Re: {LONGTERMINVESTORS} KEC International: Thread
RAJESH DESAI
Rajesh Desai
KEC
International
BUY CMP:
Rs67
TP: Rs84- IDBI CAPS
Visit Update - On road to recovery!
We met the management (Mr. Chandak) of KEC International. While KEC’s margins disappointed due to host of factors like increasing competitive intensity and entry cost of new businesses, the company believes that the worst in terms of margins might be behind them and expects a gradual improvement in the margins over the course of the next few quarters. The traction in transmission business, both in domestic and international, continues to be good and new businesses continue to promise strong growth potential. The stock is trading at 6.9X FY14E earnings. We maintain a ‘BUY’ on the stock.
n What went wrong in Q2FY13? KEC reported an EBITDA margin of 5.1% in Q2FY13 and negatively surprised the street. Few things converged in Q2, leading to significantly below trend margins: 1) The company had bid for few orders in Power Grid at very low margin last year(executed in the next few quarters). The company has bid for such contracts as the competitive intensity was very high 2) The new businesses (Railway, Power systems, Water) were taken at low/zero margins to build pre-qualification in this business; lot of these orders are coming in for execution, impacting margins negatively 3) SAE tower, which was making abnormally high margins of 14-16% till Q1FY13, has now came down to more normalized levels of 10-12%.
n Margins likely to improve from hereon: KEC believes that margins have bottomed out and likely to improve from Q2FY13 levels as 1) the pace of execution of lower margin orders will subside over the next few quarters and the new orders which have been taken for new businesses over the last two quarters are more profitable and hence, would help improve margins 2) The competitive intensity in Power Grid orders has also reduced (visible in increased market share of players like KEC and Kalpataru) over the last six months. We believe that the competitive intensity decreased due to the fact that Power Grid stopped opening bids of a lot of players who were not performing in terms of execution. Also, people who had taken orders at low margins are draining financially and hence, refraining from ordering.
n Strong order book - New business to drive growth: KEC has an order book of Rs93bn (67%-Transmission lines, 17%-Power systems, Others-16%).KEC continued to believe that water and railway could be big businesses, going forward and hence, worked on acquiring necessary PQ in this business. As part of KEC’s continuous expansion strategy, the company is looking at providing Engineering, Procurement and Construction (EPC) solutions for Solar and Wind sector.
n Outlook and Valuation: We believe KEC has a strong growth drive in place and it has managed to grow new businesses successfully to secure its future growth. With strong execution likely to continue, margins are gradually improving and interest rates are likely to come down which are expected to support earnings recovery. The stock is trading at 6.9X FY14E earnings. We maintain ‘BUY’ on the stock.--
CA. Rajesh Desai