CMP: INR316 TP: INR350 (11%) Neutral

Transcription

1 6 November QFY18 Results Update Sector: Capital Goods K E C Intl. BSE SENSEX S&P CNX 33,731 10,452 Bloomberg KECI IN Equity Shares (m) M.Cap.(INRb)/(USDb) 81.2/ Week Range (INR) 338 / 111 1, 6, 12 Rel. Per (%) -3/30/132 Avg. Val, INRm 165 Free float (%) 49.1 Financials & Valuations (INR b) Y/E Mar E 2019E Net Sales EBITDA PAT EPS (INR) Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Estimate change TP change Rating change CMP: INR316 TP: INR350 (11%) Neutral Operating performance above expectations led by margins beat Revenue performance below estimates: Consol. revenue grew 3% YoY to INR21.3b in 2QFY18. We note that revenue growth would be been much better at 5% YoY if not for the GST-led impact. All business segments, excluding T&D, witnessed growth. T&D business including SAE Tower sales declined 4.5% growth YoY. T&D contributed 80% of revenue, followed by Cables (11%), Railways (6%), and Solar, Civil and Water (4%). Management broadly maintained its revenue growth guidance of 10-15% YoY for FY18, which will be supported by a pick-up in execution of T&D orders in hand and strong growth in the non-t&d segments. Consol. EBITDA margin expanded 120bp YoY to 10.1% in 2QFY18, led by an improved performance from the standalone business. SAE Towers reported an operating margin of 7.4% in 2QFY18 v/s 14.5% in 2QFY17. Management raised its FY18 operating margin guidance to 10% from 9-9.5% earlier. Net profit rose 37.4% YoY, led by execution of better-margin orders and a reduction in interest cost. Valuation view KEC is well positioned to capitalize on increased domestic spending in Power T&D, Railways and Water. Margins have improved over the last two years, led by the stabilization of new verticals and the completion of loss-making legacy orders. We raise our estimates for FY18/19 by 9/7% to factor in the better-than-estimated margin performance in 1HFY18. However, given expensive valuations, we maintain our Neutral rating with a revised target price of INR350 (17x DEC19E EPS), in line with the five-year average multiple, taking into consideration a strong pick-up in domestic order execution, an improved overseas subsidiary performance and a better business outlook. The stock trades at 22/18x FY18/19E EPS of INR14.3/17.6. Quarterly performance (Cons.) (INR Million) FY17 FY18 FY17 FY18E MOSL Var. Y/E March 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 1Q Est Vs Est Sales 17,487 20,742 19,123 28,492 18,568 21,322 21,500 33,184 85,844 94,573 23,386-9% Change (%) EBITDA 1,496 1,853 1,818 3,011 1,763 2,158 2,105 3,297 8,179 9,324 2,209-2% Change (%) As of % Sales Depreciation ,297 1, Interest ,536 2, Other Income PBT 535 1,003 1,006 2, ,365 1,248 2,079 4,634 5,650 1,248 9% Tax ,587 1, Effective Tax Rate (%) Reported PAT , ,338 3,048 3, % Change (%) Adj PAT , ,338 3,048 3, % Change (%) E: MOSL Estimates Ankur Sharma - Research analyst (Ankur.VSharma@MotilalOswal.com); Amit Shah - Research analyst (Amit.Shah@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Consol. revenue grew 3% YoY to INR21.3b in 2QFY18. Revenue was impacted by GST implementation (adjusting for GST, revenue growth would have been 5% YoY). All business segments, excluding T&D, witnessed growth. T&D business including SAE Tower sales declined 4.5% growth YoY. T&D contributed 80% of revenue, followed by Cables (11%), Railways (6%), and Solar, Civil and Water (4%). Management broadly maintained its revenue growth guidance of 10-15% YoY for FY18, which will be supported by a pick-up in execution of T&D orders in hand and strong growth in non-t&d segments. Transmission segment revenue (ex SAE Tower) declined 4.5% YoY to INR17.1b, led by a delay in execution of orders in hand on account of GST implementation. On the ordering front, KEC expects ordering from SEBs to remain healthy. SEBs like Karnataka, Tamil Nadu, West Bengal Andhra Pradesh and Telengana have increased their T&D spending to reduce AT&C losses. However, ordering from PGCIL stands muted. SAE Towers reported revenue decline of 4.7% YoY to INR1.5b. SAE Towers registered operating margins of 7.4%. Management expects SAE to clock revenue of INR10b for FY18, led by a pick-up in execution of orders in hand from 3QFY18. Railways segment has started to witness ordering traction, and KEC has order backlog worth INR13.6b. KEC expects revenue booking of INR8b in FY18, and has booked revenue of INR2.7b in Railways. Working capital cycle during the quarter stands elongated, led by an increase in receivables days (234 days v/s 228 days in 4QFY17) on account of delayed collection of receivables with a few customers. Even inventories position increased by 7 days to 24 days, led by delayed receipt of environmental clearance at Brazil. Current order book provides decent medium-term revenue visibility: Order book stands at INR14.1b, up 30.0% YoY, BTB of 1.5x. Order intake at INR29.6b declined 5% YoY, and order pipeline remained healthy (L1 in orders worth INR40b). KEC expects ordering to improve from SEBs like Karnataka, Tamil Nadu, West Bengal, Andhra Pradesh and Telengana. In the international market, KEC continues to see order as well as tender traction from SAARC region, South East Asia and selected African regions. Exhibit 1: Consolidated Segmental Revenues (INR m): Execution in T&D segment remain muted denting revenue growth Revenues 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 YoY QoQ Transmission-Rest 15, ,430 13,340 14,610 th -4%% G th 10% Transmission SAE 2, ,480-5% 60% Total Transmission 17,070 17,080 21,530 14, ,020 14,890 17, % 15% Cables 2, ,030 2,200 2, % 9% Railway ,060 1,580 1,190 87% -25% Water/solar/civil % 460% Total 20,240 20,600 25,470 25,470 21,290 19,650 28,840 18,950 21,320-1% 13% * Transmission include South Asia, International and Power systems 6 November

3 Exhibit 2: Consolidated order book: Geographical composition Internation al, 48 India, 52 Exhibit 3: Consolidated order book: Segmental composition Railways, 10% Cables, 2% Civil, 3% Water &Solar, 2% Transmissio n, 83% Exhibit 4: Order book provides decent medium-term revenue visibility Order book (INR m) Book-to-bill ratio (x) Exhibit 5: Geographical order intake: Order inflow dominated by finalization of orders in domestic market International Domestic 6% 46% 43% 49% 53% 53% 54% 50% 51% 46% 65% 35% 94,620 93, ,500 94, , , , , ,250 93,220 87,610 95, ,370 98,720 93,700 94, , , % 57% 51% 47% 47% 46% 50% 35% 49% 54% 94% 65% 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFy18 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Exhibit 6: Standalone revenue registers growth led by pickup in execution of orders in hand Standalone Revenues (INR m) YoY growth (%) Exhibit 7: Sustainability of margins for last 8 quarters lends confidence Standalone EBIDTA (INR m) Margin (%) 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 18,157 14,526 15,106 18,746 17,210 13,943 16,630 16,443 18,906 13,961 18,181 18,826 22,938 14,931 17,957 16,810 25,967 17,061 18,837 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY ,177 1, , November

4 Exhibit 8: Revenue impacted during the quarter as delay in receipt of environmental clearance at Brazil impacting dispatch Subsidiary Revenue (INR m) YoY growth (%) Exhibit 9: Operating margins impacted by negative operating leverage Subsidiary EBIDTA (INR m) Margin (%) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 6,303 4, Valuation and outlook KEC is well positioned to capitalize on increased domestic spending in Power T&D, Railways and Water. Margins have improved over the last two years, led by stabilization of new verticals and completion of loss-making legacy orders. We raise our estimates for FY18/19 by 9/7%, respectively, to factor in better than estimated margin performance in 1HFY18. However, given expensive valuations, we maintain Neutral with a revised target price of INR350 (17x DEC19E EPS), in line with five-year average multiple, taking into consideration strong pick-up in domestic order execution, improved overseas subsidiary performance and better business outlook. The stock trades at 22/18x FY18/19E EPS of INR14.3/17.6. Exhibit 10: Change in estimates New Estimates Old Estimates % Change Description e 2019e 2018e 2019e 2018e 2019e Sales 85,844 94, ,558 97, ,153-3% -1% EBITDA 8,179 9,324 11,111 9,104 10,720 2% 4% Margins(%) 9.5% 9.9% 9.7% 9.3% 9.3% 1% 0% PAT 3,048 3,672 4,529 3,359 4,217 9% 7% EPS % 7% YoY Growth(%) 110% 20% 23% 11% 25% Concall takeaways Overall GST and business environment 5% growth excluding GST impact on sales International grew strongly, while domestic saw a slowdown on deferral by customers. GST led to a) tender delays, deferred, and b) solar seeing slowdown, so looking at export markets. Share of non-pgcil orders has gone up - SAE has won 2 large EPC projects. BOT to be commissioned soon. Orders for FY18 targeted at INR b. PGCIL - most orders are on TBCB and not nomination; PGCIL likely to win these and give out orders. 6 November

5 SEBs - earlier primarily from South; PGCIL tying up with Bihar, UP, Orissa, North East, and also Gujarat seeing tenders coming out; FY19 will see better capex by SEBs. Civil - doing very well with INR4b order book, PBT breakeven; not seeing any big jobs. Expects to clock INR10b of sales in civil. M. East - tendering is improving in Jordon, Egypt. Saudi still doing very low tendering, but a long tender list. Saudi has cleared all outstanding, and expects a revival in a few months; should bounce back with oil prices. Africa - significant growth seen in Q4/Q119 with large projects being planned. SAARC - Bangladesh, Indonesia too seeing good traction. Margins 10.1% margins (+130bp YoY). Don t expect any significant impact on margins from commodity prices - already in the margins as of Q2. PGCIL margins at 10% at the time of bidding. Margins will likely be at 10% in FY18, up from 9-9.5%; 9.7% in 1H18. Higher on account of a) taking only higher-margin orders, b) operational efficiencies, c) projects completed on schedule, and d) steel is 15-16% of project, so not affected and domestic is pass through SAE is at 10% margin and improve with the large EPC orders; cables is 5-6%; T&D is at +10% margin. Focused on profitable margins and expect margins to expand over the next few years. 30% of orders have a price variation clause. Working capital Receivables higher on delay in making invoices and collection. Brazil saw delays in one project - this has been restarted. Higher state orders could lead to higher WC; will take higher margin to compensate. Saudi receivables - all approved bills have been paid and no current O/S, as more projects get completed; retention will be released. Interest rate is 7-7.5% and has come down with a rating upgrade and lower interest rate; will maintain at 2.7% of sales. Ordering environment Domestic at 65% of total, despite PGCIL not contributing; got a large private sector order during Q218, and SEBs are also starting to spend. INR40b of L1 and significant portion from SEB. Rail is doing well and upcoming L1 from T&D. SEBs are 32% of order book and balance 20% from PGCIL and private sector; 52% is India order book. Execution 5% growth if GST impact not there on sales in Q November

6 Sales will be in 10-15% in Q218; orders got postponed and so were execution; 5% impact on the Indian business. Delay on account of GST will be compensated more in Q4 and less in Q318. Working capital Seeing some stress on cables - went to 28% v/s 18% earlier; is impacting the WC. Otherwise, no material impact on GST. Net debt impacted by GST as WC debt taken in Q218; so should come down to INR20b. Tax rate at 34-35%. 50% of debt is overseas. SAE Towers Was doing INR10b annually and will do a similar no. this year as well; got into EPC with 2 more orders in Q218; sales from these orders will start only from 2H18. PGCIL also participating in Brazil - Sterlite has already won an order. Rail Target is to do INR7-8b in FY18 vs. INR4-5b in FY17; Sales can touch INR20b in 3 years. INR1.4b of orders in railways in Q218; FY18 target is INR20b. Rail stopped tendering in Q218 on GST; INR70b of bids put in the railways and expect good orders in Nov-December. Rail electrification target at 8,000kms in 3 years; wants to reduce timelines; 4000kms target and KEC is doing 1000kms (25%). INR1.3b is capex and KEC can potentially do 50% of this opportunity. DFCC - KEC quoted and will get into this as well. 6 November

7 Operating metrics INR M FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20e Order Book 78,000 85,720 94, ,796 95,080 94, , , , ,264 T&D (incl Power Systems, Telecom) 63,290 67,719 77,560 80,784 71,310 70,868 90, , , ,321 SAE Towers 8,920 7,543 7,292 8,568 9,508 11,339 12,630 13,262 13,925 14,621 Cables 1,240 1,457 1,042 2,448 5,705 4,725 1, Railways 3,890 3,429 4,356 4,488 4,754 5,669 15,157 25,959 33,757 41,358 Water 660 5,572 4,451 5,508 3,803 2,268 6,316 7,684 8,376 8,884 Order Intake 62,000 65,867 74,840 84,820 82,230 87, , , , ,523 T&D (incl Power Systems, Telecom) 55,134 51,500 51,714 59,544 55,916 69,896 83, , , ,818 SAE Towers 7,753 10,253 10,009 12,335 13,568 15,603 17,944 20,635 23,730 Cables 5,440 6,020 7,640 8,567 11,512 9,585 9,886 10,381 11,107 12,218 Railways 3,440 1,430 5,160 2,375 2,549 2,614 14,830 17,054 18,759 21,573 Water 1,360 5,470 1,640 4, ,743 6,179 6,488 6,812 7,153 Revenues 44,742 58,150 69,790 79,010 84,590 85,178 85,383 93, , ,811 T&D (incl Power Systems, Telecom) 34,682 40,730 48,470 61,160 64,840 61,638 58,214 61,162 71,138 81,058 SAE Towers 3,540 9,130 10,320 8,540 8,030 8,300 9,719 9,473 11,367 11,935 Cables 4,800 5,710 5,520 6,310 9,070 11,180 10,540 11,067 11,620 12,201 Railways 910 1,640 2,700 1,690 1,330 2,100 4,460 6,253 10,961 13,972 Water ,780 1,310 1,320 1,960 2,450 5,119 6,121 6,644 Revenues, % YoY 30.0% 20.0% 13.2% 7.1% 0.7% 0.2% 9.0% 19.5% 13.1% T&D (incl Power Systems, Telecom) 17.4% 19.0% 26.2% 6.0% -4.9% -5.6% 5.1% 16.3% 13.9% SAE Towers 157.9% 13.0% -17.2% -6.0% 3.4% 17.1% -2.5% 20.0% 5.0% Cables 19.0% -3.3% 14.3% 43.7% 23.3% -5.7% 5.0% 5.0% 5.0% Railways 80.2% 64.6% -37.4% -21.3% 57.9% 112.4% 40.2% 75.3% 27.5% Water 195.7% -52.9% 0.8% 48.5% 25.0% 109.0% 19.6% 8.6% Net Debt (INR M) 11,950 10,351 15,133 19,830 18,388 29,376 17,902 15,033 8, Reported NWC (Days) November

8 Financials and Valuations Income Statement (INR Million) Y/E March E 2019E 2020E Total Revenues 69,795 79,018 84,680 85,178 85,844 94, , ,201 Change (%) Raw Materials 53,301 59,594 64,527 61,798 59,489 66,505 80,742 92,145 Staff Cost 4,829 5,661 5,865 6,392 7,327 8,043 9,742 11,158 Other Expenses 7,852 8,831 9,168 10,064 10,849 10,701 12,963 14,846 EBITDA 3,814 4,933 5,120 6,923 8,179 9,324 11,111 13,052 % of Total Revenues Other Income Depreciation ,318 1,297 1,337 1,414 1,490 Interest 1,944 2,633 3,089 2,794 2,536 2,565 3,207 3,688 PBT 1,470 1,733 1,266 2,914 4,635 5,650 6,967 8,569 Tax ,436 1,587 1,977 2,439 2,999 Rate (%) Adjusted PAT ,479 3,048 3,672 4,529 5,570 Change (%) Exceptional Items Reported PAT ,610 1,479 3,048 3,672 4,529 5,570 Change (%) Balance Sheet (INR Million) Y/E March E 2019E 2020E Share Capital Reserves 10,958 11,402 12,784 12,390 15,349 18,272 21,876 26,309 Net Worth 11,472 11,916 13,298 12,904 15,864 18,786 22,390 26,823 Minority Interest Loans 16,690 21,270 20,451 30,229 19,981 22,981 25,981 28,981 Deferred Tax Liability ,034 1,240 1,240 1,240 1,240 Capital Employed 28,783 33,699 34,277 44,167 37,085 43,008 49,612 57,044 Gross Fixed Assets 13,332 14,026 16,379 16,934 16,977 17,980 18,984 19,987 Less: Depreciation 3,519 4,283 4,311 4,957 5,902 7,239 8,652 10,143 Net Fixed Assets 9,813 9,742 12,069 11,977 11,075 12,075 13,075 14,075 Capital WIP Investments ,304 1,304 1,304 1,304 Goodwill 3,424 3,778 3,943 1,952 1,910 1,910 1,910 1,910 Curr. Assets 48,809 60,197 64,519 76,425 74,718 85, , ,382 Inventory 3,960 5,052 4,764 3,602 3,947 4,348 5,267 6,032 Debtors 34,305 43,390 38,529 46,576 42,004 46,275 52,915 57,008 Cash & Bank Balance 1,556 1,440 2, ,080 7,948 17,380 28,407 Loans & Advances 6,613 8,520 9,507 1, Other Current Assets 2,375 1,794 9,655 24,215 26,237 26,237 26,237 26,237 Current Liab. & Prov. 33,564 40,197 42,995 44,573 50,063 55,790 67,358 76,992 Creditors 32,679 38,946 41,777 43,537 49,016 54,743 66,311 75,945 Other Liabilities 885 1,251 1,219 1,036 1,047 1,047 1,047 1,047 Net Current Assets 15,244 19,999 21,524 31,852 24,655 29,521 35,051 41,390 Application of Funds 28,783 33,699 34,277 44,167 37,085 43,008 49,612 57,044 E: MOSL Estimates 6 November

9 Financials and Valuations Ratios Y/E March E 2019E 2020E Basic (INR) Adj EPS Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE RoIC Turnover Ratios Debtors (Days) Inventory (Days) Creditors. (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) Cash Flow Statement (INR Million) Y/E March E 2019E 2020E PBT before EO Items 1,470 1,551 2,611 2,914 4,634 5,650 6,967 8,569 Depreciation ,318 1,297 1,337 1,414 1,490 Interest 1,822 2,536 2, Direct Taxes Paid ,126-1,221-1,436-1,587-1,977-2,439-2,999 (Inc)/Dec in WC -3,738-3,957-3,206-11,539 8,424 1,001 3,903 4,687 CF from Operations ,052-8,742 12,769 6,011 9,845 11,747 Others CF from Oper. Incl. Others ,529-8,742 12,938 6,011 9,845 11,747 (Inc)/Dec in FA -1,349-1,441 1,165-1,257-3,354-2,304-2,304-2,304 Free Cash Flow -2,217-1,534 2,694-9,999 9,584 3,707 7,542 9,444 Investment in liquid assets & Others CF from Investments -1,210-1,340 1,249-1,257-3,354-2,304-2,304-2,304 (Inc)/Dec in Debt 3,945 4,101 1,065 10,665-8,270 2,911 2,815 2,720 Interest Paid -1,983-2,634-3, Dividend Paid ,137 Others , CF from Fin. Activity 1,605 1,317-2,157 8,792-8,358 2,161 1,890 1,583 Inc/Dec of Cash ,207 1,226 5,868 9,432 11,027 Add: Beginning Balance 2,029 1,556 1,440 2, ,079 7,948 17,380 Closing Balance 1,556 1,440 2, ,079 7,948 17,380 28,407 E: MOSL Estimates 6 November

10 Corporate profile Company description KEC is global infrastructure Engineering, Procurement and Construction (EPC) major. It has presence in the verticals of Power Transmission & Distribution, Cables, Railways, Water & Renewables. The Company has powered infrastructure development in 61+ countries across Africa, Americas, Central Asia, Middle East, South Asia and South East Asia. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Sep-17 Jun-17 Sep-16 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding HDFC Trustee Company Limited and its affiliates 8.0 Reliance Capital Trustee Company Limited & its Affiliates 2.5 SBI Mutual Fund & its affiliates 2.1 LIC of India 1.7 FIL Investments (Mauritius) Limited 1.5 Source: Capitaline Exhibit 4: Top management Name Designation H V Goenka Chairman Vimal Kejriwal Managing Director & CEO V Jagannadha Rao Company Secretary Exhibit 5: Directors Name R D Chandak D G Piramal Nirupama Rao S M Trehan Vinayak Chatterjee Name A T Vaswani G L Mirchandani S M Kulkarni S S Thakur Source: Capitaline *Independent Exhibit 6: Auditors Name Deloitte Haskins & Sells Kirit Mehta & Associates Type Statutory Cost Auditor Source: Capitaline Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY FY Source: Bloomberg 6 November

11 N O T E S 6 November

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Ltd. offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products 6 November