Research Report on KEC International Ltd

Research Report on KEC International Ltd 

CMP 103     TGT  125      Return : 21%

T&D spending set to intensify

Investments in the Transmission & Distribution (T&D) sector have lagged

investments in power generation over the last 5 years. Transmission line

additions have been declining yoy since FY11 due to lower spending by the

private sector. This in turn has led to congestion in the domestic transmission

network and has impacted power generation at many plants. However, the

trend has changed in FY15 as capacity additions in transmission lines doubled

YTD FY15. We believe orders from Power Grid would increase from FY16 as it

is expected to commission large projects in FY15. Strong presence in domestic

market and vendor restriction by Power Grid would aid KEC to gain market

share going forward. The company has also ventured into the export market

and has a strong foothold in MENA, Americas and CIS countries.

Revenue growth to gain momentum from FY16E

KEC's order book at the end of Q1 FY15 stood at Rs103bn, up 2.7% yoy, with

BTB of 1.3x. For FY15, the company expects order intake to improve 8‐10%

yoy. In the international market it has already announced order inflow of

Rs10.3bn in Q2 FY15 and expects order inflows from the domestic market to

rise from H2 FY15. International orders accounted for 59% of the total order

book for the company, higher from 49% at the end of FY13. FY15 order inflow

growth could be lower than management guidance at 7% as we expect order

inflow momentum to pick up only from FY16. We estimate order inflow

growth at 15% post FY15 led by a recovery in the domestic market.

Earnings growth to surge over FY14-16E

KEC managed to report revenue CAGR of 20.9% over FY11‐14 on the back of

its diversification exercise. However, margins for the company remained

under pressure. We believe that margins for KEC have formed a trough and

would expand going ahead due to execution of legacy orders by Q2 FY15 and

higher share of transmission orders of total order book. We expect debtor

days to decline over the next two years leading to a decline in interest costs.

Earnings CAGR of 71% over FY14‐16E is being supported by faster execution,

margin expansion and lower finance costs. KEC stock price has corrected by

~25% over the last 2‐months and valuations appear attractive at 9.6x FY16

earnings, given the strong growth in earnings over FY14‐16E.