PL Stock Report - KEC International (KECI IN) - Analyst Meet Update - Healthy tender pipeline, margin revival on cards - Accumulate

KEC International (KECI IN) – Amit Anwani – Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: ACCUMULATE | CMP: Rs552 | TP: Rs578

Analyst Meet Update - Healthy tender pipeline, margin revival on cards

We attended KEC analyst meet wherein the management highlighted that traction continues from both T&D (domestic as well as international markets) and Civil segment. Company will continue to focus on revenue growth, profitability and better working capital management. Tender pipeline stands at ~Rs1trn. Margins are expected to gradually improve from H1FY24 and likely to reach ~7% in FY24 with completion of legacy orders and improvement in SAE performance. Order book including L1 stands strong at ~Rs340bn as on FY23. Given strong order book position management will be selective in bidding orders and only bid for order with minimum margin threshold and cash flow visibility. Management guided revenue of Rs200bn, with order inflow of Rs250bn and EBITDA margin of ~7% for FY24.

We remain positive on KEC for long term given its 1) strong OB, 2) healthy execution momentum, 3) strong T&D outlook and 4) revenue visibility from non-T&D segments like Civil, Railways, Oil & Gas etc. We revise our estimate by ~3.4% for FY25, driven by strong tender pipeline in T&D (domestic & international), strong traction in Civil segment and focus on international markets for non T&D segment. The stock is trading at PE of 26.4x/12.4x FY24/25E. Maintain ‘Accumulate’ rating on stock with revised TP of Rs578 (Rs559 earlier), valuing it at 13x FY25E.

Healthy order and tender pipeline provides growth visibility: Order book stands at ~Rs305bn, (1.8x TTM revenue), majorly comprising of T&D (47%), Civil (33%) and Railways (13%). Tender pipeline remains strong at Rs1trn from domestic as well as international market providing order inflow visibility, going forward. Demand remains strong from urban infra, water pipelines, domestic & international T&D, technologically enabled segments of metros/railways and Oil & Gas (O&G) sectors. While on exports front traction continues form geographies such as Middle East, Americas, Brazil and SAARC.

Increasing focus on international markets for Non-T&D segment: Currently export orders only comprise of T&D segment. Going forward, management will be looking to leverage its strong T&D positon in exports market to enter other segments such as Railway, Civil and O&G. Management targets to bag at least one international order for non-T&D segment in FY24.

Margins to revive gradually: Margins are likely to gradually improve from Q1FY24 and reach ~7% by end of FY24 owing to 1) completion of legacy orders (expected to be completed in H1FY24), 2) improving SAE performance with execution of high margin tower supply order and 3) execution of newer orders.

Net working capital days to further reduce to 110 days: Net working capital days declined to 118 days as on Mar’23 vs 137days as on Mar’22, mainly driven by reduction in inventory level, GST balance collection and better net working capital in water segment. Management targets to further bring it down to 110 days in FY24. Net debt is likely to remain at same level of ~Rs50bn as on FY23, despite healthy revenue growth expected in FY24.

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