Margin improvement expected from 4QFY22 – KEC International

Update on the Indian Equity Market:

On Tuesday, NIFTY closed in the green at 18,056 (+0.3%). Among the sectoral indices, IT (+1%), REALTY (+0.5%), and FINANCIAL SERVICES (+0.3%) closed higher while METAL (-1.9%), FMCG (-0.4%) and PSU BANK (-0.2%) closed in the red. HCLTECH (+4.5%), ADANIPORT (+3.5%), and HDFC (+1.8%) were the top gainers. JSWSTEEL (-3.1%), TATASTEEL (-2.9%), and BPCL (-1.7%) were among the top losers.

Excerpts from an interview of Mr. Vimal Kejriwal, MD, and CEO, KEC International with CNBC-TV18 dated 7^th January 2022:

• On 6^th January 2022, the cabinet cleared ₹ 120bn plan to set up infrastructure to transmit electricity from renewable energy projects to boost green sources. This will help meet half of the nation’s energy requirement by 2030, and the expected timeline for this project was around 4-5 years.
• Kejriwal expects the conversion in orders is likely to take place in Q2FY23E or Q3FY23E. The Company will likely get ~15% to 20% business and is expected to generate Rs ~20,000 mn business for KEC.
• On the margins side, he added it will not be more margin accretive because of the heavy competition with big giants like Power Grid or Adani Transmission, or starlight. Heavy competition from biggies leaves less space for EPC to generate profit and leads to maintaining normal margins.
• KEC doesn’t see the postponement of tenders on the ground situation and KEC is not looking to the postponement of orders. KEC is the lowest bidder or L1 in another order of ₹ 60,000 Mn and KEC expects that many of them converted during the Q4FY22 so even if the tenders get postponed KEC sees healthy orders coming in the 2HFY22.
• Improvement in margins will start from 4QFY22 onwards led by softened steel and cement prices and improvement in the availability of steel. New orders are at the current prices and the execution has started kicking in and the company expects from 1QFY23 and 2QFY23 the margins would be near double digits.
• In the civil segment, KEC performed well in FY21 and did the business of ₹ 10,000 – 11,000 mn, and in FY22 the civil segment is expected to be doubled in terms of business and another 50% increase might be seen in FY23. The civil order book closed at ~₹ 60,000 mn as of today. The civil segment is primarily driven by metros, water projects, and metals and mining, these three areas where KEC seeing significant growth to be continuing.
• In the railway segment, KEC underperformed because of disturbance in the market due to heavy competition but KEC expects good growth in FY22. KEC has taken a stand of wait and watch in conventional railways but the company seeing significant growth in the metro side rather than conventional in the near term.
• On the revenues Mr. Kejriwal further added, they expect ~15% to 20% growth in FY22 and, ~50% to 60% order book is still from conventional railways but they seeing changes in revenue breakup and metros will be the focussed area rather than conventional for KEC. The Government has embarked on “Mission Raftar” where KEC is expected to get most of the orders other than that company seeing some slowdown in conventional railways.

Asset Multiplier comments:

• We think the healthy order book, expansion of business in newer geographies, and diversification in revenue segments will be the key positives for KEC International but the heavy competition by big players in the sector and increased commodity prices pull back the profitability and the margins.
• Healthy growth opportunity in global and domestic transmission and distribution sector, electrification of railways and rural region and government’s measures towards boost infrastructure driven growth for KEC International.

Consensus Estimate: (Source: Market screener website)

• The closing price of KEC International was ₹ 497/- as of 11-January-2022.  It traded at 24x/16x/13x the consensus Earnings per share estimate of ₹ 21/32/39/- for FY22E/FY23E/FY24E respectively.
• The consensus average target price is ₹ 520/- which implies a PE multiple of 13x on FY24E EPS of 39/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”