KEC International's Q3FY18 results (Outperformer) - Strong performance to sustain

Q3FY18 result highlights

• PAT at Rs1.1bn (+75%yoy): on strong operational performance.
• Pick up in execution drives revenue growth: Revenues were up 26% yoy to Rs24bn helped by a low base as well as pick up in execution across segments as GST related issues receded. Strong backlog resulted in traction across segments - T&D (+20% yoy), SAE (+41% yoy), Railways (+98% yoy) and Civil (+4x yoy). However, cables (-2% yoy) was muted as higher GST rates impacted sales. However, GST rates have been cut since, which is likely to revive revenues.
• Margin expansion sustains (+64bps yoy): to 10.2% led by execution of higher margin T&D orders as also sustained improvement at SAE and non-transmission segments. Hence EBITDA +34% yoy to Rs2.4bn
• Interest cost +6% yoy: to Rs607mn. Net debt increased by Rs570mn yoy to Rs25bn (-Rs120m qoq) due to higher working capital due to GST related delays in collection of receivables, delay is release of money in Saudi and delays in receipt of customer’s advances.
• Order intake robust at Rs55.5bn (+105% yoy): led by significant order wins in railways (+6x yoy to Rs26bn). Intake was robust in T&D (+26% yoy), SAE (+150%), Civil (Rs1.6bn vs nil in 3Q17) as also cables (+12%). Hence, backlog +53% yoy at Rs171bn (73% in T&D; 1.8x FY18E revenues).

Conference call highlights: (1) FY18 guidance: revenue growth 10-15%, ~10% OPM; FY19 guidance: revenue growth 15-20%, OPM +50bps yoy (2) Debt to reduce in Q4FY18 on lower working capital; (3) Interest cost as % of sales to drop to 2.5% in FY19 from 3% in FY17 (4) Strong L1 position of Rs40bn with strong outlook of orders from railways, civil, domestic T&D.

Key positives: Pick up in execution, robust intake, margin improvement

Key negatives: deterioration in working capital

Impact on financials: FY19 EPS upgraded by 4.6% to Rs19.2

Valuation and view

Order intake momentum is being driven from both T&D (incl intl) as also railways and thereby provides revenue visibility. Moreover, margin expansion is led by improved cost structure, turnaround at SAE as also overall improvement in execution. Earnings growth trajectory is being boosted led by efforts to contain interest costs (lower working capital and rates). We believe valuations of 15x FY20E earnings are attractive given strong earnings growth (24% CAGR over FY17-20E). Outperformer.