KEC International Ltd (Q1 FY15)

KEC reported a 2.7% yoy growth in total order book to Rs102.5bn on the back of order wins from the international market.

Aug 04, 2014 09:08 IST India Infoline News Service

CMP Rs119, Target Rs146, Upside 22.7% 

  • Topline witnessed a de-growth of 1.5% yoy to Rs17.2bn, which was lower than estimate due to delay in shipments in SAE

  • Margin expansion was lower than estimate due to slower execution in international business and lower revenue

  • Order book at the end of Q1 FY15 stood at Rs103.5bn, higher by 2.7% yoy. However, order inflow of Rs18.9bn was lower than our estimate

  • Net Working capital days increased on a sequential basis due to lower customer advances and increase in inventory levels

  • Management remained confident of delivering margins above 7% in FY15

  • The company believes that non-transmission business would grow strongly over the next 3-4 years and would account for ~30-40% of total revenues

  • KEC remains our top pick in the transmission space; Maintain Buy with a revised price target of Rs146

Result table
(Rs mn) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 17,207 17,464 (1.5) 21,759 (20.9)
Material costs (8,624) (8,674) (0.6) (11,681) (26.2)
Personnel costs (1,484) (1,314) 13.0 (1,434) 3.5
Other overheads (6,083) (6,596) (7.8) (7,131) (14.7)
Operating profit 1,017 881 15.5 1,514 (32.8)
OPM (%) 5.9 5.0 87 bps 7.0 (105) bps
Depreciation (210) (166) 26.1 (176) 19.1
Interest (660) (588) 12.2 (673) (2.0)
Other income 15 57 (73.8) 32 (53.6)
PBT 163 183 (11.2) 697 (76.6)
Tax (49) (90) (45.2) (353) (86.0)
Effective tax rate (%) 30.3 49.2 50.7
Adjusted PAT 114 93 21.8 344 (66.9)
Adj. PAT margin (%) 0.7 0.5 13 bps 1.6 (92) bps
Extra-0rdinary items - (181) (100.0) - -
Reported PAT 114 (88) - 344 (66.9)
Ann. EPS (Rs) 3.5 2.9   21.8 10.7   (66.9)
Source: Company, India Infoline Research

Delay in dispatches in SAE led to a de-growth in revenues

KEC reported a topline de-growth of 1.5% yoy, lower than expected due to lower execution in the international transmission business and delay in shipments in the SAE business. This impact on topline was cushioned by an increase in revenues by 54.7% yoy. The delay in shipments under SAE business led to a decline of 17.9% yoy in topline. However, the weakness in water business extended further during the quarter. The company expects to register strong sales growth in H2 FY15 on the back of the orders received till date.


Segmental revenue
(Rs mn) Q4 FY14 Q4FY13 % yoy Q3 FY14 % qoq
T&D (Excl SAE)    12,840   13,210   (2.8)   14,120   (9.1)
SAE   1,840   2,240   (17.9)   2,340   (21.4)
Cables   1,980   1,280   54.7   2,070   (4.3)
Railway    230   190   21.1   560   (58.9)
Water   320   550   (41.8)   390   (17.9)
Total   17,210   17,470   (1.5)   19,480   (11.7)
Source: Company, India Infoline Research

Orderbook remained healthy at Rs103.5bn

KEC reported a 2.7% yoy growth in total order book to Rs102.5bn on the back of order wins from the international market. International orders accounted for 59% of the total order book for the company, higher from 55% at the end of Q4 FY14. For the quarter, order inflow was lower by 13% yoy to Rs18.9bn. International orders accounted for 77% of total order wins for the quarter. The company expects domestic orders to pick up in H2 FY15. Outlook for International markets also continues to be healthy. Order book from railways was higher by 21% yoy during the quarter.  

OPM expansion lower than expected

KEC managed to report an OPM expansion of 87bps, lower than our estimate. The miss in OPM was largely due to lower execution in the international business and delay in shipments under SAE. Operating profit for the quarter increased 15.5% yoy to Rs1bn. Operating margins for the domestic transmission business remained above 9% and is expected to remain around current levels for the rest of the year. The company has indicated that margins in the other business have started to improve with the increase in expertise. The company has maintained its guidance of 8% margins in future due to a reduction in loss making orders of the total order book. The company indicated that legacy orders in the current order book accounted for Rs1bn. The management expects to complete the loss making orders over the next 3-4 months.

Transmission business to boost earnings growth

KEC is one of our preferred picks in the T&D space due to the higher concentration of international and transmission orders. We believe KEC would be a key beneficiary of a revival in infrastructure spending as in the past, pickup in transmission spending has been faster compared to other businesses. We believe that margins for KEC have formed a trough and expansion in margins witnessed over the last two quarters would continue going ahead. Execution of legacy orders by H1 FY15 and higher share of transmission orders of total order book would lead to margin expansion for the company. We expect OPM to expand by 50bps yoy in FY15 to 6.6% and 40bps yoy in FY16 to 7%, quite lower than the management guidance of 8.5%. We expect debtor days to decline over the next two years leading to a decline in interest costs. We estimate KEC’s bottomline to double over the next two years on the back of margin expansion and lower interest costs. We maintain our BUY recommendation on the company with a revised price target of Rs146. 


Financial Summary
(Rs mn) FY13 FY14 FY15E FY16E
Revenues 69,795 79,018 88,114 96,535
yoy growth (%) 20.0 13.2 11.5 9.6
Operating profit 3,813 4,932 6,158 7,133
OPM (%) 5.5 6.2 7.0 7.4
Pre-exceptional PAT 651 848 2,098 2,796
Reported PAT 651 667 2,098 2,796
yoy growth (%) (72.2) 2.4 214.4 33.2
         
EPS (Rs) 2.5 3.3 8.2 10.9
P/E (x) 46.9 36.1 14.6 10.9
Price/Book (x) 2.7 2.6 2.2 1.9
EV/EBITDA (x) 11.4 9.6 7.1 5.9
Debt/Equity (x) 1.3 1.5 1.2 0.9
RoE (%) 5.8 7.3 16.5 18.9
RoCE (%) 13.8 15.3 18.3 20.9
Source: Company, India Infoline Research
 

Related Story

Blogs & Personal Finance