KEC International's Q1FY20 results (Outperformer) - Uptick in revenues

Q1FY20 result highlights

• Adj. PAT increased 4% yoy to Rs886mn: as operational performance was offset against higher depreciation.
• T&D execution picks up: Revenue growth was strong at 14.6% yoy to Rs24.13bn on pick up in execution in T&D (28.5% yoy) and in SAE (+13% yoy; EPC order execution) and sustained strong growth (67% yoy) in railways. This was offset by muted growth in Cables (+1.5% yoy; lower commodity prices) and decline in Solar (-79% yoy) & Civil (-45% yoy).
• Margins steady at 10.4% (+14bps yoy): led by improved revenue mix towards T&D. Moreover, margins were supported by IndAS-116 benefit by Rs70mn (+30bps), which was partially offset by Rs60mn forex loss (vs Rs200m gain in 1Q19). Hence EBITDA grew 16% yoy to Rs2.51bn.
• Interest cost +23% yoy: to Rs795mn on one time repayment of high cost debt loan (Rs50mn) and higher interest rates. Moreover, debt (incl acceptances) increased by ~Rs7.4bn to Rs35bn on qoq basis on increase in working capital (lower customer advances and payables).
• Order backlog at Rs190bn (+5% yoy; L1 at Rs35bn): providing strong visibility at 1.73x FY19 revenues with 70% from T&D. Intake was at Rs11.2bn (-59% yoy) largely due to slow ordering on back of elections.

Conference call highlights: (1) T&D performance to sustain as execution continues on back of strong backlog (2) FY20 intake likely to be at Rs160bn+ (15-20% yoy) led by uptick in intl markets (SAARC, Africa, Brazil, S.E. Asia, etc) and domestic pipeline led by green corridor and SEBs (8 TBCB projects awarded last month) (3) Railway intake and revenue momentum to sustain with 20-25% growth led by sustained electrification, (4) Interest cost as % of sales to be at 2.7% on lower interest rates, forex debt, etc (5) FY20 guidance: Revenues +15-20% with 10.5% margins and order intake at Rs160-170bn.

Impact on financials: FY20/21 EPS cut by 4.2%/3.5% to Rs21.6/25.4

Valuation and view

KEC’s diversification into new segments and sustained traction in T&D has resulted in strong revenue visibility (1.7x FY19 revenues). Moreover, focus on profitable order wins is driving margin 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 11.5x FY21E earnings are attractive in view of sustained earnings momentum (16% CAGR over FY19-21E). Outperformer.