering major rather than just being an EPC company; (4) Civil business could grow 100%/50% in FY22/23 , while railways could grow 30% in FY22; (5) Margin profile would change once civil achieves scale; (6) KECI would drive productivity through digitisation, mechanisation and automation; (7) Working capital could be trimmed by 15-20% (to sub 100days) as civil business grows. With strong prequalification in domestic and international markets across sectors, KECI is well-placed for a rerating. We have a BUY rating on the stock with a target price of INR 452/sh (14x Mar-23 EPS).

FY22 could see sharp jump in ordering: KECI is targeting order inflow of INR 160-180bn in FY22, a 35-52% jump over INR 119bn orders in FY21. Of its target, the company has already received INR 30bn in FY22. Its current bid pipeline stands at INR 650bn. While domestic T&D ordering is expected to remain subdued, we believe increased traction in MENA and a few SAARC nations would help fetch INR 80-90bn T&D orders. Government's focus on infrastructure, revival in private Capex, company venturing into new oil and gas pipeline business, and capabilities across sectors would drive growth in non-T&D. KECI is targeting another INR 80-90bn order wins from it.

Civil to take over the baton of growth from railways: Revenue from the railways business has grown at 75% CAGR over FY16-21. However, given the increased scale and recent slowdown in awarding, growth is expected to taper off to 30% for FY22. On the other hand, civil business grew 3x in FY21 and is expected to grow by 100/50% in FY22/23. KECI has been building capabilities in the civil business and is now present in industrial, residential, urban infrastructure, airports, and defense sectors. Presence across various verticals makes it one of the largest beneficiaries of the increase in Capex.

Transforming KECI into an engineering major: The management wants to position the company as an engineering major, and not just an EPC company. In the T&D space, it has proved its mettle. However, it is trying to build similar capabilities in the non-T&D segment. It wants to be the first port of call for the engineering part of the EPC business. Once it gets into engineering, the per client quantum of ordering would increase substantially. As per management, the company will drive this transformation organically.

Shares of KEC INTERNATIONAL LTD. was last trading in BSE at Rs.416.95 as compared to the previous close of Rs. 402.7. The total number of shares traded during the day was 87979 in over 3203 trades.

The stock hit an intraday high of Rs. 421.4 and intraday low of 404.55. The net turnover during the day was Rs. 36261198.

Source : Equity Bulls

Keywords