Mid-cap EPC: Earnings downgrade continues

6 Nov 2023 , 11:22 AM

Mid-cap EPC companies, KECI & KPIL, reported sharp miss in earnings. While KECI witnessed bloated interest expenses amidst rising rate cycle, KPIL witnessed added strain in OPMs from nonT&D portfolios. Rail EPC has witnessed aggressive competition from new entrants, prompting both to pull back amidst renewed thrust on Domestic and Intl T&D and emerging opportunities in civil EPC. As legacy loss-making T&D orders near completion in H2FY24, OPMs and earnings outlook is strong for FY25-26 back by strong order book and robust project pipeline. 

KECI marred by NWC cycle and interest costs: 

Despite in-line revenues, elevated finance costs (4% of sales, Rs1.7bn) led to dismal earnings. Robust domestic tender pipeline of >Rs500bn and rebound in Intl T&D augurs well for the core T&D, while legacy T&D projects near completion in H2FY24, pre-elections thrust on Civil EPC execution (esp. Water) accelerates growth in Non-T&D even as Rail EPC is under consolidation. KECI guides for Rs200bn revenues with >7% OPM, but jump in interest / sales translate in 20/9% cut in FY24/25 EPS. 

KPIL’s weak OPM to take longer to recover: 

Kalpataru Projects missed earnings on weak OPMs from closure of low-margin legacy T&D projects and O&G pipelines & Rail EPC which also struggled. Delay in decision making on O&G pipeline and increased competitive intensity in Railways impair EPC visibility in both these segments. B&F and Urban infra continue with strong performance. Cancellation of a large L1 project in Australia and delay in domestic orders prompted KPIL to cut revenues growth guidance to 25%+ from 30%+. Analysts of IIFL Capital Services cut FY24/25/26 EPS by 19/20/16% respectively. 

Prefer to wait on these names: 

While analysts of IIFL Capital Services like KECI’s pure Play EPC portfolio, but rising interest rate cycle & elevated NWC weights on earnings. KPIL on the other hand lags expectations on delivering on merger synergies with JMC and making its balance sheet asset-light through exit from infra assets, also reflected in its valuation discount vs KECI.