Management Speak: KEC International (Outperformer) - Growth trajectory to see an uptick

We met the management of KEC International. Below are key takeaways:

T&D order intake to see an uptick: Management expects Rs170-180bn order inflow in FY20E (20%+ yoy), led by growth across segments. SEBs would lead domestic T&D orders (Rs400-500bn worth of projects), led by under investment and multilateral funding. While PGCIL’s spend is muted, green energy corridor-led investments would drive ~Rs200bn worth of orders. Concurrently, international orders from SAARC countries (Bangladesh, Nepal, Sri Lanka) remain strong. SAE too is witnessing regular traction of orders in Brazil and is now seeing some orders trickling in from the US. FY19 revenues were impacted for T&D on execution issues of a private order, delay in clearances for SAE orders, etc. However, considering a healthy backlog of ~Rs63bn (1.9x FY19 revenues) and receipt of clearances at SAE, management expects T&D revenues to accelerate. 

Non T&D to sustain growth trajectory: The share of non-T&D improved from ~25% in FY18 to 36% in FY19, led by doubling of revenues in railways and civil. KEC is looking to expand its addressable market in railways from 15% to 20-25% of rail capex. Railways is investing in electrification, signalling upgradation, line doubling, etc. Accordingly, rail revenues will continue to witness 20-25% CAGR the next few years (Rs19bn revenues; book to bill of 2.8x FY19 revenues). In civil, KEC has seen significant scale up over last 2-3 years (~Rs5bn FY19 revenues), led by traction in the industrial segment. KEC is now entering the infra segment such as metro, airports, etc. Considering a strong backlog of ~Rs10bn and scope expansion, it expects civil to ramp up further over next few years.  

FY20E to see uptick in execution, interest cost to fall to 2.5% of sales: Considering the robust backlog of Rs200bn+ (1.8x FY19 revenues; Rs30bn L1), management believes execution acceleration across segments will drive 15-20% revenue growth. Despite higher growth in non T&D, margins are likely to remain stable at 10.5% as rail, cables and SAE see margin expansion on scale and cost efficiencies. Working capital normalised towards the end of FY19, led by receipt of retention money from Saudi, normalisation of payable days and advances from international orders. Accordingly, it expects interest cost to fall to 2.5% of sales (2.8% in FY19). 

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 are driving margin expansion. On the other hand, debt reduction towards the end of FY19 is encouraging, which should help lower interest costs. We believe the stock looks attractive at 14x/12x FY20E/21E earnings, in view of sustained earnings momentum (18% CAGR over FY19-21E). We reiterate Outperformer rating.