(KECI IN) Rating: BUY CMP: Rs370 TP: Rs425 June 15, 2018 Analyst Meet Update Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating BUY - Target Price 425 - Sales (Rs.m) 1,15,667 1,33,017 - - EBITDA (Rs.m) 11,408 13,252 - - EPS (Rs.) 20.9 24.7 - - Key Financials FY17 FY18 FY19E FY20E Sales (Rs. m) 85,844 1,00,580 1,15,667 1,33,017 EBITDA (Rs. m) 8,180 10,062 11,408 13,252 Margin (%) 9.5 10.0 9.9 10.0 PAT (Rs. m) 3,049 4,604 5,384 6,345 EPS (Rs.) 11.9 17.9 20.9 24.7 Gr. (%) 106.2 51.0 16.9 17.8 DPS (Rs.) 1.8 2.7 3.1 3.7 Yield (%) 0.5 0.7 0.8 1.0 RoE (%) 21.2 25.7 24.2 23.4 RoCE (%) 17.4 24.8 26.6 27.2 EV/Sales (x) 1.3 1.1 1.0 0.8 EV/EBITDA (x) 13.6 10.8 9.7 8.2 PE (x) 31.2 20.6 17.6 15.0 P/BV (x) 6.0 4.8 3.9 3.2 Key Data KECL.BO KECI IN 52-W High / Low Rs.443 / Rs.209 Sensex / Nifty 35,600 / 10,808 Market Cap Rs.95bn/ $ 1,405m Shares Outstanding 257m 3M Avg. Daily Value Rs.470.0m Shareholding Pattern (%) Promoter s 50.99 Foreign 10.66 Domestic Institution 20.19 Public & Others 18.16 Promoter Pledge (Rs bn) 0.97 Stock Performance (%) 1M 6M 12M Absolute (2.9) 7.4 47.9 Relative (3.1) (0.3) 29.2 Kunal Sheth kunalsheth@plindia.com 91-22-66322257 Shreyans Jain shreyansjain@plindia.com 91-22-66322256 Spreading its wings We met the management of KEC, key highlights being 1) KEC can grow at 15%+ over the next five years 2) All businesses will have similar margins to T&D over the next five years 3) Have invested in capability building of new businesses 4) Expect Non-T&D share to increase to 40% in the next five years (20% currently) 5) Increased focus on risk management as company has grown in size, segments and geography. KEC believes key growth drivers over the next five years will be railway business (domestic and international) and civil (inflow can be 2x/3x of Rs5bn inflow it did in FY18). In T&D segment, growth will be from Brazil (has potential to grow at 20-25% CAGR), Central America, Bangladesh and Middle East revival (share of ME reduced to 15-16% in the Order Book from 25-26%). KEC see uptrend in commodity prices and interest rates as key risks to business. In FY18, KEC deliberately slowed down inflow from international markets keeping in mind the hardening commodity prices and fixed price nature of contract in overseas market. While the last three years saw NWC days reduce by ~30-40 to 93 days, KEC believes further improvement in working capital and interest cost looks unlikely, given increasing mix of SEB in domestic T&D business and scale up of new business. We believe that a strong order book, improving margin profile and healthy outlook in T&D and emerging segments like Railways/Civil will help KEC deliver 24% earnings CAGR over FY17 20E. We maintain BUY with TP of Rs425. Key Growth Drivers: KEC believes that Railways will be the key growth driver, with higher contribution from International markets where margins are also higher than the domestic market. Management expects Civil business to grow significantly. Order inflow is likely to be 2-3x of Rs5bn achieved in FY18. In the T&D space, International markets like Brazil (can grow 25-30%), Central America, Bangladesh and Middle East are expected to drive growth. Strong order book: KEC s order book for FY18 stood at Rs173bn (up 37% YoY) and order inflow stood at Rs151bn (up 22% YoY). KEC is L1 in orders worth Rs15bn. In Domestic markets, traction in orders from SEB continues to be strong (TN/Orissa/UP/WB/AP/Telangana etc). Power Grid is working with various states like UP/Bihar to help them build intra-state network. In International markets, KEC continues to see strong traction in markets like SAARC, Brazil and Africa. KEC has guided for sales growth of 15% and margin of 10% for FY19. KEC believes Railways/Sub-station/Civil/Solar segments could be important growth drivers for the company, going ahead. Outlook and Valuation: The stock is trading at 15x FY20E earnings. We believe that a strong order book and improving margin profile will help KEC deliver 24% earnings CAGR over FY17 20E. Maintain BUY. June 15, 2018 1
Financials Income Statement (Rs m) Net Revenues 85,844 1,00,580 1,15,667 1,33,017 YoY gr. (%) 0.8 17.2 15.0 15.0 Cost of Goods Sold 41,646 72,716 55,983 64,380 Gross Profit 44,198 27,865 59,684 68,637 Margin (%) 51.5 27.7 51.6 51.6 Employee Cost 7,327 7,984 10,063 11,573 Other Expenses 28,691 9,819 38,213 43,812 EBITDA 8,180 10,062 11,408 13,252 YoY gr. (%) 18.1 23.0 13.4 16.2 Margin (%) 9.5 10.0 9.9 10.0 Depreciation and Amortization 1,297 1,097 1,088 1,316 Balance Sheet Abstract (Rs m) Non-Current Assets Gross Block 15,066 16,349 18,349 20,349 Tangibles 12,261 13,543 15,543 17,543 Intangibles 2,805 2,805 2,805 2,805 Acc: Dep / Amortization 5,902 7,146 8,087 9,403 Tangibles 4,158 5,255 6,343 7,659 Intangibles 1,744 1,891 1,744 1,744 Net fixed assets 9,165 9,202 10,261 10,946 Tangibles 8,103 8,288 9,200 9,884 Intangibles 1,062 914 1,062 1,062 EBIT 6,883 8,964 10,320 11,936 Margin (%) 8.0 8.9 8.9 9.0 Net Interest 2,536 2,466 2,196 2,619 Other Income 289 404 423 444 Capital Work In Progress 51 781 781 781 Goodwill 1,910 1,920 1,920 1,920 Non-Current Investments 2,198 2,055 1,735 2,394 Net Deferred tax assets (1,240) (1,007) (1,007) (1,007) Other Non-Current Assets 3,552 3,720 3,761 4,374 Profit Before Tax 4,635 6,902 8,546 9,762 Margin (%) 5.4 6.9 7.4 7.3 Total Tax 1,587 2,298 3,162 3,416 Effective tax rate (%) 34.2 33.3 37.0 35.0 Profit after tax 3,049 4,604 5,384 6,345 Minority interest - - - - Share Profit from Associate - - - - Adjusted PAT 3,049 4,604 5,384 6,345 YoY gr. (%) 106.2 51.0 16.9 17.8 Margin (%) 3.6 4.6 4.7 4.8 Extra Ord. Income / (Exp) - - - - Reported PAT 3,049 4,604 5,384 6,345 YoY gr. (%) 106.2 51.0 16.9 17.8 Margin (%) 3.6 4.6 4.7 4.8 Other Comprehensive Income - - - - Total Comprehensive Income 3,049 4,604 5,384 6,345 Equity Shares O/s (m) 257 257 257 257 EPS (Rs) 11.9 17.9 20.9 24.7 Current Assets Investments 1,304 393 393 393 Inventories 3,947 6,274 6,972 7,289 Trade receivables 42,268 50,444 53,872 58,309 Cash & Bank Balance 2,080 2,313 1,156 2,491 Other Current Assets 19,064 6,061 17,350 19,953 Total Assets 87,281 1,05,390 1,00,432 1,11,242 Equity Equity Share Capital 514 514 514 514 Other Equity 15,349 19,460 23,922 29,181 Total Networth 15,864 19,974 24,437 29,695 Non-Current Liabilities Long Term borrowings 7,656 7,384 5,884 3,884 Provisions 349 177 534 658 Other non current liabilities - - - - Current Liabilities ST Debt / Current of LT Debt 12,325 9,010 11,010 13,010 Trade payables 21,983 46,572 30,105 34,621 Other current liabilities 27,630 21,001 27,760 28,672 Total Equity & Liabilities 87,281 1,05,390 1,00,432 1,11,241 June 15, 2018 2
Cash Flow (Rs m) Key Financial Metrics Year PBT 3,048 6,902 8,546 9,761 Per Share(Rs) Add. Depreciation 1,297 1,097 1,088 1,316 CEPS 16.9 22.2 25.2 29.8 Add. Interest 2,536 2,466 2,196 2,619 BVPS 61.7 77.7 95.1 115.5 Less Financial Other Income 289 404 423 444 FCF 62.0 61.1 4.0 17.9 Add. Other 3,760 (404) (1,141) (444) DPS 1.8 2.7 3.1 3.7 Op. profit before WC changes 10,641 10,061 10,689 13,251 Return Ratio(%) Net Changes-WC 7,034 9,239 (4,490) (3,239) Core RoCE 19.1 26.8 27.7 29.1 Direct tax (1,044) (2,298) (3,162) (3,416) RoCE 17.4 24.8 26.6 27.2 Net cash from Op. activities 16,630 17,002 3,038 6,596 ROIC 8.2 8.7 10.4 11.0 Capital expenditures (670) (1,282) (2,000) (2,000) RoE 21.2 25.7 24.2 23.4 Interest / Dividend Income 130 404 423 444 Balance Sheet Others (1,292) 911 - - Net Debt : Equity (x) 1.0 0.7 0.6 0.5 Net Cash from Invt. activities (1,831) 33 (1,577) (1,556) Net Working Capital (Days) 103 37 97 85 Issue of share cap. / premium - - - - Valuation(x) Debt changes (11,223) (3,587) 500 - PER 31.2 20.6 17.6 15.0 Dividend paid (11) (788) (922) (1,086) P/B 6.0 4.8 3.9 3.2 Interest paid (2,556) (2,466) (2,196) (2,619) P/CEPS 16.9 22.2 25.2 29.8 Others - - - - EV/EBITDA 13.6 10.8 9.7 8.2 Net cash from Fin. activities (13,790) (6,841) (2,618) (3,705) EV/Sales 1.3 1.1 1.0 0.8 Net change in cash 1,010 10,193 (1,158) 1,335 Dividend Yield (%) 0.5 0.7 0.8 1.0 Free Cash Flow 15,944 15,719 1,038 4,596 Quarterly Financials (Rs m) Y/e Mar Q1FY18 Q2FY18 Q3FY18 Q4FY18 Net Revenue 18,568 21,322 24,049 36,642 YoY gr. (%) 6.2 2.8 25.8 28.6 Raw Material Expenses 12,609 14,816 17,383 27,908 Gross Profit 5,959 6,505 6,667 8,734 Margin (%) 32.1 30.5 27.7 23.8 EBITDA 1,763 2,158 2,441 3,699 YoY gr. (%) (41.4) 22.4 13.1 51.5 Margin (%) 9.5 10.1 10.2 10.1 Depreciation / Depletion 272 279 271 275 EBIT 1,491 1,880 2,170 3,424 Margin (%) 8.0 8.8 9.0 9.3 Net Interest 631 572 607 656 Other Income 98 57 123 126 Profit before Tax 958 1,365 1,687 2,894 Margin (%) 5.2 6.4 7.0 7.9 Total Tax 329 471 568 930 Effective tax rate (%) 34.3 34.5 33.7 32.2 Profit after Tax 630 894 1,118 1,963 Minority interest - - - - Share Profit from Associates - - - - Adjusted PAT 630 894 1,118 1,963 YoY gr. (%) 103.5 37.4 78.6 34.9 Margin (%) 3.4 4.2 4.7 5.4 Extra Ord. Income / (Exp) - - - - Reported PAT 630 894 1,118 1,963 YoY gr. (%) 103.5 37.4 78.6 34.9 Margin (%) 3.4 4.2 4.7 5.4 Other Comprehensive Income - - - - Total Comprehensive Income 630 894 1,118 1,963 Avg. Shares O/s (m) 257 257 257 257 EPS (Rs) 2.4 3.5 4.3 7.6 June 15, 2018 3
Price Chart Recommendation History (Rs) 450 363 275 188 101 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 11-Jul-17 BUY 302 271 2 02-Aug-17 BUY 329 299 3 01-Sep-17 BUY 340 312 4 09-Oct-17 BUY 340 308 5 06-Nov-17 BUY 345 316 6 10-Jan-18 BUY 400 388 7 07-Feb-18 BUY 413 348 8 13-Apr-18 BUY 419 409 9 16-May-18 BUY 425 379 Analyst Coverage Universe Sr. No. CompanyName Rating TP (Rs) Share Price (Rs) 1 ABB Accumulate 1533 1270 2 Ashoka Buildcon BUY 321 254 3 Bharat Electronics BUY 157 119 4 BHEL Reduce 90 84 5 Crompton Greaves Consumer Electricals BUY 299 244 6 Cummins India BUY 857 681 7 Engineers India Accumulate 180 139 8 J.Kumar Infraprojects BUY 365 271 9 Kalpataru Power Transmission Accumulate 534 463 10 BUY 425 379 11 KSB Pumps Accumulate 925 906 12 Larsen & Toubro BUY 1566 1378 13 Power Grid Corporation of India Accumulate 231 210 14 RPP Infra Projects BUY 379 253 15 Sadbhav Engineering BUY 456 352 16 Siemens Accumulate 1401 1128 17 Thermax Accumulate 1247 1154 18 Voltas Accumulate 652 584 PL s Recommendation Nomenclature (Absolute Performance) BUY : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly June 15, 2018 4
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