Result Update Rating matrix Rating : Buy Target : 345 Target Period : 12-15 months Potential Upside : 14% What s changed? Target Changed from 33 to 345 EPS FY18E Changed from 14.4 to 14.9 EPS FY19E Changed from 18.4 to 19.2 Rating Unchanged Quarterly performance Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) Revenue 1,856.8 1,748.7 6.2 2,849.2-34.8 EBITDA 176.3 149.6 17.9 31.1-41.4 EBITDA (%) 9.5 8.6 94 bps 1.6-17 bps PAT 63. 3.9 13.5 145.5-56.7 Key financials Crore FY16 FY17E FY18E FY19E Net Sales 8,421.6 8,59.3 9,952.9 11,651.7 EBITDA 679.3 817.9 938.5 1,132. Net Profit 231.1 329.5 382. 492.4 EPS ( ) 9. 12.8 14.9 19.2 Valuation summary FY16 FY17E FY18E FY19E P/E 34 23.7 2.5 15.9 Target P/E 38.4 26.9 23.2 18. EV / EBITDA 14.8 12.1 1.6 9. P/BV 4.8 4.1 3.5 2.9 RoNW (%) 14.3 17.4 17.2 18.6 RoCE (%) 15.3 16.3 17.7 19.5 Stock data Particular Amount Market Capitalization 7815.8 Crore Total Debt (FY17) 3124 Crore Cash and Investments (FY17) 368.9 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 17.3 56.7 69.9 2.3 Jyoti Structure 5.2 (3.5) (27.9) (5.1) Kalpataru Power 3.8 17.4 13. 63.6 Research Analyst Chirag J Shah chirag.shah@icicisecurities.com Performance on track August 3, 217 KEC International (KECIN) 32 KEC International delivered a reasonable set of Q1FY18 results. The key positive surprise was higher-than-expected revenues led by a pick-up in domestic execution. EBITDA margin improvement continues further coupled with a decline in interest rates. PAT was also a tad higher than expectations The topline increased 6.2% YoY to 1856.8 crore, which was a tad higher than our estimate of 1822.2 crore. Order backlog at 13532 crore was higher-than-expected, clearly indicating strong order inflows in Q1FY18. Power T&D business revenues grew 13% YoY to 1334 crore whereas SAE Tower revenues declined 41% YoY on account of client side delays Total order inflow, order backlog for Q1FY18 grew 3% YoY to 13532 crore, 279 crore, respectively. KEC is also favourably placed in orders worth 45 crore, mostly in the T&D segment EBITDA margins came in at 9.4% vs. our estimate of 9.5%. The consistency in improvement in margins is commendable for KEC. The key contributor was muted growth in raw material expenses. The company has maintained margin guidance in the 9-9.5% range Interest costs fell 12.3% YoY in finance costs to 63 crore Hence, PAT of 63 crore was above our estimate of 59.1 crore Order backlog growth of 3% leads to confidence on visibility In Q1FY18, the company bagged orders to the tune of 279 crore. The key takeaway was the share of domestic order inflows was at 94% while the share of international dipped to 6%. The outlook seems stronger as it is L1 in orders to the tune of 45 crore. The management commentary also suggests that, going ahead, there are strong business opportunities emerging from SEBs. We believe these will compensate the moderation of ordering from Power Grid. The consolidated order book was at 13532 crore, which will ensure 17% revenue CAGR in FY17-19E. Going ahead, we expect order inflow run rate to range between 1189 and 123 crore for FY18E and FY19E, respectively. Also, we expect the consolidated order backlog at 15184 crore by FY19E on the back of strong execution trends in the power T&D & railways business. New business segments scaling up handsomely The current order book in the railways is at 1218 crore coupled with strong revenue visibility & business pipeline. During Q1FY18, segment revenues were at 158 crore vs. 69 crore in Q1FY17, which is up 129%. Solar business has also registered 51% YoY growth in revenues in Q1FY18. The solar business may remain muted in the medium term over confusion on GST rates across the value chain of solar EPC. The new entry in the civil business (industrial & residential segment) has exhibited a strong order strong backlog of 46 crore and also clocked revenues of 15 crore in Q1FY18. Performance on track; maintain BUY We upgrade our fair value on the stock from 33 to 345 (18x FY19E EPS). This is on the back of a consistent performance being delivered by KEC and the strong visibility it provides (17% and 2% revenue and PAT CAGR, respectively). This is expected to translate into RoEs expanding by 12 bps to 18.6% in FY19E given the strong recovery in profitability and significant focus on improving the balance sheet quality (focus on receivable management). Hence, we maintain our BUY rating. ICICI Securities Ltd Retail Equity Research
Variance analysis Q1FY18 Q1FY18E Q1FY17oY (Chg %) Q4FY17oQ (Chg %) Comments Revenue 1,856.8 1,822.2 1,748.7 6.2 2,849.2-34.8 Revenues were higher-than-expected on account of 13% YoY growth in T&D revenues and 129% YoY growth in the railways business Other Income 9.8 5. 5. 96. 11.4-13.7 Employee Expenses 191.3 178.2 173.5 1.3 186.4 2.7 Raw Material Expenses 826.2 846.1 82.8.7 1,479. -44.1 Other Operating Expenses 228.2 23.4 215.1 6.1 388.6-41.3 Erecting and Contracting Expenses 434.7 396. 389.9 11.5 494.1-12.. EBITDA 176.3 171.4 149.6 17.9 31.1-41.4 EBITDA Margin (%) 9.5 9.4 8.6 94 bps 1.6-17 bps Margins in line with estimates Depreciation 27.2 2. 29.1-6.4 4.8-33.3 Interest 63.1 65.5 72. -12.3 63.7 -.8 Decline in interest costs was in line with estimates PBT 95.8 75. 53.5 79. 28.1-53.9 Total Tax 32.9 31.8 22.6 45.4 62.5 NM PAT 63. 59.1 3.9 13.5 145.5-56.7 Key Metrics Order inflows 2,79. 2,4. 2,885-3.3 2,885. -3.3 Order inflows from domestic markets Order backlog 13532 13231 143 3 1235 9.6 Backlog and execution cycle ensures reasonable visibility, going ahead Change in estimates FY18E FY19E ( Crore) Old New % Change Old New % Change Comments Revenue 9,82.3 9,952.9 1.5 11,491.3 11,651.7 1.4 Strong order wins in FY16-17 and lower execution cycle will lead to 17% revenue CAGR for KEC in FY17-19E EBITDA 94.4 938.5 -.2 1,118. 1,132. 1.3 EBITDA Margin (%) 9.6 9.3-25 bps 9.7 9.6-12 bps PAT 369.9 382. 3.3 472.7 492.4 4.2 PAT has been revised more than EBITDA on account of higher effective tax rate EPS ( ) 14.4 14.9 3.2 18.4 19.2 4.1 Assumptions Current Earlier FY16 FY17E FY18E FY19E FY18E FY19E Order Inflow growth 6.2 41.7-3.7 3.4-6.9 7. Order Backlog growth -8.3 33.7 15.1 4.5 13.4 5.6 Revenue growth.6.8 15.9 17.1 14.2 17.2 EBITDA Margins 8. 9.5 9.3 9.6 9.5 9.6 ICICI Securities Ltd Retail Equity Research Page 2
Company Analysis Backlog growth of 3.1% YoY ensures steady 17% revenue CAGR KEC has witnessed strong order inflows in FY16 to the tune of 8714 crore while FY17 has been even stronger at 42% YoY growth at 1235 crore. Even in Q1FY18, the company has bagged orders to the tune of 279 crore. The key takeaway was the share of domestic order inflows was at 94% while the share of international dipped to 6%. The outlook seems stronger as it is L1 in orders to the tune of 45 crore. The management commentary also suggests that, going ahead, there are strong business opportunities emerging from SEBs (West Bengal, AP, Telangana, Tamil Nadu and Odisha. We believe these will compensate for the moderation of ordering from Power Grid. Consolidated order book was at 13532 crore, which will ensure 17% revenue CAGR in FY17-19E. Going ahead, we expect order inflow run rate to range between 1189 crore and 123 crore for FY18E and FY19E, respectively. Also, we expect the consolidated order backlog at 15184 crore by FY19E on the back of strong execution trends in the power T&D & railways business. In terms of segmental performance, SAE suffered a decline of 41% YoY on the back of client side delays in acquisition of materials in Q1FY18. On account of GST, loss in revenues was to the tune of 1 crore. Going ahead, in Q2FY18, there will be some slackness in revenues and tendering process. The management commentary, however, suggests KEC is comfortably placed to achieve 15% YoY growth in revenues. Exhibit 1: Exhibits strong order inflow trends Exhibit 2: thereby adding to order backlog and visibility ( crore) 14 12 1 8 6 4 2 6586.22 7484 8482 824 8714 1235 1189 123 5. 4. 3. 2. 1.. -1. ( crore) 16 14 12 1 8 6 4 2 4 3 2 1-1 -2 (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E 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 FY12-19E ( crore) 14 12 1 8 6 4 2 5814 6979 792 8468 8516 8584 9953 11652 35 3 25 2 15 1 5-5 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Revenues YoY growth (%) ICICI Securities Ltd Retail Equity Research Page 3
New business segments scaling up handsomely The current order book in the railways is at 1218 crore coupled with strong revenue visibility & business pipeline. During Q1FY18, the segment revenues were at 158 crore vs. 69 crore in Q1FY17, which is up 129%. The solar business also registered 51% YoY growth in revenue in Q1FY18. The solar business may remain muted in the medium term over confusion on GST rates across the value chain of solar EPC. The new entry in the civil business (industrial & residential segment) has exhibited a strong order strong backlog of 46 crore and also clocked revenues of 15 crore in Q1FY18. KEC maintains margin guidance in 9-9.5% range for FY18E EBITDA margins came in at 9.4% vs. our estimate of 9.5%. The consistency in improvement in margins is commendable for KEC. The key contributor was muted growth in raw material expenses. The company has maintained margin guidance in the 9-9.5% range. In Q1FY18, the key positive surprise was >1% EBITDA margins that the company clocked in the domestic T&D business. Strong execution, margin recovery, better financial leverage to drive robust PAT CAGR of 2% (FY17-19E) Going ahead, we expect KEC to exhibit 2% CAGR in profitability in FY17-19E, which will be contributed by 17% CAGR in EBITDA and 16.2% revenue CAGR in the same period. We expect EBITDA to grow to 1118.1 crore by FY19E from 679.3 crore in FY16. Even on increased execution, interest costs growth will be lower than rise in revenues at 8% YoY, which will provide strong financial leverage gain. We believe this, coupled with lower tax rates (35% for FY18E & FY19E vs. 41% in FY16, would lead to PAT of 37 crore and 473 crore in FY18E and FY19E, respectively. Exhibit 4: PAT to rise sharply on the back of strong margins recovery 6 5 4 ( crore) 3 2 1 492 33 382 29 192 231 73 17 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Debt up QoQ but on account of GST based inventory build up KEC as of Q1FY18 has total net debt of 2212 crore (including acceptance of 969 crore, total net debt was at 3181 crore) vs. 319 crore in Q1FY17 and 1932 crore in Q4FY17. The sequential rise in debt can be attributed to the rise in inventory levels owing to GST issues, which we believe will normalise in H2FY18E. However, gross receivables have reduced to 5788 crore in Q1FY17 to 5587 crore in Q1FY18. ICICI Securities Ltd Retail Equity Research Page 4
RoE profile to improve materially on margin recovery/decline in leverage With recovery in margins and resultant 2% CAGR in PAT over FY17-19E will help KEC to improve its RoE to 17.2% and 18.6% in FY18E and FY19E, respectively. The RoCE is also expected to improve from 16.4% in FY17 to 19.5% in FY19E. Exhibit 5: Return ratios to bounce back strongly 25 2 15 (%) 1 5 FY14 FY15 FY16 FY17 FY18E FY19E ROE ROCE ICICI Securities Ltd Retail Equity Research Page 5
Outlook and Valuation We upgrade our fair value on the stock from 33 to 345 (18x FY19E EPS). This is on the back of consistent performance being delivered by KEC and strong visibility it provides (17% and 2% revenue and PAT CAGR). This will translate into RoEs expanding by 12 bps to 18.6% in FY19E given the strong recovery in profitability and significant focus on improving balance sheet quality (focus on receivable management). Hence, we maintain our BUY rating. Exhibit 6: Interest/EBITDA ratio to improve, going ahead 7 6 5 (%) 4 3 6.3 2 1 4.8 31. 28.1 24.7 FY15 FY16 FY17 FY18E FY19E ICICI Securities Ltd Retail Equity Research Page 6
( ) (%) Recommendation History vs. Consensus 35 3 25 2 15 1 5 12. 1. 8. 6. 4. 2. May-15 Jul-15 Oct-15 Dec-15 Mar-16 May-16 Aug-16 Oct-16 Dec-16 Mar-17 May-17. Aug-17 Source: Bloomberg, Company, ICICIdirect.com Research Series1 Idirect target Consensus Target Mean % Consensus with Buy Key events Date Mar-12 Dec-12 Mar-13 Mar-13 Sep-13 Nov-13 Apr-14 Dec-14 Event Revenue crosses 5 crore for the first time with higehest ever PAT of 29 crore in its operating history KEC's order backlog crosses 1 crore mark in its operating history Market share in PGCIL ordering at 31% in FY13. Number of contracts won stood at 1 worth 2152 crore With execution of low margin orders of new SBUs, KEC's EBITDA margins fall to record lows to 4.1% in Q4FY13 Margins do recover to 6.3% in Q2FY14 after dismal perfomance of Q4FY13. However, going ahead, consistency is the key Market share in PGCIL ordering at 16% in YTDFY14. Number of contracts won stood at 1 worth 2152 crore 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 Q3FY15 performance disappointing owing to higher-than-expected margins on the back of execution of low margins legacy orders Mar-15 Mar-16 Mar-17 Improvement in Q4FY15 performance across all parameters and mangament sets out strong guidance for FY16E 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 The company continues with consistent improvement in EBITDA margins and also records strong order inflows to the tune of 1235 crore and closes the year with order backlog of 12631 crore, up 33% YoY Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 RPG Ventures 18-Jul-17 7. 17.9-11.8 2 HDFC Asset Management Co., Ltd. 31-Mar-17 5.5 14.1.1 3 Life Insurance Corporation of India 31-Mar-17 2.5 6.4. 4 SBI Funds Management Pvt. Ltd. 31-Mar-17 2.3 6. -2.2 5 Reliance Nippon Life Asset Management Limited 31-Mar-17 2. 5.2-1.7 6 Fidelity International Asset Management Company (Korea) 31-Mar-17 2. 5.1 5. 7 FIL Investment Management (Singapore) Ltd. 31-Mar-17 2. 5.1-1.5 8 Goenka (Harsh Vardhan) 31-Mar-17 1.9 4.8. 9 Dimensional Fund Advisors, L.P. 3-Apr-17 1.5 3.9. 1 Birla Sun Life Asset Management Company Ltd. 31-Mar-17 1.2 3.2.1 Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Promoter 5.86 5.86 5.86 5.86 5.86 FII 6.28 6.8 6.28 6.6 7.23 DII 25.59 25.5 25.59 26.39 23.64 Others 17.27 16.84 17.27 16.69 18.27 Buys Sells Investor name Value Shares Investor name Value Shares Fidelity International Asset Management Company (Korea) +16.7M +5.MS RPG Ventures -455.99M -11.79M ABN AMRO Investment Solutions (AAIS) +1.25M +.39M SBI Funds Management Pvt. Ltd. -7.13M -2.22M Darwin Inversiones S.A. +.61M +.18M UTI Asset Management Co. Ltd. -6.56M -2.4M Nuveen LLC +.39M +.1M Reliance Nippon Life Asset Management Limited -5.62M -1.75M L&T Investment Management Limited +.32M +.1M FIL Investment Management (Singapore) Ltd. -4.91M -1.53M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7
Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17 FY18E FY19E Total operating Income 8,421.6 8,59.3 9,952.9 11,651.7 Growth (%).9 1. 17. 17.1 Raw Material Expenses 4,148. 4,164.6 4,852.1 5,7.5 Employee Expenses 642.4 732.7 847.7 1,8. Erecting and Contracting Expenses 2,71.8 1,784.3 2,149.9 2,512.6 Administrative Expenses 974.9 1,84.9 1,26.6 1,424.6 Total Operating Expenditure 7,837. 7,766.5 9,11.4 1,645.7 EBITDA 679.3 817.9 938.5 1,132. Growth (%) 32.7 2.4 14.7 2.6 Depreciation 47.9 15.3 18.9 114.9 Interest 277.4 253.6 263.9 279.6 Other Income 1.3 28.9 2.8 2. Exceptional Item.... PBT 364.2 487.9 586.6 757.6 Total Tax 133.1 158.4 24.6 265.2 PAT 231.1 329.5 382. 492.4 Adjusted PAT 231.1 347.5 382. 492.4 Growth (%) 2.1 5.3 9.9 28.9 EPS ( ) 9. 12.8 14.9 19.2 Cash flow statement Crore (Year-end March) FY16 FY17 FY18E FY19E Profit after Tax 231.1 329.5 382. 492.4 Add: Depreciation 47.9 15.3 18.9 114.9 (Inc)/dec in Current Assets -478.9-576.4-1,21.5-1,249.1 Inc/(dec) in CL and Provisions -11.8 519.1 586.9 633.6 Others 3.3 3. 5. 5. CF from operating activities -31.6 377.5 56.2-8.1 (Inc)/dec in Investments. -13.4.. (Inc)/dec in Fixed Assets -34.9-5. -75. -75. Others.... CF from investing activities -34.9-18.4-75. -75. Issue/(Buy back) of Equity.... Inc/(dec) in loan funds 36.6-5.. 1. Dividend paid & dividend tax -3.9-49.4-55.6-61.8 Inc/(dec) in Sec. premium.... Others. 7.6.. CF from financing activities 275.7-99.4-55.6 38.2 Net Cash flow -6.8 97.7-74.3-44.9 Opening Cash 332. 271.3 368.9 294.6 Closing Cash 271.3 368.9 294.6 249.7 Balance sheet Crore (Year-end March) FY16 FY17 FY18E FY19E Liabilities Equity Capital 51.4 51.4 51.4 51.4 Reserve and Surplus 1,563.4 1,843.5 2,169.9 2,6.6 Total Shareholders funds 1,614.8 1,895. 2,221.3 2,652. Total Debt 2,52.7 2,47.7 2,47.7 2,57.7 Deferred Tax Liability.... Minority Interest / Others.... Total Liabilities 4,135.5 4,365.6 4,692. 5,222.7 Assets Gross Block 1,383. 1,419.5 1,479.5 1,554.5 Less: Acc Depreciation 396.7 52. 61.8 725.7 Net Block 986.3 917.5 868.6 828.8 Capital WIP 16.4 3. 45. 45. Total Fixed Assets 1,2.8 947.5 913.6 873.8 Investments. 13.4 13.4 13.4 Inventory 429.8 479.4 52.2 551.2 Debtors 4,494.8 4,196.4 4,771.9 5,426.8 Loans and Advances 873.7 998.3 1,91.8 1,122. Other Current Assets 926.1 1,626.7 1,956.3 2,471.3 Cash 271.3 368.9 294.6 249.7 Total Current Assets 6,995.7 7,669.8 8,616.9 9,821.1 Creditors 2,939.1 2,914.2 3,48.5 3,99.3 Provisions 97.8 72.9 12.3 139.7 Total Current Liabilities 4,28.8 4,547.9 5,134.8 5,768.4 Net Current Assets 2,966.9 3,121.9 3,482.1 4,52.7 Others Assets.... Application of Funds 4,135.5 4,365.6 4,692. 5,222.7 Key ratios (Year-end March) FY16 FY17 FY18E FY19E Per share data ( ) EPS 9. 12.8 14.9 19.2 Cash EPS 1.9 16.9 19.1 23.6 BV 62.8 73.7 86.4 13.2 DPS 1. 1.6 1.8. Cash Per Share 1.6 14.4 11.5 9.7 Operating Ratios (%) EBITDA Margin 8. 9.5 9.3 9.6 PBT / Total Operating income 4.3 5.7 5.9 6.5 PAT Margin 2.7 3.8 3.8 4.2 Inventory days 19.6 19.5 18. 16.5 Debtor days 194.8 18. 175. 17. Creditor days 127.4 125. 125. 125. Return Ratios (%) RoE 14.3 17.4 17.2 18.6 RoCE 15.3 16.3 17.7 19.5 RoIC 16.4 18. 19.1 2.6 Valuation Ratios (x) P/E 33.8 23.7 2.5 15.9 EV / EBITDA 14.8 12.1 1.6 9. EV / Net Sales 1.2 1.2 1..9 Market Cap / Sales.9.9.8.7 Price to Book Value 4.8 4.1 3.5 2.9 Solvency Ratios Debt/EBITDA 3.7 3. 2.6 2.3 Debt / Equity 1.6 1.3 1.1 1. Current Ratio 1.7 1.7 1.7 1.7 Quick Ratio 1.7 1.6 1.6 1.7. ICICI Securities Ltd Retail Equity Research Page 8
ICICIdirect.com coverage universe (Capital Goods) CMP M Cap ( ) TP( ) Rating ( Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E AIA Engineering 1448 1,533 Buy 13322 5.1 51.9 6.3 28.9 27.9 24. 24.7 21.9 22.4 22.1 19.6 19.9 Thermax (THERMA) 91 944 Hold 1223 12.2 26.7 31.5 74.6 34.1 28.9 11.6 12.1 13.6 5.6 11.2 12. KEC International (KECIN) 285 33 Buy 3881 12.8 14.1 18. 22.3 2.2 15.8 16.1 17. 18.8 17.4 16.1 18.1 L&T (LARTOU) 116 143 Buy 16124 33.9 42. 48.6 34.2 27.6 23.8 1.2 12. 13.5 11.4 13.3 14.4 Greaves Cotton (GREAVE) 165 176 hold 426 7.3 8.7 9.8 22.6 19. 16.8 28.7 33.3 34.2 21.2 23.7 24.5 VaTech Wabag (VATWAB) 6 765 Buy 3633 18.8 39.4 48. 31.9 15.2 12.5 22.1 24.3 24.8 1. 18.4 19.1 NRB Bearing (NRBBEA) 125 115 Hold 1115 5.6 5.9 6.5 22.4 21.1 19.3 16. 16.8 16.9 17.5 16.8 16.5 Timken India (TATTIM) 73 7 Hold 4691 14.3 15.9 19.3 51. 48.3 43.3 22.7 24.2 24.2 16. 15.7 16.7 Grindwell Norton (GRINOR) 43 5 Buy 3543 1.8 12.5 14.4 39.8 34.5 29.9 19.5 21.3 22.4 13.4 14.2 15. EPS ( ) P/E (x) RoCE (%) RoE (%) ICICI Securities Ltd Retail Equity Research Page 9
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