MOSL: KEC INTERNATIONAL (Neutral)-Transmission spend driven by SEBs and TBCB projects-Maintains FY19 margin guidance of 10%

KEC International: Transmission spend driven by SEBs and TBCB projects; Maintains FY19 margin guidance of 10%

(KECI IN, Mkt Cap USD1.4b, CMP INR370, TP INR410, 10% Upside, Neutral)

We met KEC International’s (KECI) management. Key takeaways:

• Transmission spending driven by SEB orders and TBCB projects: KECI witnessed strong traction in state electricity board (SEB) orders, which increased threefold over the previous year to INR24b in FY18. The company bagged SEB orders primarily from the states of Tamil Nadu, Karnataka and West Bengal in FY18. In the current fiscal, it is also targeting orders from Telengana, Gujarat, Odisha, Haryana, Jharkhand and AP. PGCIL ordering, however, was flat YoY at INR10b in FY18. Management highlighted the key trend of increasing substation capex, which is likely to equal transmission line capex (as PGCIL is looking to upgrade the existing substations and also install STATCOM and HVDC stations). Large tariff based competitive bidding (TBCB) jobs are also in the offering in FY19 from both private developers and the states. Even inter-state transmission line spend is reviving on account of the recent disruptions in north India. Among the overseas markets, Brazil and the Middle East should drive the company’s growth.
• FY19 margin guidance maintained: Management expects the EBITDA margin to remain at 10%, as the impact of higher input prices is being offset by a depreciating rupee (50% of sales from overseas). The overseas business commands a higher EBIDA margin, but one also needs to factor in (a) the fixed price nature of overseas contracts and b) geographical risks. By segment, Railways is at par with T&D on project-level margins; however, given the large capacity created by KECI in the Rail segment, the EBITDA margin is relatively low. As Railway sales double in FY19, the segment’s EBITDA margin is likely to come closer to T&D margin.