Q4FY17 RESULT UPDATE RETAIL EQUITY RESEARCH KEC International Ltd Capital Goods BSE CODE:532714 NSE CODE: KEC Bloomberg CODE: KEC:IN SENSEX: 30,365 Accumulate Rating as per Mid Cap 12months investment period CMP Rs242 TARGET Rs270 RETURN 11% 24 th May, 2017 Visibility improved... KEC International Limited (KEC) is a global infrastructure Engineering Procurement and Construction (EPC) major. It has presence in the verticals of Power T&D, Cables, Railways and Water & Renewable. Q4FY17 revenue grew by 10% YoY (in-line) supported by pick-up in T&D and railway execution. EBITDA margin improved by 154bps YoY to 10.4% with operating leverage building up in railway & solar business. Adj. PAT grew by 91% YoY led by operational efficiency, lower interest cost and higher other income. Order book looks healthy at Rs12,631cr cemented by 42% YoY growth in order intake in FY17. We increase our PAT estimate by 25% & 29% for FY18E & FY19E factoring an improved execution & lower effective tax rate. We value KEC at a P/E of 15x (12x earlier) on FY19E on improved earnings outlook and changed our rating to Accumulate from Hold with a revised target price of Rs270. Strong order inflow provides visibility Q4FY17 order intake grew by 45% YoY supported by a pick-up in SAE tower business and a traction in railway segment. SAE tower business witnessed growth of 71% YoY and Railway at 480% YoY. KEC holds strong L1 orders of Rs3,312cr and is expected to convert into the order book in the coming quarters. Order inflow from Jordan & Saudi was witnessed improvement and management expects a significant pickup in substation order from international market. KEC has entered into civil business segment with an order intake of Rs227.We expect KECs order book is likely to grow at a CAGR of 16% over FY17-19E. Execution is picking up... KEC registered a revenue growth of 10% YoY which is in-line with our estimate supported by pick-up in T&D and railway execution. Order booking in T&D (standalone) grew by 7.7% YoY and railway grew significantly by 312% YoY in Q4FY17. Whereas, revenue from SAE business impacted by translation loss on account of a strong appreciation of the rupee against the dollar and cable business witnessed de-growth of -7% YoY. The company expects ordering to improve from SEBs like Karnataka, Tamil Nadu, West Bengal, Andhra Pradesh and Telengana. Going forward the healthy order book will continue to drive the revenue growth and we expect revenue to grow at a CAGR of 14% over FY17- FY19E. Margins continue to surprise... EBITDA margin expanded by 154bps YoY to 10.4% (above our estimate) in Q4FY17 on account of drop in raw material cost and operating leverage building up in railway & solar business. We improved our FY18 & FY19 margin estimate by 60bps & 50bps to 9.4% and 9.5% respectively due to the benefit from high margin order book. The better operational efficiency and drop in interest cost & growth in other income has registered a PAT growth of 91% YoY. We expect the turnaround in SAE & railway business with a revival in execution of T&D orders will enhance the PAT growth. Valuations Healthy order book & improvement in margins will drive the earnings growth. We factor adj. PAT to grow at CAGR of 23% over FY17-19E. We value KEC at P/E of 15x FY19E EPS with a change in rating from Hold to Accumulate. Company Data Market Cap (cr) Rs6,273 Enterprise Value (cr) Rs8,618 Outstanding Shares (cr) 25.7 Free Float 49.14% Dividend Yield 0.0% 52 week high Rs253 52 week low Rs111 6m average volume (cr) 0.04 Beta 1.18 Face value Rs2 Shareholding % Q2FY17 Q3FY17 Q4FY17 Promoters 50.86 50.86 50.86 FII s 6.3 6.8 8.05 MFs/Insti 25.3 25.4 26.39 Public 17.5 16.9 14.7 Others Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return 44% 79% 91% Absolute Sensex 7% 18% 22% Relative Return* 37% 61% 70% *over or under performance to benchmark index 300.0 250.0 200.0 150.0 100.0 50.0 0.0 KEC International Sensex Rebased May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Standalone (Rs.bn) FY17 FY18E FY19E Sales 87.6 100.8 113.8 Growth (%) 2.8 15.2 12.8 EBITDA 8.2 9.5 10.8 Margin(%) 9.3 9.4 9.5 PAT Adj 3.0 3.8 4.6 Growth (%) 58.9 25.9 20.6 Adj.EPS 11.8 14.9 18.0 Growth (%) 58.9 25.9 20.6 P/E 20.4 16.2 13.5 P/B 3.9 3.2 2.6 EV/EBITDA 10.1 8.7 7.7 RoE (%) 19.6 21.7 21.3 D/E 1.4 1.2 1.0 Antu Eapen Thomas Analyst
Financials Profit & Loss Account (Rs cr) Q4FY17 Q4FY16 YoY Growth(%) Q3FY17 QoQ Growth (%) Sales 2,884 2,620 10.1 1965 46.8 EBITDA 301 233 29.2 182 65.6 Margin% 10.4 8.9 154bps 9.3 119bps Depreciation 41 44-6.4 30 36.7 EBIT 260 190 37.3 152 71.3 Interest 64 71-9.7 58 9.1 Other Income 11 1 934.5 7 63 Exceptional Items - - - - - PBT 208 120 73.1 101 106.8 Tax 63 44 42.8 38 64.4 Reported PAT 146 76 90.5 63 132.5 Adjustment - - - - - Adj PAT 146 76 90.5 63 132.5 No. of shares (cr) 25.7 25.7 25.7 EPS (Rs) 5.7 2.9 90.5 2.4 132.5 Change in estimates Old estimates New estimates Change % Year / Rs cr FY18E FY19E FY18E FY19E FY18E FY19E Revenue 9,882 10,941 10,084 11,380 2.0 4.0 EBITDA 870 985 948 1,081 9.0 9.8 Margins (%) 8.8 9.0 9.4 9.5 60bps 50bps PAT 307 358 383 462 24.8 29.1 EPS 11.9 13.9 14.9 18.0 24.8 29.1
Consolidated Financials Profit & Loss Account Sales 8,468 8,516 8,755 10,084 11,380 % change 7.2 0.6 2.8 15.2 12.8 EBITDA 512 679 818 948 1081 % change 3.8 33 20 16 14 Depreciation 88 88 130 139 147 EBIT 424 592 687 809 934 Interest 309 277 254 233 238 Other Income 11 10 29 13 15 PBT 261 325 463 590 711 % change 68 24 43 27 21 Tax 100 133 158 206 249 Tax Rate (%) 38 41 34% 35% 35% Reported PAT 161 192 304 383 462 Adj* 91 0 0 0 0 Adj PAT 70 192 304 383 462 % change (17.2) 172.3 58.9 25.9 20.6 No. of shares (cr) 25.7 25.7 25.7 25.7 25.7 Adj EPS (Rs) 2.7 7.4 11.8 14.9 18.0 % change (17.2) 172.3 58.9 25.9 20.6 DPS (Rs) 0.7 0.7 0.8 0.9 0.9 Balance Sheet Cash 206 111 208 291-80 Accounts Receivable 3,853 4,495 4,227 4,973 6,142 Inventories 476 430 395 503 598 Other Cur. Assets 1,411 1,637 2,524 1,741 2,089 Investments - - - - - Gross Fixed Assets 1,065 1,252 1,178 1,248 1,308 Net Fixed Assets 731 840 810 647 579 CWIP 16 20 5 12 12 Intangible Assets 528 418 297 510 491 Def. Tax (Net) (53) (42) (124) (125) (125) Other Assets 5,05 162 249 220 220 Total Assets 7,674 8,071 8,591 8,771 9,925 Current Liabilities 4,168 4,111 4,892 4,641 5,290 Provisions 122 114 105 124 140 Debt Funds 2,045 2,325 1,998 2,048 2,098 Other Liabilities 10 10 10 10 10 Equity Capital 51 51 51 51 51 Reserves & Surplus 1,278 1,460 1,535 1,896 2,335 Shareholder s Fund 133 151 159 195 239 Total Liabilities 7,674 8,071 8,591 8,771 9,925 BVPS (Rs) 52 59 62 76 93 Cash flow Ratios Net inc. + Depn. 349 412 593 728 858 Non-cash adj. 116 294 177 27-10 Changes in W.C (321) (769) 188 (302) (947) C.F.O 153 (51) 959 454-99 Capital exp. 117 (78) (74) (79) (60) Change in inv. 0 89 0 0 0 Other invest.cf 8 7 0 0 0 C.F - investing 125 18 (74) (79) (60) Issue of equity - 0 0 0 0 Issue/repay debt 106 (139) (413) 79 50 Dividends paid (17) (58) (21) (22) (24) Other finance.cf (305) (274) (439) (314) (238) C.F - Financing (216) (63) (786) (286) (212) Chg. in cash 62 (96) 99 88-371 Closing cash 206 111 210 291-80 Y.E March FY15A FY16A FY17A FY18E FY19E Profitab. & Return EBITDA margin (%) 6.0 8.0 9.3 9.4 9.5 EBIT margin (%) 5.0 6.9 7.9 8.0 8.2 Net profit mgn.(%) 0.8 2.2 3.5 3.8 4.1 ROE (%) 5.6 13.5 19.6 21.7 21.3 ROCE (%) 6.8 7.0 10.0 10.0 10.2 W.C & Liquidity Receivables (days) 226.9 262.8 281.4 243.0 264.0 Inventory (days) 26.9 25.2 24.2 26.0 27.0 Payables (days) 188.1 172.5 215.1 168.3 176.4 Current ratio (x) 1.4 1.6 1.5 1.6 1.6 Quick ratio (x) 1.0 1.1 0.9 1.1 1.2 Turnover &Levg. Gross asset T.O (x) 7.8 7.9 7.7 8.3 8.9 Total asset T.O (x) 1.1 1.1 1.1 1.2 1.2 Int. covge. ratio (x) 1.4 2.1 2.7 3.5 3.9 Adj. debt/equity (x) 1.7 1.5 1.4 1.2 1.0 Valuation ratios EV/Sales (x) 1.0 1.0 0.9 0.8 0.7 EV/EBITDA (x) 16.2 12.6 10.1 8.7 7.7 P/E (x) 88.5 32.5 20.4 16.2 13.5 P/BV (x) 4.7 4.1 3.9 3.2 2.6
Recommendation Summary (last 3 years) Dates Rating Target 300.0 29 th Sept,2014* Accumulate 124 7 th Feb, 2015 Buy 109 250.0 11 th May, 2015 Buy 118 200.0 16 th Feb, 2016 Buy 134 11 th May, 2016 Buy 152 150.0 03 rd Aug,2016 Hold 157 25 th October,2016 Buy 157 100.0 10 th November,2016 Buy 163 07th February, 2017 Hold 167 50.0 24 th May, 2017 Accumulate 270 0.0 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; *Initiating Coverage Mid Cap and Small Cap; Buy - Upside is 10% or more. Buy - Upside is 15% or more. Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%. Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. General Disclosures and Disclaimers CERTIFICATION I, Antu Eapen Thomas, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all of the subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as Geojit. 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