KEC International's Q2FY19 results (Outperformer) - Strong order intake, visibility improves

Q2FY19 result highlights

• PAT +10% yoy to Rs978mn: on margin expansion.
• T&D execution weak, to pick up going forward: Revenues were up 13% yoy to Rs24.1bn on robust execution across non-T&D segments:  Railways (+3.6x yoy) and Civil (+2.6x yoy) as also cables (+11% yoy). However, T&D (-11% yoy) was weak as most orders have yet to see meaningful exectuion.
• Margins +40bps to 10.4%: despite adverse mix towards non-T&D revenues as scale in railways is driving margin expansion. Moreover, forex gains on INR depreciation aided margins. Hence EBITDA +17% yoy to Rs2.53bn.
• Interest cost +46% yoy: to Rs768mn on higher debt (+24% yoy) and interest rates. Net debt (incl acceptances) was at Rs42.1bn (-Rs2.7bn qoq; received Rs3bn in 2Q19) on higher working capital.
• Robust order intake at Rs51.8bn (+75% yoy): led by significant wins in T&D in the current quarter. 1HFY19 intake was strong at Rs79.3bn (+38% yoy) led by strong wins in railways, solar and T&D. Backlog +44% yoy at Rs201bn (70% in T&D; 1.74x FY19E revs). L1 of Rs40bn.

Conference call highlights: (1) T&D performance to improve going forward as execution sees an uptick, while intake pipeline is strong across both domestic mkt and intl mkts (MENA, Africa, Brazil) (2) Interest cost as % of sales to increase from 2.5%, but be less than 3% largely on higher interest rates, working capital issues to subside into 2H (3) Railway revenues to double in FY19 to Rs16bn on strong backlog, margins to improve on scale up (converge with T&D by FY19 end) (4) FY19 guidance: 15% revenue growth & 10% OPM; order intake to increase by 10-15% yoy (5) Capex for FY19E Rs1.4-1.5bn

Impact on financials: FY19/20 EPS cut by 2% each to Rs20.3/23.7

Valuation and view

KEC is seeing strong traction in order wins and is driving strong revenue visibility (1.7x FY19E revenues). Moreover, positive operating leverage and focus on profitable order wins is driving margin expansion. However, higher interest rates are likely to drive increase in interest costs. Accordingly, we expect 15% earnings CAGR over FY18-20E. We believe valuations at 13x FY20E earnings are attractive in view of sustained earnings momentum and superior return ratios. Outperformer.