PL Stock Report: KEC International (KECI IN) - Q2FY24 Result Update – Reasonable Q2; margins holds key for re-rating - HOLD

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

Rating: HOLD | CMP: Rs615 | TP: Rs645

Q2FY24 Result Update – Reasonable Q2; margins holds key for re-rating

Quick Pointers:

§ Order pipeline remains strong at ~Rs1.25trn+, comprising of T&D(~Rs750bn), Civil (Rs200bn), Railways (Rs200bn) etc.

§ Revenue booking worth ~Rs4bn deferred owing to supply chain constraints, excess rainfall in certain parts of India and RoW issue in domestic T&D.

We revise our FY24/25E by -14.8%/-9%, factoring in higher interest cost amid higher interest rates and higher debt levels. KEC International (KEC) reported healthy performance with consolidated revenue growth of 10.7% YoY despite slippages and EBITDA margins expansion of 1728bps YoY to 6.1% (to further improve from H2FY23 onwards) with completion of low margin legacy orders, stabilizing supply chain constraints and healthy SAE brazil performance. Interest cost as % of sales was at higher level at ~4% due to higher interest rates and increase in net debt (Rs44.9bn vs Rs35.5bn in Q2FY23). Management maintained its FY24 guidance of ~Rs200bn revenue with EBITDA margins of ~7% (with downside risk 20-30bps). Management is confident to meets its order inflow guidance of Rs250bn (~Rs90bn orders received YTD), driven by strong domestic as well as international pipeline.

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. The stock is currently trading at PE of 35.2x/15.7x/11.6 FY24/25/26E. We roll forward to Sep’25E and maintain ‘Hold’ rating with TP to Rs645 (unchanged), valuing it at PE of 14x Sep’25E.

Gross margins expansion aids EBITDA margins: Consol Sales grew 10.7% YoY to ~Rs45bn (PLe ~Rs47.5bn), led by healthy execution in Civil (up 42.4% YoY to Rs10.5bn), Cables (up 5.9% YoY to Rs4.1bn), T&D (up 7.3% YoY to Rs22bn), while it declined for Railways business (down 12.1% YoY to Rs7.8bn). EBITDA grew 54.2% YoY to ~Rs2.7bn (PLe ~Rs2.9bn) while EBITDA margins expanding 172bps YoY to 6.1% in line with PLe of 6.1%, aided by gross margin expansion of 150bps YoY to 23.2%. PAT came in at Rs558mn vs Rs552mn in Q2FY23 (PLe Rs740mn). In Q2FY23 KEC reported negative tax of Rs287mn (due to negative differed tax) resulting in higher PAT.

Order book stands strong at Rs313bn: YTD order inflows came in at Rs90bn, driven by T&D and Civil segment. Order book stands at ~Rs313bn (1.7x TTM revenue), up ~13.6% YoY with T&D accounting 48% of the total order book. Additionally, it is L1 in orders worth ~Rs40bn. Tender pipeline remains healthy at ~Rs1.25trn+ from both domestic as well as international market across segments, thereby driving order inflows, going forward.

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