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KEC International's Q4FY18 results (Outperformer) - Shining performance

Q4FY18 result highlights

• PAT +33% yoy to Rs1.96bn: on strong pick up in execution.
• Execution picks up: Revenues were up 29% yoy to Rs36.6bn on pick up in execution across segments (notably railways, civil) - T&D (+21% yoy), SAE (+19% yoy), Railways (+74% yoy) and Civil (+4.5x yoy). However, cables (-8% yoy) was muted on shift of operations to Vadodara.
• Marginal decline in margins (-47bps yoy): to 10.1% due to high base, higher RM costs (rise in commodity prices) and adverse mix (higher share of railways and civil). Hence EBITDA +34% yoy to Rs3.7bn.
• Lower working capital drives debt reduction: by Rs3.9bn in FY18 led by its efforts on receivables reduction (-15 days yoy; release of Saudi retention money). Hence, interest cost +3% yoy to Rs656mn in 4Q18.
• Order intake at Rs38bn (+2% yoy) for 4Q18; +22% yoy in FY18 to Rs151bn: led by significant order wins in railways (Rs39bn in FY18 vs Rs15bn in FY17) and civil (Rs5bn), while T&D was at Rs97bn (+4% yoy). Backlog +37% yoy at Rs173bn (71% in T&D; 1.7x FY18E revenues).
• FY18 PAT +51% yoy to Rs4.6bn: led by pick up in execution (+17%yoy), margin expansion (+50bps), lower interest cost (-3% yoy; lower debt).

Conference call highlights: (1) FY19 guidance: revenue +15%, 10% OPM;  order intake +15-20% (2) Interest cost as % of sales to stay steady at 2.5% in FY19 as interest rate headwinds restrict room for reduction; Working capital to remain steady (3) Expect strong revenue traction from railway and civil (+80-85% yoy) (4) Railway margins to converge with T&D by Q2/Q3FY19, civil to take longer (5) Orders to pick up from international T&D led by MENA, Africa, Brazil & offset any domestic weakness

Impact on financials: FY19/20 EPS upgraded by 7%/6% to Rs20.5/23.8

Valuation and view

KEC is seeing strong traction in its operational performance led by its focus on execution and containing interest costs via control on working capital. Moreover, strong order wins from transmission and also new segments such as railways & civil is providing revenue visibility. Accordingly, with stable margins, we expect 16% earnings CAGR over FY18-20E. We believe valuations at 16x FY20E earnings are attractive in view of sustained earnings momentum and superior return ratios. Outperformer.