KEC International: Bullish on growth

16 Jun 2023 , 12:20 PM

KEC International (KECI) maintained a bullish stance, owing to government’s thrust on infrastructure, capex spurt in GCC (esp. Saudi Arabia) and robust opportunities in Civil EPC (esp. Water). However, management cautioned that elevated interest rates, commodity volatility and geopolitical conflicts continue to be key risks for performance in FY24. Conclusion of most of the lossmaking fixed price domestic T&D projects by H1FY24 and sustained margins in the Non-T&D business will help drive OPM & earnings expansion. With NWC cycle under check, analysts of IIFL Capital Services expect a rebound in OPMs to aid RoE improvements in FY24/25. Despite the valuation having re-rated over past few quarters, analysts of IIFL Capital Services find it inexpensive at 14x FY25. Maintain BUY.

Domestic T&D witnessing demand tailwinds: 

T&D business saw sales growth of 27% YoY to Rs87.5bn, on the back of robust demand from domestic markets led by both POWERGRID & TPCB players; while also eyeing strong demand from GCC (esp. Saudi Arabia) and North America. With SAE turning Ebitda-positive in FY23, OPM for the T&D business seems to have bottomed out and expected to rise to 8-9% by FY25.

Non-T&D business delivers on growth & margins: 

Non-T&D business saw robust revenue growth (+22% YoY to Rs92bn) led by Civil (+75% YoY to Rs33bn) and O&G (+1.7x YoY to ~Rs5bn) while Ebitda margins sustained at~8%. Management stressed O&G & Civil to be key growth drivers in the near future. Management expects Water within Civil to perform particularly well; but cautions that it is suffering from high lead times on delivery of pipes.

Cashflows improve as management delivers on NWC cycle reduction: 

KECI reduced NWC cycle to 118 days (down 19 days YoY) while setting a target for FY24 at 110 days, ultimately aiming for a double-digit NWC cycle for FY25. WC improvements aided in FCF generation of Rs4.4bn with Operating CF improving to 3.5x PAT, up from -0.8x PAT in FY22. Management commits to sieving orders based on their impact on cashflows & NWC to achieve set objectives. KECI is guiding for revenue to scale the Rs200bn mark in FY24 with Ebitda margins sustaining at 7% on a blended basis.