Engineering | Assetmultiplier

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.”

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Selective improvement visible, total market turnaround still far away: Mr Unnikrishnan, Themax

Update on the Indian Equity Market:

The weakness witnessed in global equity markets on Friday got reflected in the Indian Equity market at start of the week on Monday. Concerns mounted about the ability of authorities to keep the coronavirus from spreading further beyond China. NIFTY50 closed 2.0% lower at 11,839 level. All NIFTY50 stocks closed in the red. The worst performers were JSWSTEEL (-7.4%), VEDL (-6.5%) and TATASTEEL (-6.3%). METAL (-5.4%), AUTO (-3.5%) and PHARMA (-3.1%) were among the worst hit. No sectoral index closed positively.

Selective improvement visible, total market turnaround still far away: Mr Unnikrishnan, Themax

Excerpts from an interview with Mr Unnikrishnan, MD – Thermax published in Mint dated 24th February 2020.

Orders in January were better than the past couple of months. Selective improvement is visible towards the end of 1HFY20 and at the start of 2HFY20E. A total turnaround is far away.
There is a lot of traction and capacity build-up in the oil and gas industry. Mr. Unnikrishnan expects a lot more orders coming from the sector in 2HFY21E.
The cement sector is seeing positive movement. Most cement companies in India are not overleveraged and there are some greenfield and brownfield expansions expected.
Mr. Unnikrishnan thinks Oil & gas, and cement are the only 2 sectors where there could be investments in FY21E.
The consumer facing industry is seeing improvement in the utilization levels from December. The negativity in consumer-facing industry, FMCG and durables for the last 6-7 months should start reversing in 1HFY21E. This means that some companies will start ordering from 2HFY20E, which will benefit Thermax.
Thermax was facing some issues in terms of slower payments coming in from both the private sector and government orders. Mr Unnikrishnan says private sector payments are improving due to improved performance. There is no improvement in the pace of public sector payments despite the issue being taken up to the highest levels. Including the contracting fraternity, Rs 1,750 bn is stuck with PSUs and government departments, some of which are on account of project completions getting delayed.
Mr. Unnikrishnan sees a positive movement in India related to the environment, both in air pollution control and in wastewater and effluent treatment. Many ‘A’ category industries are moving into ESG (Environmental, social, and governance) mode as they understand that without ESG, investments will not come to them. So a higher level of voluntary compliance is seen from the industry.
CLSA put out a note saying that this will be a year to focus on emission reduction for companies like NTPC. As per Mr. Unnikrishnan, NTPC has already completed this in half of their plants and they have/ will already initiate action on the rest. Pre dominant part of Indian power generation is with state electricity boards and none of them have placed orders for the Flue-gas-desulfurisation (FGD). That means about 100,000 mega-watts worth of coal-fired power plants are yet to initiate action. When it happens, it will be a huge market opportunity. However, most of these state electricity boards, except 2 are financially stranded.
Thermax is in negotiations with multiple private Indian cement companies for pollution control and carbon footprint reduction. Thermax has done multiple plants and is in negotiations with multiple Indian cement companies for generating electricity from their waste heat. There could be some orders in this area in 4QFY20E itself and also a few in 1HFY21E.

Consensus Estimate: (Source: market screener website)

The closing price of Thermax Ltd. was ₹ 970/- as of 24-February-2020. It traded at 35x/ 26x/ 22x the consensus earnings estimate of ₹ 28/ 37/ 45 for FY20E/ FY21E/ FY22E respectively.
The consensus target price for Thermax Ltd. is Rs 1,063 implying a P/E of 24x over the FY22E EPS of Rs 45/-