KEC International's Q4FY19 results (Outperformer) - Revenue weak; significant debt reduction

Q4FY19 result highlights

• Adj. PAT fell 1% yoy to Rs1.94bn: on lower than expected revenues.
• T&D execution weak, to pick up going forward: Revenue growth was muted at 5% yoy to Rs38.4bn on slow execution in domestic T&D (-1.3% yoy) orders due to execution challenges in a domestic private project and muted 4% yoy growth in SAE due to delays in clearances in orders. This was offset by strong growth in non-T&D segments: Railways (+76.3% yoy), Civil (+29.4% yoy) and Cables (+25.5% yoy).
• Margins expand (+30bps yoy) to 10.4%: despite adverse mix towards non-T&D revenues (31% of revenues vs 26% in 4Q18) as scale in railways is driving margin expansion. Moreover, forex gains on INR depreciation aided margins. Hence EBITDA +7.8% yoy to Rs3.99bn.
• Interest cost +38% yoy: to Rs846mn on higher debt and interest rates. However, debt (incl acceptances) fell by ~Rs10bn to Rs30.4bn on qoq basis due to receipt of Rs4bn Saudi retention, customer advances from international orders and sale of BOT assets.
• Order backlog at Rs203bn (+17% yoy; L1 at Rs37bn): providing strong visibility at 1.85x FY19 revenues with 72% from T&D. Intake was at Rs25.5bn (-33% yoy) due to election led slow ordering momentum in domestic region. FY19 intake at Rs141bn (-7% yoy) on weak ordering in the domestic T&D (slowdown in PGCIL & SEBs due to elections).

Conference call highlights: (1) T&D performance to improve post elections as execution sees an uptick (2) FY20 intake likely to be at Rs160-180bn led by strong domestic pipeline (Rs250bn in various bidding stages) and uptick in intl mkts (SAARC, Africa, Brazil) (3) Railway intake and revenue momentum to sustain with 20-25% growth led by sustained electrification, (4) FY20 guidance: Revenues +15-20%; 10.5% OPM; interest as % of sales to be at 2.5% (2.8% in FY19), intake at Rs160-180bn (+20-25% yoy growth).

Impact on financials: FY20/21 EPS maintained at Rs22.6 / 26.3

Valuation and view

KEC’s diversification into new segments and sustained traction in T&D has resulted in strong revenue visibility (1.8x FY19 revenues). Moreover, focus on profitable order wins and cost efficiencies is driving margin expansion. On the other hand, the debt reduction in the quarter has been encouraging led by initiatives to reduce receivables and sale of assets, which should aid lower interest costs going forward. We believe valuations at 13x/11x FY20E/21E earnings are attractive in view of sustained earnings momentum (18% CAGR over FY19-21E). Outperformer.