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MOSL: K E C Intl. (Buy)-Operating performance in line-Core T&D business picks up

K E C Intl.: Operating performance in line; Core T&D business picks up

(KECI IN, Mkt Cap USD1.1b, CMP INR293, TP INR430, 47% Upside, Buy)

 

• In-line revenues supported by robust growth in T&D section: 1QFY20 consol. revenue grew 15% YoY to INR24.1b (in-line with our est. of INR24.5b). T&D business registered strong growth of 25% YoY with SAE growth at 13% YoY. Even the Railways segment registered healthy growth of 67% YoY with revenue of INR5.5b. The Cables business was flat, growing a meager 1.6% YoY, while the Civil business declined 45% YoY, led by slowdown in real estate. T&D revenue stood at 66% of the total revenue v/s 61% in 1QFY19, while non-T&D contributed 34% v/s 39% in 1QFY19.
• Operating profit up 16% YoY, margin at 10.4%: 1QFY20 operating profit grew 16% YoY to INR2.5b (in-line with our est. of INR2.6b), supported by improving margin profile in the non-T&D business. For the standalone business, operating profit grew 25% YoY, with margin improving 100bp YoY to 10.7%. SAE Towers' calculated margin stood at 9.2% v/s margin of 13.8% in 1QFY19. Net profit registered muted growth of 2% YoY to INR0.9b (14% below our est. of INR1.0b). Net profit during the quarter was impacted by (a) Prepayment charges of INR60mn on higher interest cost related debt, (b) lease policy change impact of INR20m, and (c) increase in the marginal cost of borrowing given the tight credit environment prevailing in the country.
• Valuation view: We cut our earnings estimate by 3%/2% for FY20/FY21E to factor in the higher-than-estimated interest cost. The stock trades at 12x/10x FY20/FY21E EPS of INR23.7/INR28.6. We maintain 'Buy' rating on the stock with TP of INR430, given (a) its strong order book position (INR190b; 1.7x its FY19 revenue), (b) the declining business concentration risk due to foray into railways, civil, etc., and (c) reasonable valuations with earnings CAGR of 22% over FY19-21E.