KEC International's Q3FY19 results (Outperformer) - Revenue growth disappoints, visibility strong

Q3FY19 result highlights

• PAT was flat yoy (+0.6%) at Rs1.12bn: on higher interest costs.
• T&D execution weak, to pick up going forward: Revenue growth was lower than expected at 10% yoy to Rs26.1bn on slow execution in domestic T&D (+2% yoy) orders due to elections and delays in clearances in international orders, particularly at SAE (-38.9% yoy). This was offset by strong growth in non-T&D segments: Railways (+164.9% yoy), Civil (+26.4% yoy) and Cables (+14% yoy).
• Margins expand (+40bps yoy) to 10.6%: despite adverse mix towards non-T&D revenues (37% of revenues vs 25% in 3Q18) as scale in railways is driving margin expansion. Moreover, forex gains on INR depreciation aided margins. Hence EBITDA +15.3% yoy to Rs2.81bn.
• Interest cost +53% yoy: to Rs857mn on higher debt (incl acceptances, +17% yoy) and interest rates. Net debt (incl acceptances) was at Rs40bn (-Rs1.83bn qoq) on higher working capital, notably in railways.
• Order backlog at Rs206bn (+20% yoy): providing strong visibility at 1.84x FY19E revenues with 73% from T&D. intake was at Rs36bn (-35% yoy) due to high base. 9MFY19 intake at Rs115.3bn (+2% yoy) on weak ordering in the domestic T&D (slowdown in PGCIL & SEBs due to elections). KEC has L1 orders worth Rs18bn.

Conference call highlights: (1) T&D performance to improve in 4Q19 as execution sees an uptick, while intake pipeline is strong across both domestic and intl mkts (MENA, Africa, Brazil) (2) Interest cost as % of sales to be at 2.7-2.8% in FY19E, implying a sharp decline in 4Q19 led by ~Rs2.7bn payout by Saudi, rationalisation of vendor payments, sale of BOT assets, shift towards low cost debt, etc. (3) Railway revenues to double in FY19 to Rs17bn on strong backlog, margins to improve on scale up (converge with T&D by FY19 end) (4) Revenue guidance: 12-15% in FY19E; 15-20% in FY20E

Impact on financials: FY19/20 EPS cut by 5% each to Rs19.3/22.6

Valuation and view

KEC is seeing strong traction in order wins and is driving strong revenue visibility (1.8x FY19E revenues). Moreover, positive operating leverage and focus on profitable order wins is driving margin expansion. However, higher working capital coupled with higher interest rates are driving increase in interest costs, which we believe is likely to reduce on various initiatives being undertaken by the mgmt. We believe valuations at 10.5x FY20E earnings are attractive in view of sustained earnings momentum (12% CAGR over FY18-20E). Maintain Outperformer.