Q1FY24 Review: KEC International: Richly priced

7 Aug 2023 , 01:47 PM

Analysts of IIFL Capital Services downgrade KEC Intl. (KECI) to ADD from BUY, after a robust 58% return since their upgrade in Dec’23 and significant improvement in growth visibility thereafter. Thrust on domestic infra and rebound in T&D market have aided the re-rating. While execution has picked up, OPMs are to follow suit in H2FY24. Despite this, elevated NWC cycle and borrowings to support growth have significantly increased finance costs (3.7% of Q1FY24 sales) and RoEs, with no signs of respite in the near term. Analysts of IIFL Capital Services cut FY24/25/26 EPS by 11/7/4% respectively and struggle to find a margin of safety at the current valuations of 18xFY25 and 15xFY26 EPS. Analysts of IIFL Capital Services revised target price of Rs731 is based on exit PER 18xSep’25 EPS, implying 11% upside. 

T&D rides the capex wave – T&D revenues surged by 33% to Rs18.8bn, on the back of robust execution across geographies. Domestic tender pipeline is pegged at Rs200bn; while international tendering has strong traction from the Middle East (esp. Saudi Arabia & UAE) and SAARC. While the losses in domestic legacy projects continue, OPMs are likely to be in 7% range in H2FY24. SAE turned PBT positive on tower supply focused execution, but refinancing of NWC loans is pending. 

Pockets of underperformance emerge in Non-T&D: Non-T&D revenues grew 22% YoY, led by Civil EPC (+60% YoY) while O&G (+13% YoY) and Rail EPC (+8% YoY) witnessed tepid growth and Cables declined (-7% YoY). O&G’s inflows moderated and OB declined 15%, given the weak tendering in H1FY24. NWC woes in Railway jobs continue. Management is banking on Water projects & Data Centres to drive the Civil portfolio. 

Delivers on NWC improvement; but finance cost impacts bottom line: KECI reduced the NWC cycle to 126 days (down 22 days YoY) and is on track to achieve 110 days by FY24-end. However, higher borrowing cost (up 330bps YoY to 7.7%) on elevated working capital debt (expected to trend upwards) weighs on net profits and the targeted RoE recovery. Analysts of IIFL Capital Services cut FY24/25/26 EPS by 11/7/4% respectively and believe the stock is richly priced.