MOSL: K E C INTL. (Neutral)-States to drive domestic T&D capex-Railways to provide strong business opportunity

​K E C Intl.: States to drive domestic T&D capex; Railways to provide strong business opportunity

(KECI IN, Mkt Cap USD1.3b, CMP INR314, TP INR350, 11% Upside, Neutral)

• We recently met management of KEC International at our ‘Midcap Conference’.
• Domestic T&D business is expected to be driven by state capex – we note that 65% of the contribution comes from states and private sector, and balance from PGCIL.
• Railways segment offers very robust opportunity in the electrification segment, with the government planning to electrify 4,000km lines in FY18 and 8,000km lines in FY19.
• SAE Tower is expected to be the key beneficiary of the USD4b power T&D capex planned by the Brazil government.
• Diversification with intent to intensify growth: KEC, predominantly a power T&D EPC player, has diversified into multiple segments (e.g. solar, cables, railways and civil construction) to leverage its execution capabilities and intensify growth. The company aims to achieve 20% revenue growth over the next few years, and expects segments like railways and civil construction to contribute meaningfully toward this.
  
• Domestic T&D business to be driven by state capex: KEC believes that the recent slowdown in ordering from PGCIL would be more than offset by ordering from states. KEC expects ordering from states to be ~INR400b. Key states like Tamil Nadu, Karnataka, West Bengal and Rajasthan have a strong pipeline of projects, with funding from multilateral agencies. Order backlog in Power T&D from states now contributes 65%, as against 20% earlier. KEC expects order inflow growth of 15-20% over the next few years.