KEC International's Q3FY20 results (Outperformer) - Strong inflows and lower debt to drive earnings

Q3FY20 result highlights

• Adj. PAT +31% yoy to Rs1.45bn: led by uptick in revenues & lower tax.
• Revenue growth +16% yoy to Rs28.1bn: led by uptick in T&D execution (+9% yoy; flat domestic T&D). SAE saw +122% yoy on low base & uptick in execution of EPC projects. Further, sustained execution in railways (9.1% yoy) and smart infra revenues (Rs330mn vs nil in 3Q19) boosted revenues. This was partially offset by decline in other segments (11% of revs): cables (-20% yoy; lower RM prices), solar (-44% yoy) and civil (-21% yoy).
• Margins largely stable at 10.4%: (-27bps yoy) led by improved revenue mix (70% from T&D) and improvement in rail margins. Hence EBITDA grew 13.2% yoy to Rs3.19bn.
• Debt reduced by Rs6.8bn yoy and Rs1.4bn qoq: driving 5.4% yoy drop in interest cost to Rs811mn. Debt (incl acceptances) was at ~Rs33.4bn.
• Order backlog at Rs220bn (+7% yoy; L1 at Rs25bn): Intake was at Rs60.5bn (+72% yoy; Rs98.2bn in 9MFY20; -15% yoy) largely due to slow ordering in T&D (both domestic and SAE).

Conference call highlights: (1) T&D execution to sustain on back of strong backlog (2) High growth in SAE led by execution of 3 large EPC orders in Brazil; momentum to sustain; albeit lower order intake to impact growth in FY21E (3) While order inflow pace has picked up, domestic T&D continues to be muted with limited orders from PGCIL; SEB ordering continues from states like Rajasthan, W. Bengal, Orissa, etc. International ordering is seeing an uptick, particularly in Middle East. (4) Railways ordering remains strong with several orders in tendering stage; margins in railways have moved to double digit in line with T&D margins led by scale in business (5) Focus on working capital with receivables from Saudi collected (Rs680mn in 9MFY20); interest cost at 2.6% of sales in FY20E (6) FY20 guidance maintained: Revenues +15-20%, 10-10.5% OPM, ~Rs140bn intake

Impact on financials: FY20/21 EPS maintained at Rs24/28

Valuation and view

KEC’s diversification into new segments has resulted in strong backlog of Rs220bn (1.8x FY20E revenues). Moreover, focus on profitable order wins is driving steady margins despite diversification in new areas (railway margins comparable to T&D). On the other hand, working capital and thereby debt has been kept under check, which is likely to drive lower interest costs (2.6% in FY20 vs 2.8% in FY19). We believe valuations at 12.4x FY21E earnings are attractive in view of sustained earnings momentum (22% CAGR over FY19-21E). Outperformer.