Capital Goods: Mid-cap EPC: Earnings continue to disappoint

9 Feb 2024 , 11:20 AM

Kalpataru Projects (KPIL) outperformed KEC Intl (KECI) with better pace of execution, higher net margins and relatively higher accretion of new orders. While KPIL reported in-line results, weak guidance led to 8-12% cut in FY24-26 EPS; KECI’s 23% miss in earnings prompted further 4/7% cut in FY24/25 EPS. Rising finance expenses did see some relief on QoQ basis, adding breather to net margins. T&D, B&F and Urban infra continue to be key growth driver while hyper aggressive competition in rail EPC (from road EPC players) and delay in decision making on O&G pipeline jobs hurt. Weak earnings base FY23-24 and gradual recovery in Core T&D and civil EPC with healthy margins in FY25- 26 backed by healthy backlog and strong project pipeline will drive 37% EPS Cagr for KPIL and 66% for KECI in FY24-26. 

Supply chain constraints dampen earnings for KECI: 

Slippages in execution, adverse revenue mix (margin impacts from Rail EPC & O&G pipelines) and elevated freight costs (on exports) led to 23% miss in earnings. While broad execution pace is healthy (YTD 17% YoY) and OB of Rs302bn (1.8x TTM Sales) ensures visibility for 15% revenue Cagr in FY24-26 pace of margin recovery in Core T&D will anchor profitability expansion for KECI. With QOQ reduction in net debt, mgmt. targets deleveraging to ease interest intensity in FY25. 

Elevated finance cost reduce KPIL’s earnings: 

KPIL’s revenue growth was driven by T&D, B&F and Urban infra while water, O&G and rail EPC lagged. With YTD revenues growth at 17% and OB visibility at 3.2x TTM sales, ramp up in civil EPC is key to deliver growth. Divestment of non-core assets is targeted to reduce net debt in FY24-25. Execution headwinds and supply chain constraints prompts cut in revenue guidance from 25%+ to 20% in FY24, driving downgrade in earnings. KPIL’s delay on delivering merger synergies with JMC and making its balance sheet asset-light through exit from infra assets, also reflected in its valuation discount vs KECI.