KEC International's Q2FY20 results (Outperformer) - Revenues see an uptick; trend to sustain

Q2FY20 result highlights

• Adj. PAT +44% yoy to Rs1.39bn: led by strong revenues and lower tax.
• T&D execution picks up (+21% yoy): driving overall revenue growth at 16.6% yoy to Rs28.1bn. SAE saw +95% yoy on low base & uptick in execution. Further, sustained strong growth in railways (35% yoy) boosted revenues. This was partially offset by decline in other segments (11% of revs): cables (-6% yoy; lower RM), solar (-92% yoy) and civil (-51% yoy).
• Margins steady at 10.5% (flat yoy): as higher mix of low margin railway revenues were offset against high margin T&D revenues. Moreover, margins were impacted by high logistics costs in certain international orders, which was partially offset by Rs200mn forex gain (vs Rs60m loss in 1Q20). Hence EBITDA grew 16.1% yoy to Rs2.94bn.
• Interest cost +7% yoy: to Rs822mn on higher WC debt. Debt (incl acceptances) was at ~Rs34.8bn from Rs30.4bn in FY19 (steady qoq) on increase in working capital (higher receivables & lower payables).
• Order backlog at Rs180.9bn (-10% yoy; L1 at Rs50bn): providing strong visibility at 1.64x FY19 revenues. Intake was at Rs26.5bn (-49% yoy; Rs38bn in 1HFY20; -53% yoy) largely due to slow ordering.

Conference call highlights: (1) T&D performance to sustain as execution continues on back of strong backlog (2) High growth in SAE led by execution of 3 large EPC orders in Brazil; momentum to sustain (3) Earlier guidance of Rs170bn order inflows for FY20 seems difficult to achieve; we believe it will be flat intake for FY20 (4) Railway intake and revenue momentum to sustain with 20-25% growth led by sustained electrification, and entry into new segment (RRTS), while margins are trending upwards and likely to see double digit by year end (5) Interest cost as % of sales to be at 2.7% on lower interest rates and lower debt as working capital improves (6) FY20 guidance: Revenues +15-20% & 10.5% margins.

Impact on financials: FY20/21 EPS upgraded by 10% each to Rs23.8/28

Valuation and view

KEC’s diversification into new segments and sustained traction in T&D has resulted in strong revenue visibility (1.6x FY19 revenues). Moreover, focus on profitable order wins is driving steady expansion. On the other hand, debt reduction would be a key monitorable as liquidity eases (resulting in higher payable days), which would drive lower interest costs. We believe valuations at 9.5x FY21E earnings are attractive in view of sustained earnings momentum (22% CAGR over FY19-21E). Outperformer.