KEC International's Q1FY19 results (Outperformer) - Robust margins; execution to pick up

Q1FY19 result highlights

• PAT +37.9% yoy to Rs868mn: on robust margins & higher other income.
• T&D execution weak, to pick up going forward: Revenues were up 13.4% yoy to Rs21bn on robust execution across most segments:  SAE (+78.8% yoy), Railways (+98% yoy) and Civil (+8x yoy) as also cables (+17.7% yoy). However, T&D (-24.5% yoy) was weak due to labor shortage, monsoon impact and non-readiness of sites.
• Margins improve further (+78bps yoy): to 10.3% due to margin expansion in civil, railways (+100-125bps yoy) and cables, as also forex gains due to rupee depreciation. Hence EBITDA +23% yoy to Rs2.16bn.
• Interest cost +9.5% yoy: to Rs691mn on higher debt and interest rates. Net debt rose Rs8.6bn qoq on credit squeeze faced by vendors (lower payables), restrictions on rollover facilities (lower acceptances) & delays in receipt of funds in Saudi (higher receivables; to be recd in 2Q).
• Order intake at Rs27.5bn (-1.5% yoy): led by significant wins in railways (Rs9.3bn vs nil in 1Q18). However, T&D intake was weak (-35% yoy to Rs13.6bn). Backlog +34% yoy at Rs181.9bn (70% in T&D; 1.6x FY19E revs).

Conference call highlights: (1) T&D performance to improve going forward as execution sees an uptick, while intake pipeline is strong as KEC has participated in tenders worth Rs50bn in domestic mkt, while traction is strong in intl mkts (MENA, Africa, Brazil) (2) Interest cost as % of sales to remain at ~2.5% as working capital issues subside (to normalize to ~95 days by FY19 end); (3) Railway margins +100bps yoy; to converge with T&D by FY19 end as scale improves with Rs16bn/Rs25bn revs in FY19/20E, order pipeline remains strong and expect ~Rs50bn of intake in FY19 (4) FY19 guidance: 15% revenue growth & 10% OPM (5) Capex for FY19E Rs1.4-1.5bn

Impact on financials: FY19/20 EPS upgraded by 1% each to Rs20.8/24.2

Valuation and view

KEC is seeing strong traction in its operational performance led by its focus on execution and containing interest costs via control on working capital. Moreover, strong order wins from transmission and also new segments such as railways & civil is providing revenue visibility. Accordingly, with stable margins, we expect 16% earnings CAGR over FY18-20E. We believe valuations at 13.5x FY20E earnings are attractive in view of sustained earnings momentum and superior return ratios. Outperformer.