Q1FY24 Review: KEC International: Richly priced

7 Aug 2023 , 01:47 PM

Analysts of IIFL Securities 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 Securities 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 Securities 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 Securities cut FY24/25/26 EPS by 11/7/4% respectively and believe the stock is richly priced.