KEC International (KECIN) 149

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1 Result Update Rating matrix Rating : Buy Target : 182 Target Period : months Potential Upside : 23% What s changed? Target Changed from 162 to 182 EPS FY17E Changed from 11.1 to 1.8 EPS FY18E Chnaged from 13. to 14. Rating Unchanged Quarterly performance Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) Revenue 1, , , EBITDA EBITDA (%) bps bps PAT Key financials Crore FY15 FY16 FY17E FY18E Net Sales 8, , , ,244.8 EBITDA Net Profit EPS ( ) Valuation summary FY15 FY16 FY17E FY18E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization Crore Total Debt (FY16) 3124 Crore Cash and Investments (FY16) Crore EV 6143 crore 52 week H/L 155/ 5 Equity capital 51.4 Crore Face value 2 Price performance 1M 3M 6M 12M KEC International Ltd Jyoti Structure 5.2 (3.5) (27.9) (5.1) Kalpataru Power Research Analyst Chirag Shah shah.chirag@icicisecurities.com On strong footing February 1, 217 KEC International (KECIN) 149 KEC International reported a good set of Q3FY17 results. The key positive takeaways were higher-than-expected EBITDA margins and lower finance costs that drove profitability despite a miss on revenues (on account of demonetisation and delay in land clearance in a few substation projects) The topline declined 7.1% YoY to crore, below our estimate of 2184 crore). The revenue miss may be largely on account of demonetisation, which impacted revenues to the tune of 5-6 crore for Q3FY17. On an overall basis, transmission revenues declined 13.5% YoY to 15 crore. SAE Towers reported handsome growth of 28% YoY in revenues to 277 crore. Railways business grew 3% YoY and is on track to achieve 45 crore of revenue for FY17E. With a recovery in industrial metals like aluminium and copper, cables segment also recorded 2% YoY revenue growth in Q3FY17 Order backlog was at crore whereas order inflows for 9MFY17 were at 8634 crore EBITDA margins continue to show a strong improvement quarter after quarter. For Q3FY17, it came in at 9.3% vs. our estimate of 8.6% in Q3FY17. On the leverage side, with better control on receivable days interest costs declined 13.5% YoY Hence, PAT was at 62.8 crore in line with our estimates Topline visibility strong, margins continue to surprise 9MFY17 order inflow and order backlog growth of 26% YoY and 19% YoY will lead to a strong pick-up in execution over FY18E and lead to revenue CAGR of 11% for KEC in FY16-18E. The company is also L1 in orders to the tune of 38 crore, further enhancing order win prospects. The company s subsidiary SAE has also turned around and will continue to add strongly to the consolidated performance. The management is upbeat in terms of business prospects from domestic markets (SEB ordering) and also international markets where they are trying to diffuse MENA region risk by focusing on regions like Africa. Balance sheet quality on the mend A key hallmark of 9MFY17 performance was improvement in interest cost as they were flat for the period. Even for Q3FY17, interest costs declined 13.5%. Going ahead, we expect interest costs to rise marginally by 5% vs. 15% topline growth in FY18E. Gross debt has come down from 2686 crore in Q2FY17 to 244 crore in Q3FY17. Debtor days also improved from 222 days in Q2FY17 to 218 days in Q3FY17. Railways business continues to show strong growth The company is on track to achieve the scalability in the railway business as revenues in the quarter have grown 29.6% YoY to 15 crore coupled with margins that are a tad lower than the T&D business. KEC has a target of achieving 45 crore and 75 crore revenues from this segment by FY17E and FY18E, respectively. RoEs to see significant improvement; maintain BUY High revenue visibility, scalability in new business, improving margin profile and recovery in quality of leverage/cash flows will help KEC register 25% PAT CAGR in FY16-18E. This will lead to 22 bps improvement in RoEs to 16.5% in FY18E. Hence, we continue to remain upbeat on the company s prospects and further revise our target price to 182 vs. 162 earlier. We reiterate BUY recommendation on KEC. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY17 Q3FY17E Q3FY16oY (Chg %) Q2FY17oQ (Chg %) Comments Revenue 1, ,184. 2, , Revenues were below estimates on account of demonetisation and delay in Other Income Employee Expenses Raw Material Expenses , Other Operating Expenses Erecting and Contracting Expenses EBITDA EBITDA Margin (%) bps bps Margins were above estimates as SAE reported company level EBITDA margins and strong execution was witnessed in the railways segment Depreciation Interest PBT Total Tax NM PAT Margin beat and muted finance costs led to PAT beat Key Metrics Order inflows 2,76. 2,. 2, , Order inflows were higher than estimates Order backlog Backlog and execution cycle ensures reasonable visibility, going ahead Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 9, , , , Strong order wins in FY16-Q1FY17 and lower execution cycle will lead to 1% revenue CAGR for KEC in FY16-18E EBITDA We have revised our margin estimates for FY17E and FY18E on the upside EBITDA Margin (%) bps bps PAT PAT has been revised more than EBITDA on account of higher effective tax rate EPS ( ) Assumptions Current Earlier FY15 FY16 FY17E FY18E FY17E FY18E Order Inflow growth Order Backlog growth Revenue growth EBITDA Margins ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Order inflows and pipeline strong to support 11% revenue CAGR KEC witnessed strong order inflows in FY16 to the tune of 8714 crore while 9MFY17 has been even stronger at 26% YoY growth at 8634 crore. The outlook seems stronger as it is L1 in orders to the tune of 38 crore. The management commentary also suggests that, going ahead, strong business opportunities are emerging from SEBs. We believe these will compensate the moderation of ordering from Power Grid. Consolidated order book was at crore, which will ensure 11% revenue CAGR in FY16-18E. Going ahead, we expect order inflow to grow 22% YoY to 1634 crore while for FY18E we have built in moderate growth on a high base at 18 crore. Also, we expect the consolidated order backlog at 165 crore. In terms of segmental performance, SAE continued with its strong performance as revenues grew 28% YoY to 277 crore. Going ahead, the same is expected to continue as the subsidiary has visibility for the next two years. The company is on track to achieve scalability in the railway business as revenues in the quarter have grown 29.6% YoY to 15 crore coupled with margins that are a tad lower than the T&D business. KEC has a target of achieving 45 crore and 75 crore revenues from this segment by FY17E and FY18E, respectively. Exhibit 1: KEC exhibits strong order inflow trends Exhibit 2: thereby adding to order backlog and visibility ( crore) ( crore) (%) -2-2 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16FY17EFY18E FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17EFY18E Order Inflow YoY growth (%) Order backlog YoY growth (%) Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research Exhibit 3: Trend in revenues for KEC in FY9-18E ( crore) FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Revenues YoY growth (%) ICICI Securities Ltd Retail Equity Research Page 3

4 Railways business shows strong growth Revenues from the railways business grew 29.6% YoY and 5% YoY in Q3FY17 and 9MFY17, respectively. The current backlog for the railways business is at 16 crore. The management is targeting a higher closing backlog at FY17E end. EBITDA margins were lower by 6-7 bps than the transmission business. This will move to the T&D business margin levels once a reasonable scale is achieved. Margin scale up commendable management confident of further improvement A pick-up of execution in the T&D segment and gaining scale on the new business ventures will aid further improvement of EBITDA margins. We expect KEC to report margins of 8.9% and 9% in FY17E and FY18E, respectively. On an individual basis, we expect the transmission business to produce margins in the range of 8-1% while that of SAE Towers will also scale up to company level margins by FY17E as it reported margins of 8-9% in Q3FY17. Strong visibility there will help sustain these margins in FY17E. Also, strong scalability in the railways business will help it earn margins in the range of 8-1%. The management mentioned that revenues of 5-6 crore will help KEC record margins of 8-1% in the railways business, which is possible to happen by FY18E. Strong execution, margin recovery, better financial leverage to drive robust PAT CAGR of 25% (FY16-18E) Going ahead, we expect KEC to exhibit 25% CAGR in profitability in FY16E-18E, which will be contributed by 17% CAGR in EBITDA and 11% revenue CAGR over the same period. We expect EBITDA to grow to crore by FY18E from crore in FY16. Even on increased execution, interest costs growth will be lower than rise in revenues at 5% YoY, which will provide strong financial leverage gain. This, we believe, coupled with lower tax rates (35% for FY17E & FY18E vs. 41% in FY16, would lead to PAT of crore and crore in FY17E and FY18E, respectively. Exhibit 4: PAT to rise sharply on the back of strong margins recovery ( crore) FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E ICICI Securities Ltd Retail Equity Research Page 4

5 RoE profile to improve materially on margin recovery/decline in leverage A recovery in margins and resultant 25% CAGR in PAT in FY16-18E will help KEC to improve its RoE to 15% and 16.5% in FY17E and FY18E, respectively. The RoCE is also expected to improve from 15.4% in FY16 to 16.9% in FY18E. Exhibit 5: Return ratios to bounce back strongly 3 (%) FY1 FY11 FY12 FY14 FY15 FY16 FY18E FY18E FY18E ROE ROCE ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and Valuation High revenue visibility, scalability in new business, improving margin profile and recovery in quality of leverage/cash flows will help KEC register 25% PAT CAGR in FY16-18E. This will lead to 22 bps improvement in RoEs to 16.5% in FY18E. Hence, we continue to remain upbeat on the company s prospects and further revise our target price to 182 vs. 162 earlier. We reiterate our BUY recommendation on KEC. Exhibit 6: Interest/EBITDA ratio to improve, going ahead (%) FY14 FY15 FY16 FY18E FY18E ICICI Securities Ltd Retail Equity Research Page 6

7 Recommendation History vs. Consensus ( ) Nov-14 Jan-15 Apr-15 Jun-15 Aug-15 Nov-15 Jan-16 Apr-16 Jun-16 Sep-16 Nov Jan-17 (%) Source: Bloomberg, Company, ICICIdirect.com Research Key events Series1 Idirect target Consensus Target Mean % Consensus with Buy Date Event Mar-11 KEC closes FY11 with highest ever growth rate of 36% YoY in its order backlog to 78 crore Mar-12 Revenue crosses 5 crore for the first time with higehest ever PAT of 29 crore in its operating history Dec-12 KEC's order backlog crosses 1 crore mark in its operating history Mar-13 Market share in PGCIL ordering at 31% in FY13. Number of contracts won stood at 1 worth 2152 crore Mar-13 With execution of low margin orders of new SBUs, KEC's EBITDA margins fall to record lows to 4.1% in Q4FY13 Sep-13 Margins do recover to 6.3% in Q2FY14 after dismal perfomance of Q4FY13. However, going ahead, consistency is the key Nov-13 Market share in PGCIL ordering at 16% in YTDFY14. Number of contracts won stood at 1 worth 2152 crore Apr-14 Overall market share in PGCIL orders stood at 2% while for the whole of FY14, KEC reported 14% YoY growth in order flows. The key highlight was the recovery of EBITDA margins to 6.2% in FY14 from 5.5% in FY13. The company guides for further improvement in margins and reduction in leverage Dec-14 Q3FY15 performance disappointing owing to higher-than-expected margins on the back of execution of low margins legacy orders Mar-15 Improvement in Q4FY15 performance across all parameters and mangament sets out strong guidance for FY16E Mar-16 The company continues with consistent improvement in EBITDA margins and also records strong order inflows to the tune of 8714 crore and closes the year with order backlog of 9449 crore Top 1 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 1 RPG Enterprises 31-Dec Promoter HDFC Asset Management Co., Ltd. 31-Dec FII SBI Funds Management Pvt. Ltd. 31-Dec DII Reliance Nippon Life Asset Management Limited 31-Dec Others FIL Investment Management (Hong Kong) Limited 31-Dec FIL Investment Management (Singapore) Ltd. 31-Aug Life Insurance Corporation of India 31-Dec Goenka (Harsh Vardhan) 31-Dec Dimensional Fund Advisors, L.P. 31-Oct IDFC Asset Management Company Private Limited 31-Dec Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares SBI Funds Management Pvt. Ltd M +1.77MS HDFC Asset Management Co., Ltd M -8.68M Lazard Asset Management, L.L.C M +.92M Reliance Nippon Life Asset Management Limited -4.77M -2.31M Victory Capital Management Inc. +.38M +.18M Birla Sun Life Asset Management Company Ltd M -2.16M Samsung Asset Management Co., Ltd. +.14M +.8M Mellon Capital Management Corporation -.26M -.14M Amundi Hong Kong Limited +.5M +.3M UTI Asset Management Co. Ltd. -.28M -.14M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Total operating Income 8, , , ,244.8 Growth (%) Raw Material Expenses 4, ,148. 4, ,57.1 Employee Expenses Erecting and Contracting Expenses 1, ,71.8 1, ,272.5 Administrative Expenses ,41.4 1,211.5 Total Operating Expenditure 7,956. 7,837. 8, ,428.6 EBITDA Growth (%) Depreciation Interest Other Income Exceptional Item PBT Total Tax PAT Adjusted PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY15 FY16 FY17E FY18E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets ,64.6 Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments.... (Inc)/dec in Fixed Assets Others.... CF from investing activities Issue/(Buy back) of Equity.... Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium.... Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Liabilities Equity Capital Reserve and Surplus 1, , ,83.9 2,122.7 Total Shareholders funds 1, , , ,174.1 Total Debt 2, ,52.7 2,62.7 2,72.7 Deferred Tax Liability.... Minority Interest / Others.... Total Liabilities 3, , ,476. 4,894.8 Assets Gross Block 1, ,383. 1, ,479.5 Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets 1,15.8 1, Investments.... Inventory Debtors 3, , , ,445.2 Loans and Advances ,224.8 Other Current Assets ,25.6 Cash Total Current Assets 6, , , ,938.7 Creditors 3, , , ,648.8 Provisions Total Current Liabilities 4,13.6 4,28.8 4,21.9 5,123.5 Net Current Assets 2,447. 2, , ,815.2 Others Assets.... Application of Funds 3, , ,476. 4,894.7 Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Capital Goods) CMP M Cap ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E AIA Engineering 139 1,4 Buy Thermax (THERMA) Hold KEC International (KECIN) Buy L&T (LARTOU) Buy Bhel (BHEL) Hold Greaves Cotton (GREAVE) Buy SKF (SKFIND) ,585 Buy VaTech Wabag (VATWAB) 5 64 Buy NRB Bearing (NRBBEA) Hold Timken India (TATTIM) Buy Grindwell Norton (GRINOR) Buy Bharat Electronics (BHAELE) Buy EPS ( ) P/E (x) RoCE (%) RoE (%) ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 1

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